Thursday, October 26, 2017

Pricing pressure, Horizon pilot shortages soften Alaska Air 3Q results

Alaska Air Group executives acknowledged the company’s network expansion this year—44 routes including 32 in California alone—has been met with intense pricing competition, which, combined with pilot shortages at regional carrier Horizon Air, have impacted the 2017 third-quarter results.

With its financial results now incorporating Virgin America, which formally merged with Alaska Air in December 2016, Alaska Air Group’s net profit for the quarter totaled $266 million, up 3.9% over $256 million in 3Q 2016.

Operating revenue for the quarter came in at $2.1 billion, up 35.4% from $1.6 billion in the year-ago quarter. The group’s pre-tax operating margin was 21%. Operating expenses totaled $1.7 billion, up 44.2% year-over-year (YOY) as aircraft fuel costs rose 14%. The group registered an operating profit of $439 million for the quarter, up 9.7% YOY.

“We know our growth rate is high, even for us ... and this is during a period of yield softness in the industry,” Alaska CEO Brad Tilden said. “This quarter we saw pricing pressure, especially in our California transcontinental and inter-California markets. Walkup fare levels were well below historical norms. While we believe these prices are not sustainable they are nonetheless continuing into the fourth quarter.”

Alaska EVP and CCO Andrew Harrison agreed the pace of Alaska’s new market growth “is very high, yet critical to unlocking the value of Virgin America.” Harrison said the company’s market development would not continue at its current pace and will slow to only a handful of new markets in 2018, the majority in the Pacific Northwest.

“[But] our customer utility is rising,” Harrison said. “We define utility as the percentage of total demand for a geography where we provide a nonstop flight to help meet that demand [and] we’re on track to achieve 70% utility out of San Francisco by year-end, that’s up 11 points from the acquisition.”

Tilden also addressed the pilot shortage at Horizon Air.

“Pilots have been leaving regional airlines for mainline opportunities at higher rates than in the past and at higher rates than we anticipated [and] the introduction of E175s to our fleet has also increased our training needs,” Tilden said. “We ended up being short pilots, and we scaled back our schedule especially in August and September. We’ve now adjusted our schedule to match pilot availability and cancellations have dropped dramatically. We’ve made a number of leadership changes as well and we’re also consolidating our Horizon leadership team and our operations center in Seattle, giving us a much better ability to develop talent across Horizon and Alaska.

Harrison outlined the impact of Horizon pilot shortage on 3Q revenue. “Flight cancellations led us to either refund or re-accommodate passengers, which led to displacement of higher yield bookings and loss of revenues,” Harrison said. “We estimate this resulted in about a $25-$30 million of revenue headwind, or about 1.5 points of RASM. But as Brad mentioned, we’ve adjusted the flight schedule and Horizon is now running well, and we expect these revenue headwinds to be substantially lower in the 4th quarter and behind us by year-end.”

The company is looking to completing its most critical Virgin America integration milestones by the middle of 2018. Tilden reeled off what will occur in coming months: “In January we expect to convert to a single payroll, HR and financial systems, fully integrate our loyalty programs, we expect to receive a single operating certificate from the FAA, we’ll begin the rollout of satellite Wi-Fi across the fleet and we’ll repaint our first Airbus airplane in the Alaska livery. In the spring, we plan to cut over to a single passenger service PSS system … and then in October we’ll configure our first Airbus interior to the Alaska layout.”

“We are sort of consumed with getting the merger done,” Tilden said.

Alaska Air’s consolidated passenger traffic increased 43.8% in the third quarter to 13.8 billion RPMs, as capacity increased 44.2% to 16.2 billion ASMs, producing a load factor of 85.4%, down 0.2 point YOY. Consolidated yield was down 4.1% to 13.21 cents. PRASM was down 4.2% and RASM fell 6.1%. CASM excluding fuel decreased 2.7%.

(Mark Nensel - ATWOnline News)

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