Alaska Air Group reports second quarter 2018 results

Financial Highlights:

• Reported net income for the second quarter under Generally Accepted Accounting Principles (GAAP) of $193 million, or $1.56 per diluted share, compared to net income of $293 million, or $2.36 per diluted share in the second quarter of 2017. As the company has recently implemented new accounting standards, including the standards relating to revenue recognition and retirement benefits, 2017 financial information has been adjusted.
• Reported second quarter 2018 adjusted diluted earnings per share of $1.66 compared to $2.48 reported in the second quarter of 2017. Second quarter adjusted net income excluding special items such as merger-related costs and mark-to-market fuel hedge accounting adjustments was $206 million compared to $309 million in the second quarter of 2017. This quarter’s adjusted results compare to the First Call analyst consensus estimate of $1.63 per share.
• Paid a $0.32 per-share quarterly cash dividend in the second quarter, a 7% increase over the dividend paid in the second quarter of 2017.
• Repurchased a total of 389,739 shares of common stock for approximately $25 million in the first six months of 2018.
• Generated approximately $725 million of operating cash flow, including merger-related costs and other special items.
• Held $1.6 billion in unrestricted cash and marketable securities as of June 30, 2018.

Operational Highlights:

• Transitioned to a single Passenger Service System (PSS) in April 2018, enabling us to provide one reservation system, one website and one inventory of flights to our guests.
• Reached a merger transition agreement with the Transport Workers Union (TWU) to combine Boeing and Airbus dispatchers into a single group.
• Completed Premium Class rollout on our Boeing 737-800, 900 and 900ER fleets.
• Added Aer Lingus as a global Mileage Plan partner.
• Added two Boeing 737-900ER aircraft and two Airbus A321neo aircraft to the mainline operating fleet in the second quarter of 2018. Added four Embraer 175 (E175) regional jets to Horizon Air’s fleet in the second quarter of 2018 and four E175 aircraft operated by SkyWest Airlines.

Recognition and Awards:

• Ranked “Highest in Customer Satisfaction Among Traditional Carriers” in 2018 by J.D. Power for the 11^th year in a row.
• Received top honors in three Skytrax World Airline Awards categories including “Best Regional Airline in North America,” “Best Airline Staff in North America,” and “Best Cabin Crew in the USA.”
• Virgin America was rated Best Domestic Airline in Travel + Leisure “World’s Best Awards” for 11 years in a row.
• Ranked among Forbes’ 2018 “America’s Best Employers” for the fourth year in a row.
• Awarded “Best Food and Beverage in the Americas” by Airline Passenger Service Experience Association (APEX) passenger choice awards for 2018.
• Received 17^th Diamond Award of Excellence from the Federal Aviation Administration, recognizing both Alaska and Horizon’s aircraft technicians for their commitment to training.

Alaska Air Group, Inc., today reported second quarter 2018 GAAP net income of $193 million, or $1.56 per diluted share, compared to $293 million, or $2.36 per diluted share in the second quarter of 2017. Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $206 million, or $1.66 per diluted share, compared to $309 million, or $2.48 per diluted share, in 2017.

“In the last year and half, we’ve made tremendous progress bringing Alaska Airlines and Virgin America together,” said CEO Brad Tilden. “We’re on very solid footing today thanks to the fantastic efforts of our employees, who delivered exceptional on-time performance and earned our 11th consecutive J.D. Power award for highest in customer satisfaction – all while completing the most complex part of our integration.”

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, 2018 and 2017 to adjusted amounts.

 

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.

 

 

 

 

 

 

 

 

 

 

 

Note A: Pursuant to Regulation G, we are providing reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:

• By eliminating fuel expense and certain special items (including merger-related costs) from our unit metrics, we believe that we have better visibility into the results of operations and our non-fuel cost-reduction initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.
• Cost per ASM (CASM) excluding fuel and certain special items, such as merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.
• Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan, which covers the majority of Air Group employees.
• CASM excluding fuel and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.
• Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as merger-related costs and mark-to-market hedging adjustments, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.
• Although we disclose our passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

 

GLOSSARY OF TERMS

Aircraft Utilization – block hours per day; this represents the average number of hours per day our aircraft are in transit

Aircraft Stage Length – represents the average miles flown per aircraft departure

ASMs – available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown

CASM – operating costs per ASM, or “unit cost”; represents all operating expenses including fuel and special items

CASMex – operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Debt-to-capitalization ratio – represents adjusted debt (long-term debt plus the present value of future operating lease payments) divided by total equity plus adjusted debt

Diluted Earnings per Share – represents earnings per share (EPS) using fully diluted shares outstanding

Diluted Shares – represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

Economic Fuel – best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program

Free Cash Flow – total operating cash flow generated less cash paid for capital expenditures

Load Factor – RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline – represents flying Boeing 737 and Airbus 320 family jets and all associated revenues and costs

Productivity – number of revenue passengers per full-time equivalent employee

RASM – operating revenue per ASMs, or “unit revenue”; operating revenue includes all passenger revenue, freight & mail, Mileage Plan and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional – represents capacity purchased by Alaska from Horizon, SkyWest and PenAir. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchased arrangement (CPAs). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs – revenue passenger miles, or “traffic”; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield – passenger revenue per RPM; represents the average revenue for flying one passenger one mile