Last month, Alaska Air (ALK 4.07%) was one of several U.S. airlines to raise its outlook for the second quarter. The carrier, which had initially projected that revenue per available seat mile (RASM) would increase 2% to 5% in the quarter, stated that RASM growth was on track to reach the upper half of that guidance range. The Alaska Airlines parent also reduced its forecast for nonfuel unit cost growth from around 5% to approximately 4%.
On Thursday, Alaska Airlines raised its unit revenue forecast and reduced its nonfuel unit cost outlook once again. That puts the Seattle-based airline on track to report stellar earnings growth for the second quarter -- and also bodes well for its third-quarter performance.
A stronger revenue environment and better cost performance
Alaska Airlines was one of several airlines forced to reduce its guidance during the first quarter, as competitive activity led to weak fares in some key markets, particularly on transcontinental routes. Ultimately, RASM rose 2.2% in the quarter. This allowed the company to post modest earnings growth, with adjusted earnings per share rising to $0.17 from $0.14 a year earlier.
Fortunately, industry conditions have been improving at a steady pace in recent months. Alaska Air stated in its recent investor update that RASM rose about 5% last quarter -- reaching the high end of its guidance range -- due to higher pricing for last-minute tickets on many routes.
Alaska Airlines' unit revenue growth accelerated last quarter. Image source: Alaska Airlines.
Meanwhile, Alaska Airlines reduced its unit cost outlook again. Management now expects adjusted nonfuel unit costs to come in between 8.33 and 8.35 cents for the second quarter, up 2.3% to 2.6% year over year. Just a month ago, Alaska had forecast Q2 adjusted nonfuel unit costs between 8.45 and 8.5 cents. Some of the improvement was due to costs shifting into the second half of 2019, but the carrier also cited higher productivity and lower overhead costs.
Alaska Airlines tweaked its fuel expense guidance as well, increasing its fuel consumption and average fuel price projections slightly. However, these revisions were less significant than the changes to its unit revenue and nonfuel unit cost forecasts.
Profit is set to soar
Based on the midpoints of the old and new forecasts, Alaska Air's pre-tax margin is set to come in more than 1 percentage point ahead of what the company's June guidance update implied.
Revenue will come in between $2.28 billion and $2.29 billion, up about 6% year over year. Incorporating all the aspects of Alaska's cost guidance, adjusted pre-tax profit should wind up around $356 million, compared to $276 million in Q2 2018. Finally, adjusted EPS should reach approximately $2.15, which would be up nearly 30% from $1.66 a year ago. The average analyst estimate currently stands at just $2.01.
Momentum is building for Alaska Air
The recent improvement in the revenue environment suggests that Alaska Airlines is likely to have a very strong summer season. The airline is experiencing a growing tailwind from a variety of revenue growth initiatives, most notably a basic economy "saver" fare that was introduced near the very end of 2018. Alaska also expects to reap $130 million of incremental merger synergies during 2019 from its tie-up with Virgin America. (Another $105 million of annual revenue and cost synergies should hit the bottom line by 2021.)
As a result, unit revenue should continue to grow at a solid rate in the second half of 2019. Nonfuel unit cost trends are also set to improve going forward, particularly looking ahead to the fourth quarter. Finally, while fuel prices have been volatile recently, the price of Brent crude oil is currently lower than it was at this time last year.
This paves the way for Alaska Air's strong EPS growth to continue. Analysts are currently calling for adjusted EPS to reach $5.95 this year, up 33% from $4.46 in 2018. However, this outlook seems quite conservative in light of Alaska's stellar Q2 performance.
Alaska Air is also well positioned for strong earnings growth in 2020 and beyond, as it captures the rest of the upside from its merger synergies and other revenue initiatives. As a result, Alaska Air shares look very attractive at their current valuation of less than 11 times the company's projected 2019 EPS.
