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Alaska Air Group reports second quarter 2019 results

SEATTLE, July 25, 2019 /PRNewswire/ --

Financial Highlights:

  • Reported net income for the second quarter of 2019 under Generally Accepted Accounting Principles (GAAP) of $262 million, or $2.11 per diluted share, compared to net income of $193 million, or $1.56 per diluted share in the second quarter of 2018.
  • Reported net income for the second quarter of 2019, excluding merger-related costs and mark-to-market fuel hedge accounting adjustments of $270 million, or $2.17 per diluted share, compared to $206 million or $1.66 per diluted share, in the second quarter of 2018. This quarter's adjusted results compare to the First Call analyst consensus estimate of $2.13 per share.
  • Paid a $0.35 per-share quarterly cash dividend in the second quarter, a 9% increase over the dividend paid in the second quarter of 2018.
  • Repurchased a total of 408,665 shares of common stock for approximately $25 million in the first six months of 2019.
  • Generated $1 billion of operating cash flow in the first six months of 2019, including merger-related costs.
  • Held $1.6 billion in unrestricted cash and marketable securities as of June 30, 2019.
  • Reduced debt-to-capitalization ratio to 45% as of June 30, 2019, compared to 47% as of Dec. 31, 2018.

Operational Highlights:

  • Alaska technicians, represented by the Aircraft Mechanics Fraternal Association, ratified an integrated seniority list and a transition agreement, including a two-year contract extension, in July 2019.
  • Reached a tentative agreement with the International Association of Machinists on a new five-year contract for Alaska's clerical, office, passenger service, ramp and stores employees.
  • Added EL AL Israel Airlines as a new global Mileage Plan partner.
  • Announced a new route connecting Paine Field in Everett, Washington, to Palm Springs, California.
  • Finished painting the Alaska Airlines livery on all Airbus aircraft.
  • Completed cabin interior renovations of 14 Airbus aircraft and 11 737-700 aircraft.
  • Installed high-speed satellite Wi-Fi on the 44th mainline aircraft.

Recognition and Awards:

  • Ranked "Highest in Customer Satisfaction Among Traditional Carriers" in 2019 by J.D. Power for the 12th year in a row.
  • Earned top spot for customer satisfaction on the American Customer Satisfaction Index Travel Report for 2018 - 2019.
  • Ranked as the best U.S. airline by Wallethub.
  • Named as No. 2 Domestic Airline by Travel & Leisure "World's Best Awards."

Alaska Air Group Inc. today reported second quarter 2019 GAAP net income of $262 million, or $2.11 per diluted share, compared to $193 million, or $1.56 per diluted share in the second quarter of 2018. Excluding the impact of merger-related costs, mark-to-market fuel hedge adjustments and other special items, the company reported adjusted net income of $270 million, or $2.17 per diluted share, compared to $206 million, or $1.66 per diluted share in 2018.

"The three-percentage point improvement in our adjusted pretax margin shows that our revenue initiatives and cost management efforts are paying off. We set an ambitious plan and are executing it," said Alaska CEO Brad Tilden. "But what our people really do best is provide genuine, caring service for our guests, and that's why they earned our 12th-straight J.D. Power award this year. From all of us on the leadership team, thank you to our employees for your fantastic performance. We're all looking forward to building on this momentum in the months and years ahead."

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, 2019, and 2018 to adjusted amounts.

Three Months Ended June 30,

2019

2018

(in millions, except per-share amounts)

Dollars

Diluted EPS

Dollars

Diluted EPS

GAAP net income and diluted EPS

$

262

$

2.11

$

193

$

1.56

Mark-to-market fuel hedge adjustments

3

0.02

(22)

(0.18)

Special items - merger-related costs

8

0.06

39

0.31

Income tax effect of reconciling items above

(3)

(0.02)

(4)

(0.03)

Non-GAAP adjusted net income and diluted EPS

$

270

$

2.17

$

206

$

1.66

 

Six Months Ended June 30,

2019

2018

(in millions, except per-share amounts)

Dollars

Diluted EPS

Dollars

Diluted EPS

GAAP net income and diluted EPS

$

266

$

2.14

$

197

$

1.59

Mark-to-market fuel hedge adjustments

(1)

(0.01)

(35)

(0.28)

Special items - merger-related costs

34

0.27

45

0.36

Special items - other

—

—

25

0.20

Income tax effect of reconciling items above

(8)

(0.06)

(8)

(0.06)

Non-GAAP adjusted net income and diluted EPS

$

291

$

2.34

$

224

$

1.81

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 streamed online at 1:30 p.m. Pacific time on July 25, 2019. It can be accessed 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. (through July 20, 2018, at which point it was legally merged into Alaska Airlines, 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, 2018, 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 and its regional partners fly 46 million guests a year to more than 115 destinations with an average of 1,200 daily flights across the United States and to Mexico, Canada and Costa Rica. Alaska Airlines ranked "Highest in Customer Satisfaction Among Traditional Carriers in North America" in the J.D. Power North America Airline Satisfaction Study for 12 consecutive years from 2008 to 2019. Learn about Alaska's award-winning service at newsroom.alaskaair.com and blog.alaskaair.com. Alaska Airlines and Horizon Air are subsidiaries of Alaska Air Group (NYSE: ALK).


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)





Alaska Air Group, Inc.























Three Months Ended June 30,

Six Months Ended June 30,

(in millions, except per-share amounts)

2019

2018

Change

2019

2018

Change

Operating Revenues:










Passenger revenue

$

2,111

$

1,997

6

%

$

3,827

$

3,681

4

%

Mileage Plan other revenue

118

108

9

%

228

215

6

%

Cargo and other

59

51

16

%

109

92

18

%

Total Operating Revenues

2,288

2,156

6

%

4,164

3,988

4

%

Operating Expenses:










Wages and benefits

567

544

4

%

1,124

1,080

4

%

Variable incentive pay

44

38

16

%

79

77

3

%

Aircraft fuel, including hedging gains and losses

502

475

6

%

922

884

4

%

Aircraft maintenance

115

106

8

%

235

213

10

%

Aircraft rent

82

77

6

%

165

151

9

%

Landing fees and other rentals

113

110

3

%

245

236

4

%

Contracted services

70

76

(8)

%

142

157

(10)

%

Selling expenses

87

88

(1)

%

159

166

(4)

%

Depreciation and amortization

105

97

8

%

211

191

10

%

Food and beverage service

53

55

(4)

%

102

105

(3)

%

Third-party regional carrier expense

42

39

8

%

83

76

9

%

Other

136

141

(4)

%

274

282

(3)

%

Special items - merger-related costs

8

39

(79)

%

34

45

(24)

%

Special items - other

—

—

NM

—

25

NM

Total Operating Expenses

1,924

1,885

2

%

3,775

3,688

2

%

Operating Income

364

271

34

%

389

300

30

%

Nonoperating Income (Expense):










Interest income

11

10

10

%

20

18

11

%

Interest expense

(20)

(25)

(20)

%

(42)

(49)

(14)

%

Interest capitalized

3

4

(25)

%

7

9

(22)

%

Other—net

(7)

(1)

NM

(17)

(13)

31

%

Total Nonoperating Income (Expense)

(13)

(12)

8

%

(32)

(35)

(9)

%

Income Before Income Tax

351

259



357

265


Income tax expense

89

66



91

68


Net Income

$

262

$

193



$

266

$

197














Basic Earnings Per Share:

$

2.12

$

1.57



$

2.15

$

1.60


Diluted Earnings Per Share:

$

2.11

$

1.56



$

2.14

$

1.59














Shares Used for Computation:










Basic

123.418

123.268



123.355

123.212


Diluted

124.301

124.036



124.179

123.953














Cash dividend declared per share:

$

0.35

$

0.32



$

0.70

$

0.64


 


CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


Alaska Air Group, Inc.






(in millions)

June 30, 2019

December 31, 2018

Cash and marketable securities

$

1,627

$

1,236

Other current assets

591

551

Current assets

2,218

1,787

Property and equipment - net

6,744

6,781

Operating lease assets

1,696

—

Goodwill

1,943

1,943

Intangible assets - net

125

127

Other assets

225

274

Total assets

12,951

10,912




Air traffic liability

1,173

788

Current portion of long-term debt

288

486

Current portion of operating lease liabilities

273

—

Other current liabilities

1,800

1,668

Current liabilities

3,534

2,942

Long-term debt

1,538

1,617

Long-term operating lease liabilities

1,424

—

Other liabilities and credits

2,482

2,602

Shareholders' equity

3,973

3,751

Total liabilities and shareholders' equity

$

12,951

$

10,912




Debt-to-capitalization ratio, including operating leases(a)

45

%

47

%




Number of common shares outstanding

123.338

123.194


(a)

Following the adoption of the new lease accounting standard on January 1, 2019, the ratio is calculated using the total capitalized Operating lease liability, whereas prior year periods were calculated utilizing the present value of aircraft lease payments. This change had no impact to the ratio.

 

OPERATING STATISTICS SUMMARY (unaudited)





Alaska Air Group, Inc.























Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

Change

2019

2018

Change

Consolidated Operating Statistics:(a)










Revenue passengers (000)

12,026

12,069

(0.4)%

22,442

22,558

(0.5)%

RPMs (000,000) "traffic"

14,638

14,484

1.1%

27,087

26,887

0.7%

ASMs (000,000) "capacity"

16,980

16,833

0.9%

32,487

32,313

0.5%

Load factor

86.2%

86.0%

0.2 pts

83.4%

83.2%

0.2 pts

Yield

14.43¢

13.79¢

4.6%

14.13¢

13.69¢

3.2%

RASM

13.48¢

12.81¢

5.2%

12.82¢

12.34¢

3.9%

CASMex(b)

8.33¢

8.14¢

2.3%

8.68¢

8.46¢

2.6%

Economic fuel cost per gallon(b)

$2.27

$2.30

(1.3)%

$2.20

$2.22

(0.9)%

Fuel gallons (000,000)

220

216

1.9%

419

413

1.5%

ASM's per gallon

77.2

77.9

(0.9)%

77.5

78.2

(0.9)%

Average number of full-time equivalent employees (FTE)

21,921

21,655

1.2%

21,876

21,461

1.9%

Mainline Operating Statistics:










Revenue passengers (000)

9,206

9,462

(2.7)%

17,070

17,673

(3.4)%

RPMs (000,000) "traffic"

13,207

13,221

(0.1)%

24,379

24,581

(0.8)%

ASMs (000,000) "capacity"

15,241

15,289

(0.3)%

29,114

29,387

(0.9)%

Load factor

86.7%

86.5%

0.2 pts

83.7%

83.6%

0.1 pts

Yield

13.38¢

12.95¢

3.3%

13.08¢

12.83¢

1.9%

RASM

12.66¢

12.16¢

4.1%

12.02¢

11.70¢

2.7%

CASMex(b)

7.65¢

7.43¢

3.0%

7.96¢

7.71¢

3.2%

Economic fuel cost per gallon(b)

$2.26

$2.29

(1.3)%

$2.19

$2.22

(1.4)%

Fuel gallons (000,000)

187

188

(0.5)%

356

360

(1.1)%

ASM's per gallon

81.5

81.3

0.2%

81.8

81.5

0.4%

Average number of FTE's

16,551

16,477

0.4%

16,504

16,245

1.6%

Aircraft utilization

11.1

11.6

(4.3)%

10.7

11.4

(6.1)%

Average aircraft stage length

1,311

1,298

1.0%

1,308

1,294

1.1%

Operating fleet

238

228

10 a/c

238

228

10 a/c

Regional Operating Statistics:(c)










Revenue passengers (000)

2,820

2,607

8.2%

5,372

4,885

10.0%

RPMs (000,000) "traffic"

1,431

1,263

13.3%

2,708

2,306

17.4%

ASMs (000,000) "capacity"

1,739

1,544

12.6%

3,373

2,926

15.3%

Load factor

82.3%

81.8%

0.5 pts

80.3%

78.8%

1.5 pts

Yield

24.06¢

22.64¢

6.3%

23.57¢

22.93¢

2.8%

RASM

20.51¢

19.14¢

7.2%

19.62¢

18.72¢

4.8%

Operating fleet

94

89

5 a/c

94

89

5 a/c


(a)

Except for FTEs, 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)

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

 

OPERATING SEGMENTS (unaudited)

Alaska Air Group, Inc.



























Three Months Ended June 30, 2019

(in millions)

Mainline

Regional

Horizon

Consolidating
& Other

Air Group
Adjusted(a)

Special
Items(b)

Consolidated

Operating revenues












Passenger revenues

$

1,767

$

344

$

—

$

—

$

2,111

$

—

$

2,111

CPA revenues

—

—

112

(112)

—

—

—

Mileage Plan other revenue

105

13

—

—

118

—

118

Cargo and other

57

—

—

2

59

—

59

Total operating revenues

1,929

357

112

(110)

2,288

—

2,288

Operating expenses












Operating expenses, excluding fuel

1,167

268

95

(116)

1,414

8

1,422

Economic fuel

422

77

—

—

499

3

502

Total operating expenses

1,589

345

95

(116)

1,913

11

1,924

Nonoperating income (expense)












Interest income

17

—

—

(6)

11

—

11

Interest expense

(19)

—

(7)

6

(20)

—

(20)

Interest capitalized

3

—

—

—

3

—

3

Other - net

(7)

—

—

—

(7)

—

(7)

Total Nonoperating income (expense)

(6)

—

(7)

—

(13)

—

(13)

Income (loss) before income tax

$

334

$

12

$

10

$

6

$

362

$

(11)

$

351



Three Months Ended June 30, 2018

(in millions)

Mainline

Regional

Horizon

Consolidating
& Other

Air Group
Adjusted(a)

Special
Items(b)

Consolidated

Operating revenues












Passenger revenues

$

1,711

$

286

$

—

$

—

$

1,997

$

—

$

1,997

CPA revenues

—

—

137

(137)

—

—

—

Mileage Plan other revenue

99

9

—

—

108

—

108

Cargo and other

49

1

1

—

51

—

51

Total operating revenues

1,859

296

138

(137)

2,156

—

2,156

Operating expenses












Operating expenses, excluding fuel

1,135

249

123

(136)

1,371

39

1,410

Economic fuel

432

65

—

—

497

(22)

475

Total operating expenses

1,567

314

123

(136)

1,868

17

1,885

Nonoperating income (expense)












Interest income

13

—

—

(3)

10

—

10

Interest expense

(22)

—

(5)

2

(25)

—

(25)

Interest capitalized

4

—

—

—

4

—

4

Other - net

1

(2)

—

—

(1)

—

(1)

Total Nonoperating income (expense)

(4)

(2)

(5)

(1)

(12)

—

(12)

Income (loss) before income tax

$

288

$

(20)

$

10

$

(2)

$

276

$

(17)

$

259

 

Six Months Ended June 30, 2019

(in millions)

Mainline

Regional

Horizon

Consolidating
& Other

Air Group
Adjusted(a)

Special
Items(b)

Consolidated

Operating revenues












Passenger revenues

$

3,189

$

638

$

—

$

—

$

3,827

$

—

$

3,827

CPA revenues

—

—

228

(228)

—

—

—

Mileage Plan other revenue

205

23

—

—

228

—

228

Cargo and other

105

1

1

2

109

—

109

Total operating revenues

3,499

662

229

(226)

4,164

—

4,164

Operating expenses












Operating expenses, excluding fuel

2,319

542

192

(234)

2,819

34

2,853

Economic fuel

780

143

—

—

923

(1)

922

Total operating expenses

3,099

685

192

(234)

3,742

33

3,775

Nonoperating income (expense)












Interest income

33

—

—

(13)

20

—

20

Interest expense

(40)

—

(15)

13

(42)

—

(42)

Interest capitalized

7

—

—

—

7

—

7

Other - net

(17)

—

—

—

(17)

—

(17)

Total Nonoperating income (expense)

(17)

—

(15)

—

(32)

—

(32)

Income (loss) before income tax

$

383

$

(23)

$

22

$

8

$

390

$

(33)

$

357



Six Months Ended June 30, 2018

(in millions)

Mainline

Regional

Horizon

Consolidating
& Other

Air Group
Adjusted(a)

Special
Items(b)

Consolidated

Operating revenues












Passenger revenues

$

3,152

$

529

$

—

$

—

$

3,681

$

—

$

3,681

CPA revenues

—

—

247

(247)

—

—

—

Mileage Plan other revenue

197

18

—

—

215

—

215

Cargo and other

89

1

2

—

92

—

92

Total operating revenues

3,438

548

249

(247)

3,988

—

3,988

Operating expenses












Operating expenses, excluding fuel

2,266

488

227

(247)

2,734

70

2,804

Economic fuel

799

120

—

—

919

(35)

884

Total operating expenses

3,065

608

227

(247)

3,653

35

3,688

Nonoperating income (expense)












Interest income

24

—

—

(6)

18

—

18

Interest expense

(44)

—

(10)

5

(49)

—

(49)

Interest capitalized

8

—

1

—

9

—

9

Other - net

(4)

(9)

—

—

(13)

—

(13)

Total Nonoperating income (expense)

(16)

(9)

(9)

(1)

(35)

—

(35)

Income (loss) before income tax

$

357

$

(69)

$

13

$

(1)

$

300

$

(35)

$

265


(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 excludes certain charges. See Note A in the accompanying pages for further information.

(b)

Includes merger-related costs, an employee bonus awarded in January 2018 in connection with the Tax Cuts and Jobs Act, and mark-to-market fuel hedge accounting adjustments.

 

GAAP TO NON-GAAP RECONCILIATIONS (unaudited)



Alaska Air Group, Inc.














CASM Excluding Fuel and Special Items Reconciliation

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

Consolidated:






CASM

11.33

¢

11.20

¢

11.62

¢

11.41

¢

Less the following components:






Aircraft fuel, including hedging gains and losses

2.96

2.82

2.84

2.74

Special items - merger-related costs

0.04

0.24

0.10

0.13

Special items - other(a)

—

—

—

0.08

CASM excluding fuel and special items

8.33

¢

8.14

¢

8.68

¢

8.46

¢








Mainline:






CASM

10.50

¢

10.36

¢

10.76

¢

10.54

¢

Less the following components:






Aircraft fuel, including hedging gains and losses

2.79

2.68

2.68

2.60

Special items - merger-related costs

0.06

0.25

0.12

0.14

Special items - other(a)

—

—

—

0.09

CASM excluding fuel and special items

7.65

¢

7.43

¢

7.96

¢

7.71

¢


(a)

Special items - other includes special charges associated with the employee tax reform bonus awarded in January 2018.

 

Fuel Reconciliation

Three Months Ended June 30,

2019

2018

(in millions, except for per-gallon amounts)

Dollars

Cost/Gallon

Dollars

Cost/Gallon

Raw or "into-plane" fuel cost

$

495

$

2.25

$

506

$

2.34

(Gains) losses on settled hedges

4

0.02

(9)

(0.04)

Consolidated economic fuel expense

499

2.27

497

2.30

Mark-to-market fuel hedge adjustment

3

0.01

(22)

(0.10)

GAAP fuel expense

$

502

$

2.28

$

475

$

2.20

Fuel gallons

220



216











Six Months Ended June 30,

2019

2018

(in millions, except for per gallon amounts)

Dollars

Cost/Gallon

Dollars

Cost/Gallon

Raw or "into-plane" fuel cost

$

916

$

2.18

$

929

$

2.25

(Gains) losses on settled hedges

7

0.02

(10)

(0.03)

Consolidated economic fuel expense

$

923

$

2.20

$

919

$

2.22

Mark-to-market fuel hedge adjustment

(1)

—

(35)

(0.08)

GAAP fuel expense

$

922

$

2.20

$

884

$

2.14

Fuel gallons

419



413


 

Debt-to-capitalization, adjusted for operating leases

(in millions)

June 30, 2019

December 31, 2018

Long-term debt

$

1,538

$

1,617

Capitalized operating leases(a)

1,697

1,768

Adjusted debt

3,235

3,385

Shareholders' equity

3,973

3,751

Total Invested Capital

$

7,208

$

7,136




Debt-to-capitalization ratio, including operating leases

45

%

47

%


(a)

Following the adoption of the new lease accounting standard on January 1, 2019, the ratio is calculated using the total capitalized Operating lease liability, whereas prior year periods were calculated utilizing the present value of aircraft lease payments. This change had no impact to the ratio.

 

Net adjusted debt to earnings before interest, taxes, depreciation, amortization, special items and rent

(in millions)

June 30, 2019

Adjusted debt

$

3,235

Current portion of long-term debt

288

Total adjusted debt

3,523

Less: Cash and marketable securities

(1,627)

Net adjusted debt

$

1,896


(in millions)

Last Twelve Months
Ended June 30, 2019

GAAP Operating Income(a)

$

732

Adjusted for:

Special items

96

Mark-to-market fuel hedge adjustments

56

Depreciation and amortization

418

Aircraft rent

329

EBITDAR

$

1,631


Net adjusted debt to EBITDAR

1.2x


(a)

Operating income can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.

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 imp