Alaska Air Group, Inc. (NYSE:ALK) Q1 2024 Earnings Call Transcript

Alaska Air Group, Inc. (NYSE:ALK) Q1 2024 Earnings Call Transcript April 18, 2024

Alaska Air Group, Inc. beats earnings expectations. Reported EPS is $-1.04787, expectations were $-1.09. ALK isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the Alaska Air Group 2024 First Quarter Earnings Call. [Operator Instructions] Today’s call is being recorded and will be accessible for future playback at alaskaair.com. After our speakers’ remarks, we will conduct a question-and-answer session for analysts. I would now like to turn the call over to Alaska Air Group’s Vice President of Finance, Planning and Investor Relations, Ryan St. John.

Ryan St. John: Thank you, operator, and good morning. Thank you for joining us for our first quarter 2024 earnings call. This morning, we issued our earnings release along with several accompanying slides detailing our results, which are available at investor.alaskaair.com. On today’s call, you’ll hear updates from Ben, Andrew and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call. This morning, Air Group reported a first quarter GAAP net loss of $132 million. Excluding special items and mark-to-market fuel hedge adjustments, Air Group reported an adjusted net loss of $116 million. As a reminder, our comments today will include forward-looking statements about future performance, which may differ materially from our actual results.

Information on risk factors that could affect our business can be found within our SEC filings. We will also refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel. And as usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today’s earnings release. Over to you, Ben.

Ben Minicucci: Thanks, Ryan, and good morning, everyone. As you are all aware, the most significant event this quarter was the accident involving Flight 1282 and the subsequent 4-week grounding of a third of our fleet. Our focus has been on the safe return of our fleet, caring for our employees and guests and enhancing our oversight of the production of our new aircraft. This event also had a substantial financial impact, totaling $162 million, which Boeing has fully compensated us for. To provide clarity on our core business performance, I will discuss our Q1 results, excluding the effects of Flight 1282 and the MAX grounding. During the quarter, we also received a second request for information from the DOJ, regarding our proposed acquisition of Hawaiian Airlines.

We are working to respond to these requests as quickly as possible. Given the substantial volume of information involved, we have granted the government an additional 60 days to review our responses, and we’ll continue to work with them to advance the process as swiftly as possible. We still believe strongly in the pro-consumer and pro-competitive merits of this deal and are excited by the opportunities this will unlock for Alaska, both domestically and internationally. A year ago, I set a goal for my team to reduce losses in the first quarter, traditionally our weakest, with the aim of progressing towards breakeven over the next 3 years. I am proud to announce that excluding the grounding impact we have achieved this goal in 1-year. Our Q1 performance far exceeded our initial expectation of a 30% profit improvement coming into this year.

We not only reduced losses, but we turned a small profit, absent the MAX grounding on record revenue for the quarter. Several factors contributed to this positive performance, including disciplined and thoughtful capacity planning, a concerted effort to reconfigure and optimize our network, the return of West Coast business travel, particularly among technology companies and strong leisure demand throughout our markets. While we strive to do even better going forward, the underlying improvement in our core business in Q1, despite the significant disruption felt across our business from the MAX grounding is a fantastic result for Air Group. With this outperformance, we’re revising our full year adjusted EPS from $3.25 to $5.25, which does not reflect any compensation.

We remain encouraged by our Q2 outlook and beyond. We’ve continued to see robust demand through the spring break travel season and have visibility to double-digit adjusted pre-tax margins in the second quarter despite higher fuel prices. Our commitment to changing the outcome in Q1 positions us at a better starting point, not only for the rest of this year, but also in years to come, as we look to grow profits and earnings over time from a stronger base. Now looking ahead, our focus remains on driving our strategic initiatives forward and managing the elements of our business within our control. We are excited to be back on track and running a solid operation with our full fleet and service. As I stated earlier, we’ve received $162 million in cash compensation from Boeing, making us hope for the total Q1 profit impact related to the MAX grounding.

Our long-standing partnership with Boeing is important to us and to our success. The financial agreement we’ve reached with them is a strong reflection of that relationship. We remain committed partners. But we will hold Boeing to the highest bar for quality out of the factory. And to that end, we have enhanced our in-person oversight of our 737 production line and are regularly engaging with Boeing leadership on quality and schedule. Alaska needs Boeing. Our industry needs Boeing, and our country needs Boeing to be a leader in airplane manufacturing. Operationally, we’ve regained our reliability by returning our entire fleet to service on February 8. The response from our guests has been incredibly positive with strong demand evident throughout February and beyond.

Our teams have dedicated themselves around the clock to restore operational excellence, resulting in an improved completion rate of 99.5% from the second week of February through March, were in line with our historical standard of performance. A big shout out to our entire maintenance and engineering team for bringing back all our MAX lines into service safely and reliably. Safety is a foundational and uncompromising value for Air Group, and we expect nothing, but the highest quality aircraft from Boeing. Regarding 2024 aircraft deliveries, as we’ve stated before, we expect Boeing will fall short of the ’23 planned deliveries to us this year. Andrew will discuss Q2 capacity in more detail, but our objective will be to deliver a schedule with a high-level of service and reliability our guests expect and know from us.

And Shane will discuss the impact to full year CapEx due to fewer deliveries. As we kick off the second quarter, one of our busiest and most profitable periods, we are optimistic and determined to drive strong results in our business. Safety remains paramount. And we’ve successfully restored operational excellence. Building on our Q1 profitability improvements, we are now focused on leveraging these strengths to expand profitability and generate free cash flow. With last year’s strong unit cost performance as our foundation, we’re enhancing productivity across the Board and our careful management of capacity, combined with our focus on a premium guest experience, positions us well to deliver solid financial results over the next three quarters.

And lastly, I just want to acknowledge this amazing Alaska team. from our exceptional frontline employees who deliver consistently strong operational results and guest service to our leadership team that holds itself accountable to being better each day. Together, we are driving success every step of the way. And with that, I’ll turn it over to Andrew.

Andrew Harrison: Thanks, Ben, and good morning, everyone. Today, my comments will speak to our first quarter results with a focus on unpacking our core performance and addressing second quarter trends and guidance. We achieved record first quarter revenues totaling $2.2 billion, up 1.6% year-over-year. This is an incredible result, especially when you consider the $150 million in revenue that we lost due to the grounding. Our team did a masterful job rethinking the deployment of our Q1 network in order to combat the seasonal challenges we face and to best serve the demand in our geographies. Capacity ended the quarter down 2.1% year-over-year, inclusive of an approximate 5.5 point impact from the grounding. This result was better than our initial expectation immediately following the accident due to high utilization, a better-than-expected completion rate and no significant winter weather.

Absent the grounding, capacity would have been up approximately 3.5%, a level we feel was appropriate for the Q1 environment and our network reconfiguration. In addition to our focused network efforts, we were positively impacted by the rapid return of corporate travel revenues and general close-in strength, which drove a strong unit revenue result. For the quarter, unit revenue was up 3.8% year-over-year. Excluding the impact of the grounding, unit revenue would have been up 5%, which is markedly higher than our original guidance of up 1% to 2%. This outperformance was driven by three factors: First, 1.5 points of RASM outperformance came from better-than-expected results related to the reallocation of flying. These changes more successfully met the demand across our markets, as we capitalized on more leisure flying.

Second, 1.5 points of RASM improvement came from a material step up in business travel beginning in January, especially from large technology companies. In Q1, managed business revenue grew 22%, approximately 50% driven from yield and 50% from volume. Tech companies saw the biggest improvement with revenues up over 50% year-over-year and professional services revenue an impressive 20%. To put the speed of recovery into perspective, managed business revenues increased 10% in January, a stunning 30% in February and 24% in March. These results were achieved despite the grounding and book away we experienced. Today, managed corporate revenue has fully recovered the 2019 levels, while tech is approximately 85% recovered. As we’ve said for some time, we expected business travel to come back which we are clearly seeing today.

While we did not bake this into our Q1 forecast, we do not anticipate any step back in corporate travel in Q2. And third, half point of RASM improvement came once we restored our schedule reliability, and we saw strength in close-in leisure demand return. This strength is especially evident in February, where revenue beat our original pre-grounding expectations, despite loss flying and book away at the beginning of the month. Similarly, our total March revenue surpassed our record breaking result last year on just over 1 point lower load factor, bolstered by yields that improved 2 points in month driven by strong close-in performance. Taken altogether, these impacts drove a 3.5 point improvement above the midpoint of our original guide for the quarter.

Lastly, our Premium Cabin performance continues to support what we believe to be a structural shift in higher demand for premium products. First and premium class revenues finished up 4% and 11%, respectively, during the quarter, with our first class paid load factor hitting monthly records at 68% during February and 69% in March. What makes these premium revenue results even more significant is that they would have been higher had we not experienced the grounding. Our paid premium capacity has come a long way from the days of paid load factors in the 40% range for mainline and an all coach regional fleet. As we continue to refine our premium strategy across our products and markets, we have further upside to come and remain committed to building on our premium guest experience, offering the products our guests and loyalty members want.

Our loyalty program, which we hope to share more on later this year, also continues to post strong results. With co-brand cash remuneration of approximately $430 million in Q1, up 4.2% year-over-year, notwithstanding the grounding and a major contributor to the 48% of revenues we generate outside the main cabin. Now turning to our outlook and guidance. We expect capacity to step up 5% to 7% year-over-year in the second quarter, with the low end of this range, assuming no aircraft are delivered this quarter. Given the uncertainty around delivery timing, following the grounding, we have extended the retirements of several of our older aircraft over the next few months and pushed utilization slightly higher across the Mainline Fleet, where we had opportunity.

We also added back more capacity on the regional side through Horizon and SkyWest, given higher utilization from improved pilot staffing. Through the combination of these changes, we are confident in flying a reliable schedule for our guests. While the second quarter will be our highest growth this year, it is also our most profitable growth, with June, a clear peak month for us. While we’ve added a handful of new routes across our network, the majority of our added flying is focused on additional frequencies in high demand markets, where we’ve conviction in their profitability. Second quarter bookings so far are encouraging, with yields continuing at healthy levels in April and beyond albeit slightly moderating through the quarter on growing industry capacity.

This year, we have seen a more normalized yield and booking curve, building in strength as we get closer in, a trend we expect should persist. Looking beyond Q2, the back half of the year looks to be shaping up well as industry capacity constraints remain in place and competitive intensity dynamics across our West Coast markets stabilize. In closing, the team has done a tremendous job in reshaping our network to produce a strong result for our most seasonally challenged period, with the full value of our differentiated product offering from premium seating to lounges to global partnerships, I believe we are well-positioned to drive another solid quarter of performance, as we move into our peak periods this summer. And with that, I’ll pass it over to Shane.

Shane Tackett: Thanks, Andrew, and good morning, everyone. In what has been a challenging start to the year, our people and our business model have shown amazing resilience. Safety, of course, is our absolute priority, and it will continue to be our top focus above all else. It has, however, been encouraging to see the level of improvement to our core first quarter performance this year. While managing through the difficult circumstances of Flight 1282 and its aftermath, the teams did an admirable job operating safely and on time, and our commercial team put together a network plan that coupled with strong demand, positioned us well to meet our long-term target to breakeven in Q1. We are not shy about setting ambitious goals for ourselves, and we have a good history of delivering on those commitments.

Our financial focus remains on continuing to strengthen our business model and delivering strong financial performance over the long-term. Turning to our results. For the first quarter, our adjusted loss per share was $0.92, which excludes compensation received from Boeing related to our MAX fleet grounding. The profit impact of the fleet grounding in Q1 was $162 million or $0.95 of EPS and 7 points of margin. Fuel price per gallon was $3.08, as West Coast refining margins continue to be a unique margin headwind to our results relative to the rest of the country. Our total liquidity inclusive of on hand cash and undrawn lines of credit stood at $2.8 billion, as of March 31. Debt repayments for the quarter were approximately $100 million and are expected to be approximately $50 million in the second quarter.

Our leverage levels remain healthy at 47% debt to cap and 1.1x net debt to EBITDA, while our ROIC stands above 9%. For the quarter, unit costs were up 11.2% year-over-year, 6 points of which are directly attributable to the fleet grounding, primarily from the significant loss of planned capacity. So we also incurred approximately $30 million of incremental operational recovery costs due to the grounding as well. Our core unit costs, absent grounding impacts were up approximately 5% year-over-year in the first quarter. The drivers remain similar to prior quarters and are consistent with pressures faced by most airlines, the primary of which is higher labor rates for our people. We have completed seven labor contracts over the past 2 years, including a recently signed agreement with our aircraft technicians, and we continue to prioritize finalizing an agreement with our flight attendants.

We remain committed to high productivity in our contracts. And absent the MAX grounding, we would have had a 2% increase in productivity year-over-year, as measured by passengers carried [ph] per FTE. We expect continued productivity improvements throughout the year across the company. And in May, we will operate under our new preferential bidding system for pilots for the first time, which will allow for both enhanced pilot productivity and importantly, schedules that are more aligned with our pilots priorities. While costs are materially higher structurally for the industry, our margin profile for the first quarter is evidence, we are making the right decisions on capacity deployment. And we will continue to prioritize the overall margin health of the company over growth for the sake of unit cost performance alone.

We are committed to also retain our relative cost advantage, and we continue to do well on that basis. We achieved the industry’s best cost performance last year and looking at our rolling four quarter unit costs, we have outperformed both Delta and United by 3 points on a stage length adjusted unit cost basis. While we may experience quarterly variances on a unit basis, we are not ceding any of our relative advantage. We have widened the gap over the past 12 months, and we remain focused on managing [technical difficulty] budgets and delivering strong margin performance. Not only did we improve profitability, excluding the grounding by $120 million year-over-year, when compared to the first quarter of 2019 and 2023, we’ve closed the margin gap to our largest peers by approximately 2 to 3 points.

As we look ahead to Q2 and the rest of the [technical difficulty] capacity, fuel, EPS and CapEx guidance, consistent with the metrics we shared last quarter and our focus on the overall margin profile of the business. For the full year, as Ben shared, we do not expect to receive all 23 deliveries from Boeing that we had originally planned for this year. We are in discussions with Boeing, and as we gain more clarity on those deliveries, we will update our expectations, but we expect full year capacity growth at this point to be below 3%. Also, due to lower expected deliveries, we now expect CapEx of $1.2 billion to $1.3 billion versus our prior expectation of $1.4 billion to $1.5 billion. We expect economic fuel cost per gallon to be between $3 and $3.20 for the second quarter and expect refining margins on the West Coast to be more in line with Gulf Coast, which we’ve seen in the past several weeks.

Given the significant spread in West Coast fuel costs versus the rest of the country, we are developing strategies to mitigate this disadvantage. Our first step was to discontinue our hedging program, given refining margins have become the more volatile component of fuel costs, which hedging did not protect us from. The full value of hedging cost reduction will take several quarters to bleed in. We are also changing our strategy for our annual fuel tender process to obtain better pricing and are likely to begin a program to begin a modest amount of self supply of fuel later this year and into 2025. While these will take time to fully mature into our results, we expect these actions to close the current fuel headwind we face versus the rest of the industry and will help us to be well positioned to lead the industry in margins.

And as Ben mentioned, we expect full year EPS to now land between $3.25 and $5.25 for the full year and $2.20 and $2.40 for Q2. Despite a likely $0.35 year-over-year headwind from fuel, we have visibility to a path back to healthy double-digit margins in the second quarter on our way to another strong full year performance. With the immediate impact of the grounding behind us and our operational reliability back on track, we are optimistic about our outlook for the rest of the year. The economy continues to expand with supportive wage growth, recently improving consumer sentiment and trends indicating a continuing preference to prioritize spending on travel and experiences over goods. By remaining focused on our historical strength, safety, operational excellence and relative cost performance and continuing to reap the benefits of our commercial initiatives.

Our business is configured to compete, to maintain our relative advantage and to continue to deliver strong financial results. And with that, let’s go to your question.

Operator: [Operator Instructions] And our first question will come from Andrew Didora with Bank of America.

See also 16 Best Dividend Stocks of All Time and 10 Micro-Cap Healthcare Stocks Insiders Are Buying.

Q&A Session

Andrew Didora: Hi. Good morning, everyone. Shane, I know you’re not guiding to CASM, but if I were to just think about 1Q being up 3% on 3.5% capacity, are there any kind of puts and takes you would call out for 2Q, whereby we wouldn’t see kind of CASM stepped down nicely given you’re growing at 6%. And then similarly, as I think about the back half as growth comes down, I would expect CASM to maybe flex back up. Is that a fair assessment?

Shane Tackett: Hey, Andrew. Good morning. Yes, I think that’s the right contour that we are expecting to see this year. We will see a decent improvement in unit cost in the second quarter, given the growth profile of the company. And as you mentioned, growth slows down in the back half of the year, and we will probably see a little more pressure in the back half of the year again on unit costs. I think — I do just want to mention like the company, I — like I think we’ve done a nice job though balancing capacity versus unit cost. You’ve heard us increasingly talk about our focus on the margin health of the company. So we are going to continue to be smart about how we capacity into the market, and we will continue to compete really well on a unit cost basis against the larger airlines in our markets.

Andrew Didora: That’s great. Thanks, Shane. And then just a follow-up for Andrew. I appreciate all the color you gave on corporate travel. Do you know what percentage of your revenues today are corporate and how that compares to pre-pandemic? And any color you can give us just in terms of what the RASM premium would be on corporate, say, versus leisure travel? Thank you.

Andrew Harrison: Yes. Thanks, Andrew. We don’t disclose that sort of information. But I will tell you that we see continued improvement in strength in our Corporate position, the business that is coming our way. And again, as we’ve shared for some time, this return from West Coast business travel, especially in the technology [indiscernible] area has just been very significant. And I think when you look at others’ comments around how much their managed business travel increased, ours increased significantly more year-over-year, which is very encouraging.

Andrew Didora: That’s great. Thank you.

Andrew Harrison: Thanks, Andrew.

Operator: And our next question will come from Helane Becker with TD Cowen.

Helane Becker: Thanks very much, operator. Hi, team. Hope all is well. Just a question with respect to the way we should think about the second half of the year. So second quarter continues kind of a first quarter strength? And then how are you thinking third quarter versus second quarter? Some of your peer group have been talking about a shift in seasonality, maybe stronger July. I want to say a stronger July and June and maybe not so strong August, so much or how you guys — the pattern of travel goes?

Andrew Harrison: Yes. Hi, Helane, yes, we’re seeing the same thing. I think August and the return of schools and just the exposure of our network across different geographies. June has becoming the single strongest month. And so what you’ll see here is we move capacity around to accommodate that. So we feel pretty good about getting ahead of that mix.

Helane Becker: Okay. That’s really helpful. And then, Andrew, as you look at like Alaska and the state of Alaska, what’s the capacity — industry capacity situation look like up there? I’ve been seeing some other airlines adding capacity to anchorage and Fairbanks from various cities, not Seattle. And I’m just kind of wondering if that’s impacting your overall, I don’t know, market share maybe is the right word up there?

Andrew Harrison: Yes. I think it ebbs and flows. People love to put their capacity into Alaska, as we go into the summer period. I would say industry capacity, what I call Alaska long haul is up decently. So that’s putting a little bit of pressure. But overall, we feel really good about our position in Alaska and the routes that we serve. And of course, we are very well positioned to serve anybody who is wanting to travel to Alaska.

Helane Becker: Great. Top job. Okay. Thanks very much.

Ben Minicucci: Thanks, Helane.

Operator: Your next question will come from Savi Syth with Raymond James.

Unidentified Analyst: Hi. This is Lara [ph] on for Savi. What’s the general environment that you’re assuming for the second half of the year that’s reflected in your full year EPS guide?

Shane Tackett: Yes, hi. Look, I think — the second half of the year we expect to continue to be strong and stable. We view it right now, we think it’s going to be consistent with what we are seeing today. I don’t think there’s a sign that demand is slowing down, we don’t expect that at all. I think fuel costs are a little higher than we had planned for the year, which was roughly $3 and came in at $3.08. And I think some of that increase in costs, we expect to be offset by the stronger close in demand certainly on the business side. And so net-net, we haven’t really changed our expectation for the full year, and we think it’s going to continue to be a strong demand environment.

Unidentified Analyst: Okay. Sounds good. And then one more. If you can provide any color about your recent commercial initiatives like Alaska Access and your expectations for the contribution from these programs, that would be great. Thanks again.

Andrew Harrison: Well, I’m glad you noticed Alaska Access. I think what you’re really seeing here is that we are continuing to broaden the products and services that we offer. That’s obviously something that’s quite small. The reality is the distribution landscape is materially changing. You’ve got NEC, but you’ve also got [indiscernible] order, settlement and delivery, these technology changes are going to massively increase our ability on the revenue side to distribute our various products and services. So what you’re going to see us continue to do is to bifurcate all the products and services that we have and continue to distribute those in different forms and ways over time. So we are really excited about just the technology that’s coming our way to help us generate greater revenues.