April 27--Alaska Air Group Inc. didn't miss a beat in the first quarter, posting yet another record profit of $184 million while hashing out a deal to buy Virgin America airlines.
The Seattle-based parent company to Alaska Airlines and regional carrier Horizon Air grew its net income by more than 20 percent over the then-record $149 million profit it posted in the first quarter of 2015.
The first quarter is traditionally the slowest quarter in the airline industry, but Air Group's $184 million profit nearly matches the $186 million it netted in the last quarter of 2015, also a record. Its $842 million net income for 2015 was a full-year record as well.
Overall, Alaska Air Group has defied the odds in a hyper-competitive and volatile business and posted six consecutive years of record profitability. Each quarter within those years has also been a record with very few exceptions.
On April 4, the company announced a $4 billion deal to purchase San Francisco-based Virgin America, which Air Group executives hope will make Alaska Airlines the dominant carrier on the West Coast.
Air Group CEO Brad Tilden said in an April 21 conference call with investors that Virgin and Alaska "share similar philosophies about building alignment with and taking care of our people and about putting customers first."
A vote by Virgin America shareholders on the deal is expected sometime in the second quarter, Tilden said. The parties hope to close the deal by the end of the year.
The $184 million first quarter profit translates to diluted earnings of $1.46 per share.
Alaska Air Group stock closed April 27 trading at $74.35 per share.
Tilden said the company's earnings per share are expected to outperform all but 36 companies in the S&P 500.
Air Group's 12-month return on invested capital, or ROIC, is 25.6 percent, which is more than three times its cost of capital, he noted.
"As we look forward, our 15,000 employees are operating safely and they are taking care of our customers and each other," Tilden said. "Our core business is strong and we're seeing robust demand for our product. As a result, our business is producing the sort of returns you should expect from high-quality industrials."
Operating revenue was more than $1.3 billion for the quarter, up 6 percent year-over-year; fuel costs -- the largest expense for most airlines behind personnel costs -- were down 29 percent.
Airlines worldwide have benefitted from continually falling fuel prices over the past 18 months and Alaska Air Group's companies are no exception. However, Alaska Air Group has additionally focused on reducing costs to improve its balance sheet regardless of fuel prices, Chief Financial Officer Brandon Pedersen said during the April 21 call.
This year will be the seventh year in a row that Alaska Air Group will reduce its operating expenses, according to Pedersen.
Further, the company continues to improve its fuel efficiency by 1 to 2 percent each quarter, as it upgrades its Alaska Airlines fleet of Boeing 737s. Alaska Airlines' 20 remaining and aging Boeing 737-400s will be replaced with 737-900ERs (extended range), which are 25 percent more fuel efficient, by the end of 2017.
The company's operational cash flow was $527 million for the quarter, Pedersen said, and it finished with nearly $1.6 billion in cash.
"Even after adjusting for leases, we're in a net cash position of almost $600 million," he said. "Our (debt-to-capitalization), including leases, now stands at 26 percent. Our net cash position, the 95 unencumbered aircraft in our fleet, our investment-grade balance sheet, and our long track record of conservative financial management put us in a strong position to raise the capital necessary to fund the proposed acquisition of Virgin America."
Pedersen added that the company is working with potential lenders to finance the deal and initial results are "very encouraging" both to the number and diversity of interested lenders.
The $2.6 billion cash deal also includes Air Group assuming nearly $1.5 billion of Virgin debt -- collectively making a roughly $4.1 billion transaction.
Even without the Virgin America deal, Alaska Air Group is growing. Tilden said as a whole the 41 markets its airlines have added over the past two years are profitable and producing returns higher than investment costs.
Alaska was also one of the first domestic airlines to request federal authorization to start service to Cuba.
In state, Alaska Airlines has announced plans to spend more than $100 million over the next couple years on a new hangar in Anchorage to house the larger 737-900s, as well as remodels to 11 terminals the airline owns across Alaska.
Alaska Air Group also formed McGee Air Services in March. A wholly owned Alaska Airlines subsidiary, McGee will initially operate as a vendor to Alaska Airlines and compete for its service contracts in some markets. The plan is to expand to serve other airlines as the company develops.
The name pays homage to Linious McGee, who, in 1932, founded McGee Airways in Anchorage -- the company that ultimately became Alaska Airlines.
Elwood Brehmer can be reached at email@example.com.
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