The five biggest U.S. airlines have reported their third-quarter earnings over the past week-and-a-half. Most of them lost money, excluding special items like government payroll support grants. Delta Air Lines did a little better than most of the pack, eking out a modest adjusted pre-tax profit of $216 million, equivalent to a 2.6% adjusted pre-tax margin.

However, one airline bucked the trend. On Thursday, Alaska Air (ALK 0.88%) reported a strong profit for the third quarter, with its adjusted pre-tax margin rebounding to double-digit territory.

Earnings eclipse expectations

Three months ago, Alaska Air told investors that it had recorded an adjusted pre-tax margin of 14% in the month of June and was on pace to log a double-digit adjusted pre-tax margin for the full third quarter. At the time, the airline projected that Q3 unit revenue would roughly match its 2019 result.

Like most of its peers, Alaska reported that demand dipped beginning in August as the spread of the delta variant caused COVID-19 case numbers to surge. As a result, the company reduced its third-quarter outlook in early September. However, Alaska Airlines then beat its updated guidance in the results announced this week.

Alaska Airlines planes in an airport gate area.

Image source: Alaska Airlines.

Revenue totaled $1.95 billion last quarter. down 18% from the third quarter of 2019 on an 18% capacity reduction. Unit revenue fell by less than 1%, roughly matching Alaska's initial forecast and beating its updated outlook.

Adjusted nonfuel unit costs increased 9%, which was better than the company's previous forecasts. That helped make up for higher-than-expected fuel costs, which reached $2.05 per gallon (versus a prior forecast of $1.98 per gallon).

As a result, Alaska Air generated adjusted pre-tax income of $236 million, giving it an impressive 12% adjusted pre-tax margin. Adjusted earnings per share of $1.47 easily exceeded the analyst consensus of $1.29.

A good shot at a Q4 profit

The combination of rising fuel prices and a slower-than-expected return of business travel has forced several U.S. airlines to scrap their targets of earning profits this quarter. However, Alaska Air still has a chance to remain profitable in the fourth quarter.

Alaska's initial guidance for the period calls for revenue to decline 16%-19%, compared to the fourth quarter of 2019 on 13%-16% less capacity. That implies a modest decrease in unit revenue.

Meanwhile, management expects nonfuel unit costs to rise between 7% and 9% over Q4 2019 levels. Additionally, Alaska Air projects that economic fuel costs will rise to between $2.25 and $2.30 per gallon. But while that would represent a 10% to 12% sequential increase, it would only be slightly higher than the $2.21 per gallon Alaska Airlines paid in Q4 2019, thanks to gains from the company's fuel hedges. Moreover, fuel-efficiency gains would offset most of the increase in fuel prices relative to two years ago.

A rendering of an Alaska Airlines plane flying over clouds.

Image source: Alaska Airlines.

Based on the airline's projections, Alaska Air would likely achieve an adjusted pre-tax margin between 1% and 2% this quarter. That's a bit worse than what analysts were expecting -- but a whole lot better than what other airlines have projected for Q4. Alaska has also tended to issue conservative forecasts in recent years, so it wouldn't be surprising to see the airline post even better results.

Onward and upward

Alaska Air's excellent third-quarter results should give investors confidence that the company is on track to lead the airline industry's recovery. As demand -- especially for business travel -- continues to improve, Alaska should be able to restore its capacity to pre-pandemic levels and grow revenue to record levels by the second half of 2022.

Returning the fleet to full utilization will also reduce nonfuel unit costs. Additionally, Alaska Airlines plans to expand its fleet of Boeing 737 MAX 9s from just five jets operating this past summer to 75 by the end of 2023. These new planes will replace less-efficient Airbus A319s and A320s that began to exit the fleet during the pandemic and will be fully retired within two years. This aircraft-replacement program will significantly improve Alaska's fuel efficiency while further reducing nonfuel unit costs.

In short, Alaska Air is on track to grow its earnings well beyond pre-pandemic levels over the next few years. With shares currently trading nearly 25% below their 52-week high, Alaska Air looks like one of the best airline stocks for betting on the industry's continued recovery.