Alaska Air Group’s first-quarter profit was dragged down by more expensive fuel and the cost of combining with Virgin America, as well as operational challenges due to weather. The growth from the merger has also raised labor issues.
Four months after Alaska Airlines absorbed San Francisco-based Virgin America, parent company Alaska Air Group reported Wednesday that it made a $99 million profit in its first quarter as a combined airline, down from $184 million in the first quarter a year ago.
The drop in profit was due not only to the continuing costs of the merger but also to a roughly $50 million after-tax increase in fuel prices compared to last year.
The growth from the merger has also raised labor issues, which became apparent Wednesday when Alaska’s pilots issued a statement critical of management.
On a teleconference call with Wall Street analysts, Alaska Air Chief Executive Brad Tilden insisted the integration of Virgin America is progressing well.
“We’re one quarter into 2017, and the business is looking good,” said Tilden, though he added that “we’ve got so many new things going on right now, you might say that our business is under construction.”
Alaska has announced 37 new routes since the merger closed, mostly in California.
Some of the “under construction” disruption became clear just before Tilden spoke. The union representing both Alaska and Virgin America pilots announced that negotiations with management on a new contract covering both sets of pilots have broken down and that the two sides will enter mediation next month.
Pointing to the solid profit in the first quarter and Alaska’s aggressive expansion plans, the Air Line Pilots Association (ALPA) said, “Alaska management fails to recognize the importance of valuing its front-line employees — its pilots.”
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“This is not the path to a smooth, successful merger,” the union added.
Some pilots on Alaska flights last weekend began wearing union lanyards with the slogan “This merger won’t fly without the pilots onboard.”
Chris Notaro, the chairman of ALPA’s Alaska unit, said the sticking points are the typical labor-contract issues: retirement benefits, job security and compensation.
He said mediation will continue through May and that if there is no agreement by the fall, the contract talks will go to arbitration.
On the conference call Tilden said that with the merger, “things are moving fast, and so expectations are changing.”
“I think people are a little bit more on edge. I think that we’re showing signs of it. That’s what’s going on right now,” Tilden said. “I’ll tell any of our pilots that happen to be listening, that nothing has changed at Alaska. We value our employees. We are going to work with them.”
With the merger, Alaska carried more than 10 million passengers last quarter, up 28 percent from a year earlier.
Its quarterly revenue of $1.75 billion was up 30 percent from a year ago. Earnings per share came in at 79 cents, down from $1.46 in 2016.
Alaska cited pretax costs of $40 million in direct merger expenses, an additional $10 million in fuel-hedging adjustments and $88 million in increased fuel costs.
The net after-tax profit comparison for the first quarter, excluding the merger and fuel-hedging costs, was $130 million this year versus $183 million last year, or $1.05 a share versus $1.45 a share last year.
That remaining profit drop was largely accounted for by the increased fuel costs, said Lavanya Sareen, Alaska’s managing director of investor relations.
All those figures reflect the new larger Alaska Air of this year, while last year’s results exclude Virgin America.
Alaska also provided an unaudited comparison of the combined results of the two carriers. While they carried 4.3 percent more passengers in the first quarter than in last year’s comparable period, the pretax net profit this year was $202 million (excluding the merger costs and the fuel hedging adjustment), versus $319 million for the two airlines combined last year.
Wednesday, Alaska Air shares closed down 3.5 percent for the day at $88.25.
It wasn’t only the merger that made for a challenging quarter. The weather didn’t help.
Alaska has generally a stellar on-time record, but last quarter rain and snow intervened to lower its performance, with 78 percent of Alaska flights on time and only 65 percent of Virgin America’s.
“This business has a way of keeping you humble,” said Tilden. “A rough winter on the West Coast shows that we have room for improvement in our handling of our regular operations, particularly snow, de-icing and air traffic control delays.”
“We are in the process of reviewing our operational procedures, including the winter ops program,” Tilden said.
Ben Minicucci, Alaska’s chief operating officer, said the airline may outsource its de-icing operation at Seattle-Tacoma International Airport and is studying the business case.