Alaska Air cuts its growth plan for the year, but earnings beat expectations

A chaotic schedule meltdown this month produced hundreds of canceled flights for Alaska Airlines, but on Thursday the carrier reported better financial results for the previous three months than Wall Street anticipated.

The airline lost money in January and February as cases of the omicron variant surged, but turned a profit in March as demand rebounded strongly.

In response to the pilot shortage that caused the cancellations, one executive at parent company Alaska Air Group lost his position this week. And on Thursday, management cut its previously projected growth plans for the year.

Yet as air travel rebounds, Alaska’s leadership maintained its forecast for profits going forward.

“In March, we recorded Air Group’s highest ever cash sales, 13% above our prior best month,” CEO Ben Minicucci said on a teleconference with Wall Street analysts. “We expect to deliver profits in the second quarter and for the remainder of the year.”

And Minicucci reiterated longer-term expansion plans.

Those plans include growing Alaska’s Boeing 737 MAX fleet from 20 airplanes now to a potential 145 MAX jets, including 60 of the largest model, the forthcoming MAX 10.

However executives also cautioned of a potential hitch with the MAX 10 order if Boeing is forced to upgrade that jet’s crew-alerting system.

Air travel demand surging

Executive Vice President and Chief Commercial Officer Andrew Harrison said air travel bookings have surged.

“We’ve continued to see strength in leisure demand, but overall demand has also been buoyed by the return of business travel,” he said. “What I’ve literally seen in the last two weeks is a staggering increase in flying for the large tech companies.”

Despite the flight cancellations this month, Minicucci said Alaska’s advantage remains its reputation for “operational excellence … remarkable service and culture of care.”

Alaska’s Chief Operating Officer Constance von Muehlen laid out one consequence of the cancellations debacle in a note to the pilots Tuesday.

She wrote that, “At the end of the day, as leaders we are accountable for outcomes and the shortfalls of the last couple weeks are unacceptable.”

John Ladner, who was vice president of flight operations, in charge of all the pilots, announced that day he is stepping down and will return to regular scheduled flying.

Losses now, profits forecast ahead

With air travel demand strong, the entire U.S. airline industry is anticipating a profitable summer.

Delta, American and United also reported first-quarter losses. Yet all said that despite steeply rising jet fuel prices, they expect to be profitable for the full year.

In the first quarter, Alaska reported a net loss of $143 million or $1.14 per share on revenue of $1.7 billion.

This compared to a Wall Street expectation of a $202 million loss, or $1.60 per share, with revenue just slightly lower, according to consensus estimates from S&P Global Market Intelligence.

Adjusting the quarterly loss to include write-downs of the Horizon Air Q400 turboprops that the airline has decided to phase out by the end of next year, the loss for the quarter is higher at $167 million, but still well below the Wall Street projections.

Chief Financial Officer Shane Tackett said on the earnings call this was “a reasonable result given the omicron backdrop.”

Delta last week reported a net loss in the first quarter of $940 million on revenue of $9.3 billion. American on Wednesday reported a net loss of $1.6 billion on revenue of $8.9 billion. And United on Thursday reported a net loss of $1.4 billion on revenue of $7.6 billion.

Responding to the shortage of pilots and other staff, Alaska has reduced its scheduled flying by about 2% through June.

In its forward guidance Thursday, management revised down its previous plan to increase the number of available seats this year by between 1% and 3% compared to the pre-pandemic 2019 figure, and said instead that seat capacity could be down as much as 3% compared to 2019.

Yet the company said it still expects to meet its 2022 financial target, turning the losses around to project a pre-tax profit for the year of between 6% and 9%.

Minicucci said he expects those profit margins “will lead the industry this year.”

And he said that beyond the capacity cuts through June, the company is “working hard to get our airline back to its pre-COVID size and to return to growth from there.”

The push to hire pilots

The planned fleet expansion will depend on how the company addresses the labor shortage.

Minicucci said Alaska plans to hire 600 Alaska Airlines pilots and 200 Horizon Air regional pilots.

“We’re on track on the regional side, which is fantastic. On the mainline side, we’re halfway through; we’ve hired 300 net pilots so far this year,” he said. “I feel good about the pilot pipeline, but is it a risk for our growth plans going forward? Definitely.”

Minicucci said the need to accelerate pilot hiring is putting “a huge strain on our training systems.”

And adding to the strain, he said, is the airline’s plan to get rid of all its Airbus A320 jets by early next year and its ten A321neo jets by the end of that year.

That means retraining between 600 and 700 Airbus pilots to fly the Boeing 737s at a time when training slots and available flight simulators are needed to train new hire pilots.

Unease around Boeing’s MAX 10

On the earnings call, one analyst asked about the potential impact on Alaska’s fleet plans if the Federal Aviation Administration were to require Boeing to upgrade the crew-alerting system on the forthcoming MAX 10 model, of which Alaska plans to buy 60.

The possibility of requiring a cockpit system upgrade was raised recently by lawmakers and critics, citing the MAX’s failure to meet the current safety standard on crew alerts.

If that happens and the MAX 10 enters service with different cockpit systems than the other MAXs, requiring different pilot training, Nat Pieper, senior vice president of fleet, indicated that Alaska might convert its order for MAX 10s to the smaller MAX 9s already in its fleet.

“We are really bullish on that airplane [the MAX 10]. We think it’s got the potential to have the best seat costs of any airplane in our fleet,” Pieper said. “But obviously that assumes a level of pilot commonality that runs through all of the models.”

“Should that not be the case, it’s something we would reassess,” he said. “And obviously the MAX 9 is a great airplane for us.”

The better-than-expected results sent the stock price up more than 3% in early trading before falling back to close up just 9 cents for the day at $57.58.

This is the final full month of former CEO Brad Tilden’s tenure at Alaska Air. He resigned as CEO a year ago and will step down as chairman of the board on May 5.

Alaska’s proxy statement filed last month revealed 2021 total compensation for the top executives.

Including stock awards that depend upon the share price performance, Minicucci received $5.1 million last year.

Tackett and Harrison got $3 million and von Muehlen received $2 million.