Should We Worry About Alaska Air Group?
The first quarter stunk. The second probably won't be great. But CEO Ben Minicucci says his company "is firing on all cylinders."
Dear readers,
Let’s address recent matters first: Alaska Air Group struggled in the first quarter, as it failed to earn enough revenue to offset very high fuel prices and a couple of unusual circumstances in key leisure markets.
The numbers were not pretty. The parent company of Alaska, Hawaiian, and regional airline Horizon reported a net margin of -9.6 percent on revenue of $3.3 billion. The group spent an extra $100 million for fuel than it had budgeted, paying an average cost of $2.98 per gallon, about 14 percent higher year-over-year.
Overall demand was robust, but the group faced some revenue challenges as it limped to a loss equal to $1.69 per share. During what CEO Ben Minicucci called “once in a generation rainstorms” in Hawaii, with rainfall during two weeks in March reaching 3,000 percent of normal levels in some regions, passengers called off many trips, driving “a spike in cancellations and near-term book away,” chief commercial officer Andrew Harrison said on Tuesday’s first quarter earnings call.
Customers might have shifted to Mexico, but Puerto Vallarta (where Alaska is the top U.S carrier) had its own problems. “Civil unrest leading up to the spring break travel period had a meaningful impact on demand as well,” Harrison said.
Alaska and Hawaiian remain leisure-oriented airlines, and these two regions account for roughy 30 percent of the group’s capacity — enough to cost the company nearly a point of RASM in the first quarter.
While the worst is over, Harrison warned of an overhang into April and May, a major headwind for a company that needs massive revenue to counter rising costs. It predicts its second quarter fuel bill will be $600 million higher than it planned for, and it expects to pay an average of $4.50 per gallon.1 “As of today, we are recovering approximately one-third of incremental fuel costs,” Harrison said.
With fuel costs expensive (and fluctuating), the company has suspended EPS guidance, telling analysts there are too many potential outcomes to make a concrete prediction about prices. Nonetheless, whatever the price-per-gallon, executives said they’re optimistic they can pass on some expenses to customers.
“Some of these fare increases are sticking,” Minicucci said. “We’re getting an average of $25 [extra] on an average fare, give or take, depending on which market it is.”
To gain pricing power, the group is removing flights in Mexico and on late-night departures in high-frequency markets. Though North America capacity should fall slightly year-over-year in the second quarter, systemwide capacity is expected to rise 1 percent, because of new long-haul flights from Seattle.