Alaska Air Ekes Out Another Quarter of Earnings Growth

After posting several quarters of sharp earnings declines beginning in late 2017, Alaska Air (ALK 0.72%) finally returned to earnings growth in the fourth quarter of 2018. Yet even then, the carrier relied on a lower tax rate to drive higher earnings as its adjusted pre-tax margin fell by 1.1 percentage points year over year.

Despite some headwinds, Alaska Air reported a second-consecutive quarter of earnings growth on Thursday. Furthermore, the West Coast-focused airline's pre-tax margin improved on a year-over-year basis for the first time in nearly three years.

Alaska Air results: The raw numbers

Data source: Alaska Air Q1 earnings release. Chart by author.

What happened with Alaska Air this quarter?

Alaska Air's initial guidance for the first quarter implied solid pre-tax margin expansion. However, the company was one of several airlines forced to cut its forecast during the quarter. Alaska reduced the midpoint of its revenue per available seat mile (RASM) outlook by 2 percentage points in early March, blaming weak fares for last-minute travel on several key transcontinental routes and severe winter storms that disrupted travel and bookings in the Pacific Northwest.

Fortunately, transcontinental fares began to improve in mid-March. This allowed the carrier to surpass its updated Q1 revenue forecast, posting a 2.2% RASM increase. Additionally, nonfuel unit costs came in well below the company's initial expectations. As a result, Alaska Air was able to expand its pre-tax margin to 1.5%, compared to 1.3% a year earlier. Adjusted earnings per share rose by $0.03 to $0.17 in the seasonally weakest part of the year.

Looking beyond the numbers, Alaska Airlines continued to make progress on integration work related to its late-2016 acquisition of Virgin America during the first quarter. It also began offering "Saver" fares -- its version of the basic economy fares that many airlines have introduced to attract price-sensitive travelers and boost unit revenue.

Finally, after a slight delay due to the government shutdown, Alaska Airlines began operating 18 daily roundtrips at Paine Field in Everett, Washington last month. This will allow the airline to better serve customers who live in the northern suburbs of its hometown of Seattle.

What management had to say

While Alaska Air's results fell a bit short of management's initial projections last quarter, CEO Brad Tilden was pleased with the company's performance, considering the headwinds it faced. He stated:

We performed well in the first quarter despite severe winter storms in the Pacific Northwest. ... The leadership team and I want to thank our employees for running the operation safely, and as smoothly as possible, and for taking great care of our guests throughout the quarter. Our margin improvement initiatives gained traction despite the storms, and we are optimistic about the rest of 2019.

Looking forward

Alaska Air didn't get the full benefit of its merger synergies and other revenue-growth initiatives last quarter. Management expects those revenue drivers to reach their full potential around the middle of the second quarter. Furthermore, Alaska will benefit this quarter from the timing of Easter and continued strengthening in walk-up fares for transcontinental flights.

Alaska Airlines' revenue trends appear to be strengthening. Image source: Alaska Airlines.

As a result, the company projects that RASM will rise 2% to 5% year over year this quarter. On the other hand, Alaska Airlines' nonfuel unit costs are on pace to increase by about 5%, due to a greater proportion of regional flights (which have higher unit costs), as well as the timing of maintenance spending. Fuel costs are likely to be roughly flat year over year.

Based on the midpoint of its guidance range, Alaska Air's pre-tax margin would rise modestly once again this quarter. However, given the wide range in its revenue forecast, it's also possible that the company's pre-tax margin will be flat or down year over year.

The outlook for the second half of 2019 is brighter. By then, Alaska Airlines will be getting the full benefit of its merger synergies and other revenue initiatives. Meanwhile, it expects nonfuel unit costs to rise just 3% in Q3 and decline by about 2.5% in Q4. This should help the carrier get its pre-tax margin closer to its long-term target range of 13% to 15%.