Alaska Air Group overcame rampant flight delays and tense labor relations to post a $90.2 million profit in the third quarter, exceeding...
Alaska Air Group overcame rampant flight delays and tense labor relations to post a $90.2 million profit in the third quarter, exceeding most investors’ expectations.
Chief Executive Bill Ayers credited employees’ hard work and the loyalty of Alaska Airlines and Horizon Air frequent fliers for the upside surprise.
“Passengers continue to prefer our product, despite the summer’s operational difficulties,” Ayer said on a conference call to discuss the numbers.
Aggressive purchases of fuel-hedging contracts and record percentages of filled seats also helped.
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Alaska Airlines and Horizon Air are subsidiaries of Alaska Air Group.
The parent company had revenue of $845.7 million in the seasonally busy third quarter, up 10 percent from the same period a year ago. Profit was up 22 percent year over year, and the company expects to post a profit for the full year as well.
Including one-time gains, profit for the quarter was $2.71 a share.
Excluding those gains, Alaska’s profit worked out to $2.16 a share. The consensus expectation was for $2.01 per share, according to Zack’s Investment Research.
Alaska had well-publicized difficulties with its on-time performance and baggage delivery earlier this year after it outsourced hundreds of jobs and laid off workers as part of a companywide effort to trim annual expenses by $150 million.
Ayer said further cost cuts may be necessary due to fierce competition and rising fuel prices, but he added the worst may be over for employees.
“The cost savings that we need to make, need to come from other places, where this is not a situation where we want to go back and back to labor,” Ayer said.
Alaska’s third-quarter results were particularly impressive, since fuel prices soared during the period due to Hurricane Katrina and ongoing tensions in the Mideast.
Alaska helped itself by previously hedging — or pre-purchasing — 50 percent of its third-quarter fuel needs at a price equivalent to $28.81 per barrel of crude oil.
Crude-oil prices exceeded $60 per barrel for most of the quarter and rose to nearly $70 per barrel at the end of August.
Alaska’s fuel hedging saved the company $43.5 million in the third quarter and $93.7 million so far this year.
The company has 50 percent of its fourth-quarter fuel needs hedged at $31.85 per barrel, 42 percent of its 2006 fuel hedged at just under $40 per barrel and 20 percent of 2007 fuel hedged at $45 per barrel.
Still, Ayer is not complacent about the threat of persistently high fuel prices.
“With our hedge position we bought some time, basically,” Ayer said. “If fuel stays higher, the fares have to go up. There’s no two ways about it.”
The news on ticket prices has been good for Alaska as well.
Alaska’s yields — an airline-industry measure of the profitability of each passenger carried — increased 7.5 percent, thanks largely to Alaska’s ability to raise fares. Price increases have been particularly strong on transcontinental routes and in Southern California, Ayer said.
The company’s profitability also benefited from steps initially taken to reduce delays. Alaska cut 16 flights from its summer schedule to try to improve its on-time performance. Consequently, the number of seats flown in the third quarter declined 3.2 percent.
Yet Alaska carried 0.6 percent more passengers than in the same period a year ago, so sales rose as costs declined.
Ayer went out of his way to thank frequent fliers of Alaska and Horizon for continuing to use the carriers, though many had their schedules repeatedly disrupted earlier in the year.
“We know our service fell short of their expectations during the summer and we are grateful they stuck with us,” Ayer said.
As a sign of that gratitude, Alaska this month is sending boxes of Moose Munch caramel popcorn to its MVP Gold members.
David Bowermaster: 206-464-2724 or email@example.com