Alaska Air Group, parent company of Alaska Airlines and regional carrier Horizon Air, posted a net profit of $262 million, or $2.11 per share, in the second quarter, up 36% from the same quarter last year.
“Our revenue initiatives and cost-management efforts are paying off,” CEO Brad Tilden said as Alaska announced its results Thursday. “We set an ambitious plan and are executing it.”
On a teleconference with analysts, Chief Commercial Officer Andrew Harrison said the airline has had to keep ticket prices lower on services to Hawaii and into the state of Alaska because of more competition in those markets. But otherwise, prices out of the airline’s hubs in the Pacific Northwest and California have held up, he said. The introduction of no-frills basic “Saver” fares has helped increase revenue.
With revenue up and costs down, Alaska’s pretax operating profit margin was 15.3%, a 3% improvement on the result a year ago.
Having slowed its previously high growth rate last year, Alaska plans to increase capacity in 2020 by 3% to 4%. Tilden said the airline’s first priority in that growth will be “doing whatever we need to do to defend and grow out of the states of Washington, Alaska and Oregon,” an apparent reference to Alaska Air’s heated competition with Delta Air Lines in the Northwest. Expanding service in California out of San Francisco and Los Angeles will also be a focus.
The airline is positioned for growth, Tilden said, because the implementation of the 2016 merger with Virgin America has been “faster than any other major airline integration” and is now showing up in the financial results.
Last week, Alaska announced one of the last major pieces of that integration was finally in place: Its 900 aircraft mechanics, previously in two separate groups servicing the legacy Boeing planes from Alaska and the Airbus jets inherited from the merger with Virgin America, will merge into a single bargaining unit and have agreed on seniority terms.
With that ratification, all unionized groups at Alaska will be operating under single contract agreements. In addition the reservation and back-office systems of the two airlines are now fully merged. All the Airbus aircraft have been repainted in Alaska colors and refurbishment of their cabin interiors to add more premium seats has been completed on a quarter of those jets.
Alaska President Ben Minicucci said one benefit is the ability to switch the two different airplane types in the fleet to where they make most economic sense in the route network. For example, on high-capacity transcontinental routes, Alaska’s larger Boeing 737s are replacing Airbus A320 jets that have a higher operating cost per-seat and have fewer lucrative premium seats.
Tilden also welcomed a new tentative five-year labor agreement with the International Association of Machinists union, representing 5,200 clerical, office, passenger service, ramp and stores employees.
The wage and benefit increases in these two labor agreements will add $50 million to Alaska’s annual costs from next year, and this year will add $48 million, with $24 million in signing bonuses to be paid next quarter and $24 million in extra wages and benefits for the remainder of the year.
And he praised the “fantastic performance” of Alaska’s front-line employees in winning, for the 12th year in a row, the top ranking for customer satisfaction in the annual J.D. Power survey of traditional U.S. airlines.
Total operating income rose 6 percent in the quarter, while operating costs rose only 2 percent, Alaska said. The 2019 second quarter profit compares to $193 million, or $1.56 per share, a year ago.
Chief Financial Officer Brandon Pedersen said Alaska has repaid $280 million in debt so far this year, which means that it has now paid off $1.2 billion of the $2 billion it borrowed to complete the Virgin America acquisition.
Alaska’s exposure to Boeing’s 737 MAX crisis is small. The airline wasn’t flying the aircraft before the grounding and since then two scheduled MAX deliveries have been suspended with one more due in November. Harrison said Alaska expects to get no more than one MAX by year end, assuming the jet is cleared to fly again in the fall.