Alaska Airlines’ Q3 was not easy for multiple reasons

Back in July, at the Q2 earnings call, Alaska Airlines Group, including Horizon Air, said that Q3 would not be easy: massive demand for international travel would hurt Alaska's domestic network, and a period of high fares would end. It shows in the Q3 results presented on Thursday, but not entirely for the same reasons. The Q4 and full-year guidance has been lowered. Alaska reported a net profit of $139 million, which at first sight looks favorable compared to $40 million in Q3 2022. A pre-tax margin of 11.4 percent “nearly led the industry, despite our lower direct exposure to record international demand as well as significant fuel costs headwinds, given our geographical exposure to the Westcoast,” said CEO Ben Minicucci. Q3 confirmed Alaska’s solid business model, producing a 99.7 percent completion rate and unit revenues up by twelve percent on capacity growth of six percent versus 2019. But the quarter ended with almost no revenue growth. Total revenues were $2.839 billion compared to $2.828 billion last year. Passenger revenues were $2.618 billion versus $2.615 billion, although the number of passengers carried was up seven percent to 12.2 million. The capacity strategy didn't work out as planned. The strategy to deploy the most capacity in the September quarter didn’t work out, with load factors down by 1.9 percent to 84.6 percent. Capacity could not be deployed as planned. One reason is the wildfires on Maui (Hawaii) in August, which resulted in high numbers of canceled bookings that were still down 45 percent in September. Hawaii contributes twelve percent to Alaska’s capacity, with Maui one-third of that. The cancelations cost Alaska $20 million in revenues. The carrier expects it will take several quarters for Maui traffic to recover. Revenues per available seat mile (RASM) dropped twelve percent to $15.28 cents, while costs per ASM (CASM) excluding fuel dropped by five percent to $9.57 cents. On the positive side were nine percent higher revenues from the Mileage Plan loyalty program and other revenues to $159 million. Premium cabins continued outperforming the main cabins, with First and Premium Economy revenues up by ten and six percent, respectively. Premium contributes 31 percent of all revenues. Operating expenses dropped by five percent to $2.628 billion from $2.766 billion. Salary costs and benefits were up by fourteen percent to $782 million, but fuel was down by 21 percent to $694 million. Costs for aircraft rent dropped by 37 percent to $48 million. The operating income was $211 million. Alaska reported a $237 million net profit for January-September, up from $36 million last year. Total revenues were up by ten percent to $7.873 billion from $7.167 billion. Expenses were up by five percent to $7.511 billion as fuel was more expensive in the first part of the year, while staffing costs grew by seventeen percent. The operating profit was $362 million versus $47 million. Demand is normalizing The business environment in Q4 is different again. Crude oil is up by twelve percent on last quarter, and refinery margins for jet fuel are up by seventy percent or sixty percent over Gulf coast levels. This disproportionally hurts Alaska more than others, as the airline purchases most fuel on the US West Coast. This effect could be temporary but cost the airline another $15 million in Q3. Off-season demand shows signs of normalizing from the peak in recent quarters, with corporate travel still behind. This will make the next quarters more challenging, but Minicucci is confident that Alaska Airlines can counter these headwinds thanks to proven operational reliability in the last two quarters. He said that Alaska is also ahead on reducing unit costs and will likely be the only US carrier to reduce them this year. Running an all-Boeing fleet will contribute to this even more in 2024 after Alaska retired the last Airbus A321neos in September and sold them to American Airlines. Alaska should also benefit from what Minicucci said is Alaska’s diversified revenue strategy, with 45 percent of revenues generated outside the cabins with premium products and lounges. Coming winter, capacity discipline should steer the airline through the weaker period as it moderates growth and optimizes flying. Q4 and full-year guidance lowered. For Q4, Alaska is guiding eleven to fourteen percent capacity growth, one to four percent higher revenues, three to five percent lower CASM, and an adjusted pre-tax margin of zero to two percent. Forward bookings look good, with yields up by double-digits compared to 2019. Fuel is guided at $3.30 to $3.40 per gallon, higher than the Big Three. For the full year, capacity should end at twelve to thirteen percent up year on year, CASM one to two percent down, revenue growth of seven to eight percent, an adjusted pre-tax margin of seven to eight percent, plus earnings per share of between $4.25 and $4.75. This is down on the guidance provided in July when Alaska said that it expected revenue growth of eight to ten percent year on year, CASM down by one to three percent, a pre-tax margin of between nine to twelve percent, and earnings per share of $5.50 to $7.50. Q4 and Q1 2024 will see growth drop from six percent in Q3 over 2019 from less than three percent in Q1, which is more in line with seasonal patterns and should better support demand and supply dynamics in the market.

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