Alaska reports mixed second quarter, lowers full year EPS guidance

Alaska Airlines has reported mixed second quarter results on July 17, 2024. Its adjusted net income was $327 million, or $2.55 per share, down from last year’s $387 million, or $3 per share, in the same period. TD Cowen analysts Thomas Fitzgerald and Helane Becker said the earnings per share (EPS) beat its estimates of $2.34 and consensus of $2.38 per share. The US airline’s total operating revenues fell slightly short of the analysts’ expectations at $2.9bn, up only in low single digit from last year’s $2.8bn. Total operating expenses were up slightly compared to $2.6bn. Fuel prices were $2.84 per gallon, beating TD Cowen’s forecast of $3.10 per gallon. Premium ""continues to perform well"" for Alaska, said Becker and Fitzgerald, with 33% of second quarter revenues stemming from its premium cabin segments and 46% of revenue was from outside the main cabin. ""It's clear that premium airlines are rising above the rest of the industry, and Alaska's product and performance put us in that top tier, with a strong long-term outlook to grow and compete,"" said Alaska CEO Ben Minicucci. ""That's how we brought in record quarterly revenue and achieved a 15.8% adjusted pretax margin that should lead the industry."" On the same day as its report, Alaska said it will conduct a “major expansion” of its first class and premium seating. The airline will begin a retrofit of 218 aircraft. ""Our premium cabins continue to be the bright spot in our performance,"" commented Alaska's executive vice president and chief commercial officer Andrew Harrison in its earnings call. The expansion applies to 80 737-9 MAX aircraft and 79 737-900ER aircraft, increasing premium class seats from 24 to 30 on both aircraft types, while the first class seating arrangements will remain at 16. In addition, 59 737-800s will have their first class seats increased from 12 to 16 seats, while the premium seats will remain at 30. The conversions will begin in early 2025 and through to 2026. “While the initiative will come with incremental CAPEX,” said TD Cowen analysts, “we think this is an opportune time for the carrier to retrofit its fleet and continue to improve its offerings in this customer segment.” Delta Air Lines had seen a strong growth in demand for premium and corporate travel in the second quarter. Its premium revenue grew 10% over the same period last year to $5.6bn. Furthermore, Deloitte estimated corporate travel spend by US companies to grow between 8% and 12% to meet or exceed pre-pandemic levels by the end of this year. The airline had a strong balance sheet with debt-to-capitalisation ratio of 45% and adjusted net leverage of 1.0x. It held $2.5bn in unrestricted cash as of June 30, 2024. In addition, it generated $580 million in operating cash flow during the second quarter. The airline estimated its third quarter EPS to around $1.40 to $1.60, “well below” TD Cowen’s expectations of around $1.90 and $2.10. Capacity in the third quarter is expected to be up in the low single digits compared to the same period last year. Fuel cost is set to be between $2.85 and $2.95 this quarter. Alaska lowered its full year EPS by $0.25 to around $3.50 and $4.50, claiming it “reflects the economics of a newly signed tentative agreement with our flight attendants and moderating domestic revenue environment”. However, Becker and Fitzgerald said the guide is “primarily due to non-fuel cost noise” in the second half of this year. The carrier’s flight attendants are set for an average pay rise of approximately 32% after reaching a new tentative agreement with the union. The agreement also includes boarding and retro pay. To say Alaska had a turbulent start to the year would perhaps be an understatement. In the wake of the Flight 1282 incident where a door plug blew off one of Alaska's 737 MAX 9 aircraft shortly after take off. The subsequent 737 groundings by the Federal Aviation Administration (FAA) had ""significantly impacted"" the airline. In the first quarter, Alaska had reported a net loss of $132 million. It had received $162 million in initial cash compensation from Boeing. TD Cowen analysts said Alaska had made ""an impressive job navigating"" the impact of the grounding during the quarter. Alaska had also made progress towards completing its acquisition of Hawaiian Airlines after both airlines submitted a joint application to the US Department of Transportation requesting the ""de facto transfer of Hawaiian's international route authorities"". The US Department of Justice has until August 5 to decide on the acquisition. The airline ended the quarter with around $3.1bn. Its adjusted net debt to EBITDAR was 1.0x at the end of the quarter, an improvement from the previous quarter and the end of last year. JP Morgan analysts Jamie Baker and Mark Streeter said its leverage remains below the long-term target of 1.5x, though it is expected to improve once the Hawaiian acquisition is closed. The deal is valued at around $1.9bn.