Alaska Air Group reports third quarter 2024 results

Alaska Air Group (NYSE: ALK) today reported financial results for the third quarter ending September 30, 2024.

Air Group closed out a strong third quarter, generating GAAP pretax margins of 10.7% and earnings per share (EPS) of $1.84. On an adjusted basis, our pretax margin of 13.0% will lead the industry. Given Air Group’s completed acquisition of Hawaiian Airlines on September 18, 2024, quarterly financial statements include approximately 13 days of Hawaiian Airlines results.

Quarter in Review

We are excited to host our Investor Day on December 10^th, where we will share more detail about our vision as a combined company, including higher synergy estimates driven by the combination, discuss our strategy to expand margins and generate free cash flow, and provide 2025 guidance. Given the proximity of third quarter earnings to our Investor Day, we announced on October 21^st that we would not hold an earnings conference call this quarter. While we expect to resume regular quarterly earnings calls again in January 2025, this quarter we are providing additional narrative on our third quarter performance, including discussion of Air Group trends excluding Hawaiian Airlines within our earnings release today.

Air Group’s consolidated results reported in the third quarter of 2024 include 13 days of Hawaiian Airlines results, while prior comparable periods exclude any Hawaiian results. Except where noted below, the following discussion of Air Group’s third quarter performance reflect legacy-Alaska performance, excluding Hawaiian for the 13 days it was part of the combined company.

Income and EPS

Today we reported GAAP net income of $236 million, or $1.84 earnings per share for the third quarter of 2024. Excluding special items and mark-to-market fuel hedge accounting adjustments, we reported net income of $289 million, or $2.25 earnings per share, significantly exceeding our original guidance for the quarter of $1.40 to $1.60 and coming in at the high end of our revised guidance published on September 12^th. Our adjusted pretax margin of 13.0% led industry peers for the 2^nd consecutive quarter and continues to demonstrate the strength of our business model. We have built a solid foundation of robust earnings and operating cash flow generation that we’re excited to continue building on through the combination of both Alaska and Hawaiian Airlines, as we realize substantial synergies amidst a strong demand environment and constructive industry backdrop.

Revenue

During the quarter, Alaska saw unit revenues inflect positive in August, with strength in booking trends continuing into the fourth quarter. We’ve seen improvement across the Alaska network, in particular in the Pacific Northwest and Latin America regions. Corporate demand showed renewed strength in September and into October, which drove meaningful yield improvements on close-in bookings. Managed corporate revenue grew 9% year-over-year in the third quarter with double digit growth from the technology and professional services industries. Premium revenue performance also remained strong this quarter, continuing to outperform main cabin, with first and premium class revenue up 10% and 8% year-over-year respectively on 5% year-over-year growth in premium seat capacity. Unit revenues are expected to continue their positive trajectory, from up low-single digits in the third quarter to up mid-single digits in the fourth quarter.

Operationally, Alaska delivered a reliable performance for our guests during their peak summer travel plans, not only flying our largest ever summer schedule, but doing so with a 99.2% completion rate. Growth this year has been impacted by delayed aircraft deliveries, which we expect to continue due to the ongoing strike at Boeing. Further aircraft delivery delays are expected to limit capacity growth in the final quarter of 2024 relative to our prior resource planning expectations earlier in the year.

Costs

Costs performed as expected and were in line with our prior guidance, although unit costs remain pressured from lower capacity due to delivery delays. We remain resourced for higher capacity and are experiencing the lowest attrition rates across the company since 2019. One-third of our second half 2024 unit cost increases on a year-over-year basis are directly related to relative overstaffing given originally higher planned flying volumes, as well as the natural pressure that lower capacity puts on our fixed cost base which is about half of total costs. We expect this pressure to be transitory and to return to optimized resource levels relative to our capacity throughout 2025. Despite this, productivity for the quarter improved 4.6% year-over-year.

Our expected profit sharing payouts increased materially in the quarter, primarily driven by lower fuel prices and improving revenue trends, offset by a reduction in expected wage expense from our tentative agreement with our flight attendants which did not ratify during the quarter.

Balance Sheet and Capex

Turning to our balance sheet, we ended the quarter with total liquidity of $3.4 billion, inclusive of approximately $850 million in undrawn lines of credit which were upsized following the closing of the Hawaiian acquisition. Subsequent to quarter end, we raised $2.0 billion in Term Loan B and Bond debt collateralized by Alaska’s Mileage Plan program. The bond offering garnered investor interest of greater than 7x our issued amount, and we achieved the tightest spreads seen on similar debt within the industry outside of the pandemic, a testament to the strength of our loyalty collateral and our balance sheet. Approximately $1.4 billion was used to repay higher-yielding debt assumed in the merger, which we expect to result in annual interest cost savings of approximately $30 million over the next twelve months. Following the loyalty financing and debt repayments in October, our debt to capitalization and net leverage sit today at 58% and 2.4x respectively, still among the strongest balance sheets in the industry.

For capital expenditures, we continue to plan to incur approximately $1.2 to $1.3 billion in 2024. This amount assumes we pay for 18 737 Max aircraft this year, subject to Boeing delivery ability.

Hawaiian Airlines Trends

Although we only recently completed the acquisition of Hawaiian Airlines, we are encouraged by the continued improvement in the Hawaiian network. Following significant losses incurred in the fourth quarter of 2023, Hawaiian’s EBITDAR turned positive in the second quarter and pretax results are expected to approach break even in the fourth quarter. The improvement is expected to be driven by both revenues and costs. North America PRASM inflected positive during the third quarter and we expect will be up mid-single digits year-over-year in the fourth quarter, while International PRASM is gradually improving from down double digits toward flat year-over-year in the fourth quarter of 2024. Neighbor Island results are also showing material year-over-year improvements. Several temporary cost headwinds that have challenged Hawaiian’s performance have mostly passed, with the impact of the A321 GTF engine-driven groundings fully resolved and the majority of the A330 Amazon freighter and 787 new fleet startup related costs completed.

Integration

With a proven playbook from our integration of Virgin America, we are prepared and excited to begin in earnest to bring the operating platforms of Alaska and Hawaiian together, while we maintain the legacy and value of both brands, each of which have been built over 90 years respectively. We plan to achieve three significant integration milestones in the next 18 months – the launch of a single loyalty platform, receipt of a single operating certificate, and integration of our passenger service system. We will also soon begin working with our labor-represented workgroups to start the joint collective bargain process.

We are on track to finish the year strong and expect to be among the top 3 pretax margin producers in the industry for the full year, inclusive of Hawaiian’s results from the date of acquisition closing. There is much to be excited about for our airlines as we move ahead and begin unlocking the multiples of potential we can accomplish as a combined company.

Fourth Quarter 2024 Guidance

For the fourth quarter, we expect the following results, inclusive of Hawaiian. Expectations for the fourth quarter are compared to pro forma historical results, as if the acquisition had occurred on January 1, 2023. Pro forma historical results were included with this Form 8-K. Full year 2024 EPS is expected finish above the midpoint of our previous guidance of $3.50 to $4.50 per share, inclusive of Hawaiian’s results.

(a) Earnings per share guidance assumes non-operating expense of approximately $50 million and a tax rate of approximately 28%.

Financial Results and Updates

• Reported net income for the third quarter of 2024 under Generally Accepted Accounting Principles (“GAAP”) of $236 million, or $1.84 per share, compared to net income of $139 million, or $1.08 per share, for the third quarter of 2023.
• Reported net income for the third quarter of 2024, excluding special items and mark-to-market fuel hedge accounting adjustments, of $289 million, or $2.25 per share, compared to net income of $237 million, or $1.83 per share, for the third quarter of 2023
• Subsequent to quarter end, Air Group completed $2 billion in financing, backed by the Company’s Mileage Plan program. Approximately $1.4 billion was used in October to refinance certain debt acquired with Hawaiian Airlines, which is expected to result in interest cost savings of approximately $30 million over the next twelve months.
• Repurchased 367,705 shares of common stock for approximately $14 million in the third quarter, bringing total repurchases to $63 million for the nine months ended September 30, 2024.
• Generated $318 million in operating cash flow for the third
• Held $2.5 billion in unrestricted cash and marketable securities as of September 30, 2024.
• Consolidated and upsized the Company’s existing revolving credit facilities to $850 million in support of our overall liquidity target.