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Alaska Air Group reports second quarter 2017 results

SEATTLE, July 26, 2017 /PRNewswire/ --

Financial Highlights:

  • Reported net income for the second quarter under Generally Accepted Accounting Principles ("GAAP") of $296 million or $2.38 per diluted share, compared to net income of $260 million, or $2.10 per diluted share in 2016. As the acquisition of Virgin America Inc. ("Virgin America") closed on Dec. 14, 2016, second quarter 2017 information reflects the results of Virgin America, including the impacts associated with purchase accounting. Second quarter 2016 results do not include Virgin America.
  • Reported second quarter net income, excluding merger-related costs and mark-to-market fuel hedging adjustments, of $312 million, compared to $263 million in the second quarter of 2016. Adjusted diluted earnings per share were $2.51, compared to $2.12 in the second quarter of 2016. This quarter's results were in line with First Call analyst consensus estimate of $2.52 per share.
  • Paid $0.30 per-share quarterly cash dividend in the second quarter, a 9% increase over the dividend paid in the second quarter of 2016.
  • Generated approximately $1.1 billion of operating cash flow and used approximately $512 million for capital expenditures, resulting in $572 million of free cash flow in the second quarter of 2017.
  • Held $1.9 billion in unrestricted cash and marketable securities as of June 30, 2017.

Operational Highlights:

  • Launched nine new routes during the quarter and announced 10 new routes, including obtaining final approval from the Department of Transportation for three routes to Mexico City.
  • Took delivery of two of five Airbus A321neos scheduled for delivery in 2017, becoming the first airline to operate this aircraft.
  • Began jet service at Horizon with the first flights of the new Embraer 175 jets after taking delivery of the first six of 33 aircraft scheduled for delivery over the next two years.
  • Entered into an agreement with the International Brotherhood of Teamsters to amend the eight-year contract with Horizon's pilots, providing Horizon the ability to attract and retain the best pilots in the regional industry.
  • Added Finnair as a global Mileage Plan partner.

Recognition and Awards

  • Ranked "Highest in Customer Satisfaction Among Traditional Carriers" in 2017 by J.D. Power for the 10th year in a row.
  • Virgin America: Rated Best Domestic Airline in Travel + Leisure "World's Best Awards" for 10 years in a row.
  • Rated "Best Airline Staff in North America" and "Best Regional Airline in North America" by Skytrax World Airline Awards.
  • Awarded TripAdvisor's 2017 Travelers' Choice Award for second-best midsize and low-cost airlines in North America and one of the top 10 best airlines in the world.
  • Ranked among Forbes' 2017 "America's Best Employers" for the third year in a row.
  • Certified as a great workplace by Great Place to Work, the global authority on high-trust, high-performance workplace cultures.
  • Received 16th Diamond Award of Excellence from the Federal Aviation Administration, recognizing both Alaska and Horizon's aircraft technicians for their commitment to training.
  • Received the 2017 Visionary Award for Leadership and Governance of a Public Company, presented by the Women Corporate Directors Global Institute, recognizing diversity among our directors.
  • Ranked among the Fortune 500 for the fourth year in a row.

Alaska Air Group Inc., (NYSE: ALK) today reported second quarter 2017 GAAP net income of $296 million, or $2.38 per diluted share, compared to $260 million, or $2.10 per diluted share in the second quarter of 2016. Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $312 million, or $2.51 per diluted share, compared to $263 million, or $2.12 per diluted share, in 2016.

"We had a very solid quarter, driven by a growing customer base and strong revenue performance," said CEO Brad Tilden. "Although we're dealing with a number of operational challenges, our employees continue to deliver excellent service. We are delighted that Alaska and Virgin America received top honors from J.D. Power* and Travel + Leisure* respectively, each for the 10th consecutive year. I want to congratulate our team for receiving these prestigious awards."

The following table reconciles the company's reported GAAP net income and earnings per diluted share ("diluted EPS") for the three and six months ended June 30, 2017, and 2016 to adjusted amounts:


Three Months Ended June 30,


2017


2016

(in millions, except per-share amounts)

Dollars


Diluted EPS


Dollars


Diluted EPS

Reported GAAP net income

$

296



$

2.38



$

260



$

2.10


Mark-to-market fuel hedge adjustments

2



0.02



(10)



(0.08)


Special items—merger-related costs

24



0.19



14



0.11


Income tax effect on special items and fuel hedge adjustments

(10)



(0.08)



(1)



(0.01)


Non-GAAP adjusted net income and per-share amounts

$

312



$

2.51



$

263



$

2.12





Six Months Ended June 30,


2017


2016


Dollars


Diluted EPS


Dollars


Diluted EPS

Reported GAAP net income and diluted EPS

$

395



$

3.17



$

444



$

3.56


Mark-to-market fuel hedge adjustments

12



0.10



(12)



(0.10)


Special items—merger-related costs

64



0.51



14



0.12


Income tax effect on special items and fuel hedge adjustments

(28)



(0.22)



(1)



(0.01)


Non-GAAP adjusted net income and diluted EPS

$

443



$

3.56



$

445



$

3.57


* Alaska Airlines: highest in airline customer satisfaction among traditional carriers in the J.D. Power 2008-2017 North America Airline Satisfaction Study. Virgin America: "Top Domestic Airline" 2017 in Travel + Leisure "World's Best Awards".

Statistical data, as well as a reconciliation of the reported non-GAAP financial measures, can be found in the accompanying tables. A glossary of financial terms can be found on the last page of this release.

A conference call regarding the second quarter results will be simulcast online at 8:30 a.m. Pacific time on July 26, 2017. It can be accessed through the company's website at www.alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call.

References in this news release to "Air Group," "company," "we," "us" and "our" refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified. Alaska Airlines, Inc., Horizon Air Industries, Inc., and Virgin America Inc. are referred to as "Alaska," "Horizon," and "Virgin America" respectively, and together as our "airlines."

This news release may contain forward-looking statements subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the Company's Annual Report on Form 10-K for the year ended Dec. 31, 2016, as well as in other documents filed by the Company with the SEC after the date thereof. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, changes in laws and regulations and risks inherent in the achievement of anticipated synergies and the timing thereof in connection with the acquisition of Virgin America. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance, or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.

Alaska Airlines, together with Virgin America and its regional partners, flies 40 million guests a year to 118 destinations with an average of 1,200 daily flights across the United States and to Mexico, Canada, Costa Rica and Cuba. With Alaska and Alaska Global Partners, guests can earn and redeem miles on flights to more than 900 destinations worldwide. Alaska Airlines ranked "Highest in Customer Satisfaction Among Traditional Carriers in North America" in the J.D. Power North America Satisfaction Study for 10 consecutive years from 2008 to 2017. Alaska Mileage Plan ranked "Highest in Customer Satisfaction with Airline Loyalty Rewards Programs" in the J.D. Power 2016 Airline Loyalty/Rewards Program Satisfaction Report for the last three consecutive years. Learn more about Alaska's award-winning service and unmatched reliability at newsroom.alaskaair.com and blog.alaskaair.com. Alaska Airlines, Virgin America and Horizon Air are subsidiaries of Alaska Air Group (NYSE: ALK).

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Alaska Air Group, Inc.













As the acquisition closed on December 14, 2016, amounts presented below include Virgin America results for the three and six months ended June 30, 2017 but not for the prior periods.














Three Months Ended June 30,


Six Months Ended June 30,

(in millions, except per-share amounts)

2017


2016


Change(a)


2017


2016


Change(a)

Operating Revenues:












Passenger












Mainline

$

1,556



$

1,036



50

%


$

2,828



$

1,963



44

%

Regional

251



227



11

%


463



433



7

%

Total passenger revenue

1,807



1,263



43

%


3,291



2,396



37

%

Freight and mail

32



27



19

%


56



51



10

%

Other—net

263



204



29

%


504



394



28

%

Total Operating Revenues

2,102



1,494



41

%


3,851



2,841



36

%













Operating Expenses:












Wages and benefits

469



332



41

%


917



668



37

%

Variable incentive pay

27



32



(16)

%


58



64



(9)

%

Aircraft fuel, including hedging gains and losses

344



201



71

%


683



368



86

%

Aircraft maintenance

96



65



48

%


183



133



38

%

Aircraft rent

69



26



165

%


134



55



144

%

Landing fees and other rentals

99



63



57

%


214



143



50

%

Contracted services

77



60



28

%


158



120



32

%

Selling expenses

97



55



76

%


178



104



71

%

Depreciation and amortization

90



92



(2)

%


180



180



%

Food and beverage service

50



31



61

%


95



62



53

%

Third-party regional carrier expense

27



24



13

%


54



47



15

%

Special items—merger-related costs

24



14



71

%


64



14



357

%

Other

140



81



73

%


274



175



57

%

Total Operating Expenses

1,609



1,076



50

%


3,192



2,133



50

%

Operating Income

493



418



18

%


659



708



(7)

%













Nonoperating Income (Expense):












Interest income

9



7





16



13




Interest expense

(26)



(9)





(51)



(22)




Interest capitalized

4



7





8



15




Other—net

(1)



(3)





(1)



(2)




Total Nonoperating Income (Expense)

(14)



2





(28)



4




Income Before Income Tax

479



420





631



712




Income tax expense

183



160





236



268




Net Income

$

296



$

260





$

395



$

444
















Basic Earnings Per Share:

$

2.40



$

2.11





$

3.19



$

3.58




Diluted Earnings Per Share:

$

2.38



$

2.10





$

3.17



$

3.56
















Shares Used for Computation:












Basic

123.573



123.250





123.534



123.900




Diluted

124.332



123.988





124.374



124.715
















Cash dividend declared per share:

$

0.300



$

0.275





$

0.600



$

0.550






(a)

See Combined Comparative information in the accompanying pages for year-over-year comparisons including Virgin America.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)




Alaska Air Group, Inc.








(in millions)

June 30, 2017


December 31, 2016

Cash and marketable securities

$

1,922



$

1,580






Total current assets

2,425



2,050


Property and equipment—net

6,002



5,666


Goodwill

1,940



1,934


Intangible assets

137



143


Other assets

216



169


Total assets

10,720



9,962






Air traffic liability

1,255



849


Current portion of long-term debt

337



319


Other current liabilities

1,382



1,367


Current liabilities

2,974



2,535


Long-term debt

2,469



2,645


Other liabilities and credits

2,013



1,851


Shareholders' equity

3,264



2,931


Total liabilities and shareholders' equity

$

10,720



$

9,962






Debt-to-capitalization ratio, adjusted for operating leases(a)

55

%


59

%





Number of common shares outstanding

123.521



123.328




(a)

Calculated using the present value of remaining aircraft lease payments.

 

OPERATING STATISTICS SUMMARY (unaudited)

Alaska Air Group, Inc.













As the acquisition closed on December 14, 2016, Consolidated and Mainline amounts presented below include Virgin America results for the three and six months ended June 30, 2017 but not for the prior periods.














Three Months Ended June 30,


Six Months Ended June 30,


2017


2016


Change(e)


2017


2016


Change(e)

Consolidated Operating Statistics:(a)












Revenue passengers (000)

11,400


8,647


31.8%


21,417


16,482


29.9%

RPMs (000,000) "traffic"

13,554


9,397


44.2%


25,262


17,968


40.6%

ASMs (000,000) "capacity"

15,612


11,062


41.1%


30,006


21,515


39.5%

Load factor

86.8%


84.9%


1.9 pts


84.2%


83.5%


0.7 pts

Yield

13.33¢


13.44¢


(0.8)%


13.03¢


13.34¢


(2.3)%

PRASM

11.57¢


11.42¢


1.3%


10.97¢


11.14¢


(1.5)%

RASM

13.46¢


13.51¢


(0.4)%


12.83¢


13.21¢


(2.9)%

CASMex(b)

7.94¢


7.78¢


2.1%


8.15¢


8.14¢


0.1%

Economic fuel cost per gallon(c)

$1.71


$1.53


11.8%


$1.75


$1.41


24.1%

Fuel gallons (000,000)

201


138


45.7%


385


270


42.6%

ASM's per gallon

77.7


80.2


(3.1)%


77.9


79.7


(2.3)%

Average number of full-time equivalent employees (FTE)

19,745


14,470


36.5%


19,214


14,414


33.3%













Mainline Operating Statistics:












Revenue passengers (000)

8,950


6,282


42.5%


16,733


11,925


40.3%

RPMs (000,000) "traffic"

12,525


8,456


48.1%


23,352


16,172


44.4%

ASMs (000,000) "capacity"

14,341


9,875


45.2%


27,602


19,229


43.5%

Load factor

87.3%


85.6%


1.7 pts


84.6%


84.1%


0.5 pts

Yield

12.42¢


12.25¢


1.4%


12.11¢


12.14¢


(0.2)%

PRASM

10.85¢


10.49¢


3.4%


10.25¢


10.21¢


0.4%

RASM

12.76¢


12.61¢


1.2%


12.13¢


12.31¢


(1.5)%

CASMex(b)

7.15¢


6.88¢


3.9%


7.33¢


7.18¢


2.1%

Economic fuel cost per gallon(c)

$1.70


$1.52


11.8%


$1.74


$1.40


24.3%

Fuel gallons (000,000)

179


118


51.7%


343


231


48.5%

ASM's per gallon

80.3


83.7


(4.1)%


80.5


83.2


(3.2)%

Average number of FTE's

15,447


11,261


37.2%


15,227


11,192


36.1%

Aircraft utilization

11.4


10.8


5.6%


11.1


10.7


3.7%

Average aircraft stage length

1,294


1,177


9.9%


1,295


1,195


8.4%

Operating fleet

221


152


69 a/c


221


152


69 a/c













Regional Operating Statistics:(d)












Revenue passengers (000)

2,450


2,365


3.6%


4,685


4,558


2.8%

RPMs (000,000) "traffic"

1,030


941


9.5%


1,910


1,796


6.3%

ASMs (000,000) "capacity"

1,270


1,187


7.0%


2,404


2,287


5.1%

Load factor

81.1%


79.3%


1.8 pts


79.4%


78.5%


0.9 pts

Yield

24.30¢


24.17¢


0.5%


24.22¢


24.13¢


0.4%

PRASM

19.70¢


19.16¢


2.8%


19.24¢


18.95¢


1.5%

Operating fleet

78


69


9 a/c


78


69


9 a/c



(a)

Except for full-time equivalent employees, data includes information related to third-party regional capacity purchase flying arrangements.

(b)

See a reconciliation of this non-GAAP measure and Note A for a discussion of potential importance of this measure to investors in the accompanying pages.

(c) 

See a reconciliation of economic fuel cost in the accompanying pages.

(d)

Data presented includes information related to flights operated by Horizon Air and third-party carriers.

(e)

See Combined Comparative information in the accompanying pages for year-over-year comparisons including Virgin America.

 

SUPPLEMENTARY COMBINED COMPARATIVE FINANCIAL AND OPERATING INFORMATION (unaudited)

We believe that analysis of specific financial and operational results on a combined basis provides more meaningful year-over-year comparisons. The table below provides "Combined Comparative" results for the three and six months ended June 30, 2016, determined as the sum of the historical consolidated results of Air Group and of Virgin America. Virgin America's financial information has been conformed to reflect Air Group's historical financial statement presentation for each period presented. This information does not purport to reflect what our financial and operational results would have been had the acquisition been consummated at the beginning of the periods presented.


Three Months Ended June 30,


Six Months Ended June 30,


2017

2016




2017


2016




As Reported


Combined(a)


Change


As Reported


Combined(a)


Change

Combined Comparative Operating Results

Passenger revenue

$

1,807



$

1,647



10%


$

3,291



$

3,109



6%

Other revenue

295



272



8%


560



520



8%

Total Operating Revenues

2,102



1,919



10%


3,851



3,629



6%

Non-fuel operating expense

1,265



1,152



10%


2,509



2,302



9%

Fuel expense

344



278



24%


683



516



32%

Total Operating Expenses

1,609



1,430



13%


3,192



2,818



13%

Operating Income

493



489



1%


659



811



(19)%

Nonoperating income (expense)

(14)



(3)



367%


(28)



(5)



460%

Income Before Tax

479



486



(1)%


631



806



(22)%

Special items—merger-related costs

24



18



33%


64



20



220%

Mark-to-market fuel hedge adjustments

2



(11)



(118)%


12



(14)



(186)%

Adjusted Income Before Tax

$

505



$

493



2%


$

707



$

812



(13)%













Combined Comparative Operating Statistics

Revenue passengers (000)

11,400



10,734



6.2%


21,417



20,336



5.3%

RPMs (000,000)

13,554



12,562



7.9%


25,262



23,748



6.4%

ASMs  (000,000)

15,612



14,751



5.8%


30,006



28,470



5.4%

Load Factor

86.8

%


85.2

%


1.6 pts


84.2

%


83.4

%


0.8 pts

PRASM

11.57

¢


11.16

¢


3.7%


10.97

¢


10.92

¢


0.5%

RASM

13.46

¢


13.01

¢


3.5%


12.83

¢


12.75

¢


0.6%

CASMex

7.94

¢


7.69

¢


3.3%


8.15

¢


8.01

¢


1.7%



(a)

Refer to our Investor Update issued on April 12, 2017 on Form 8-K for further details of the calculation of the three and six months ended June 30, 2016 combined data.

2016 Combined Comparative Operating Results and Statistics—Other Quarters

Refer to our Investor Update issued on April 12, 2017 on Form 8-K for combined comparative operating results and statistics for each of the quarters and full year 2016.

OPERATING SEGMENTS (unaudited)

Alaska Air Group, Inc.




























As the acquisition closed on December 14, 2016, Consolidated and Mainline amounts presented below include Virgin America results for the three and six months ended June 30, 2017 but not for the prior periods.
















Three Months Ended June 30, 2017

(in millions)

Mainline


Regional


Horizon


Consolidating
& Other


Air Group
Adjusted(a)


Special
Items(b)


Consolidated

Operating revenues














Passenger














Mainline

$

1,556



$



$



$



$

1,556



$



$

1,556


Regional



251







251





251


   Total passenger revenues

1,556



251







1,807





1,807


CPA revenues





108



(108)








Freight and mail

31



1







32





32


Other—net

244



19



1



(1)



263





263


Total operating revenues

1,831



271



109



(109)



2,102





2,102


Operating expenses














Operating expenses, excluding fuel

1,026



206



116



(107)



1,241



24



1,265


Economic fuel

304



39





(1)



342



2



344


Total operating expenses

1,330



245



116



(108)



1,583



26



1,609


Nonoperating income (expense)














Interest income

9









9





9


Interest expense

(23)





(3)





(26)





(26)


Other

3





1



(1)



3





3


Total Nonoperating income (expense)

(11)





(2)



(1)



(14)





(14)


Income (loss) before income tax

$

490



$

26



$

(9)



$

(2)



$

505



$

(26)



$

479





Three Months Ended June 30, 2016

(in millions)

Mainline


Regional


Horizon


Consolidating


Air Group
Adjusted(a)


Special
Items(b)


Consolidated

Operating revenues














Passenger














Mainline

$

1,036



$



$



$



$

1,036



$



$

1,036


Regional



227







227





227


   Total passenger revenues

1,036



227







1,263





1,263


CPA revenues





110



(110)








Freight and mail

26



1







27





27


Other—net

184



19



1





204





204


Total operating revenues

1,246



247



111



(110)



1,494





1,494


Operating expenses














Operating expenses, excluding fuel

679



192



101



(111)



861



14



875


Economic fuel

180



31







211



(10)



201


Total operating expenses

859



223



101



(111)



1,072



4



1,076


Nonoperating income (expense)














Interest income

6





1





7





7


Interest expense

(4)





(4)



(1)



(9)





(9)


Other

3







1



4





4


Total Nonoperating income (expense)

5





(3)





2





2


Income (loss) before income tax

$

392



$

24



$

7



$

1



$

424



$

(4)



$

420




(a)

The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and does not include certain charges. See Note A in the accompanying pages for further information.

(b)

Includes merger-related costs and mark-to-market fuel hedge accounting adjustments.

 


Six Months Ended June 30, 2017

(in millions)

Mainline


Regional


Horizon


Consolidating


Air Group
Adjusted(a)


Special
Items(b)


Consolidated

Operating revenues














Passenger














Mainline

2,828









2,828





2,828


Regional



463







463





463


  Total passenger revenues

2,828



463







3,291





3,291


Revenue from CPA with Alaska





205



(205)








Freight and mail

54



2







56





56


Other—net

466



36



2





504





504


Total operating revenues

3,348



501



207



(205)



3,851





3,851


Operating expenses














Operating expenses, excluding fuel

2,024



406



219



(204)



2,445



64



2,509


Economic fuel

596



75







671



12



683


Total operating expenses

2,620



481



219



(204)



3,116



76



3,192


Nonoperating income (expense)














Interest income

16









16





16


Interest expense

(45)





(5)



(1)



(51)





(51)


Other

6





1





7





7


Total Nonoperating income (expense)

(23)





(4)



(1)



(28)





(28)


Income (loss) before income tax

705



20



(16)



(2)



707



(76)



631





Six Months Ended June 30, 2016

(in millions)

Mainline


Regional


Horizon


Consolidating


Air Group
Adjusted(a)


Special
Items(b)


Consolidated

Operating revenues














Passenger














Mainline

1,963









1,963





1,963


Regional



433







433





433


Total passenger revenues

1,963



433







2,396





2,396


Revenue from CPA with Alaska





213



(213)








Freight and mail

49



2







51





51


Other—net

356



36



2





394





394


Total operating revenues

2,368



471



215



(213)



2,841





2,841


Operating expenses














Operating expenses, excluding fuel

1,380



378



206



(213)



1,751



14



1,765


Economic fuel

324



56







380



(12)



368


Total operating expenses

1,704



434



206



(213)



2,131



2



2,133


Nonoperating income (expense)














Interest income

12





1





13





13


Interest expense

(16)





(5)



(1)



(22)





(22)


Other

10







3



13





13


Total Nonoperating income (expense)

6





(4)



2



4





4


Income (loss) before income tax

670



37



5



2



714



(2)



712




(a)

The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and does not include certain charges. See Note A in the accompanying pages for further information.

(b)

Includes merger-related costs and mark-to-market fuel hedge accounting adjustments.

 

GAAP TO NON-GAAP RECONCILIATIONS (unaudited)

Alaska Air Group, Inc.
















As the acquisition closed on December 14, 2016, amounts presented below include Virgin America results for the three and six months ended June 30, 2017 but not for the prior period.









CASM Excluding Fuel and Special Items Reconciliation






Three Months Ended June 30,


Six Months Ended June 30,


2017


2016


2017


2016

Consolidated:








CASM

10.31

¢


9.73

¢


10.64

¢


9.91

¢

Less the following components:








Aircraft fuel, including hedging gains and losses

2.21



1.82



2.28



1.71


Special items—merger-related costs

0.16



0.13



0.21



0.06


CASM excluding fuel and special items

7.94

¢