2016 ends with $911M profit for Alaska Air

An Alaska Airlines passenger jet lifts off from the Juneau International Airport. (Michael Penn | Juneau Empire)

Alaska Air Group Inc. turned a $911 million profit in 2016, extending its streak of record annual earnings to seven years while also closing the purchase of one of its primary West Coast competitors during the busy year.

The Seattle-based parent to Alaska Airlines and regional carrier Horizon Air reported record fourth quarter 2016 and year-end net income of $193 million and $911, respectively, in its annual earnings report released Feb. 8.

Those results include roughly $15 million in profits and other costs attributed to the company’s purchase of San Francisco-based Virgin America airlines, which closed Dec. 14.

Last April, Air Group announced a $4 billion deal to acquire Virgin America — for roughly $2.6 billion in cash and $1.4 billion in assumed debt — in its effort to become “the premier West Coast airline” a company slogan regarding the deal highlights.

Air Group leaders have emphasized the acquisition was necessary for Alaska Airlines to compete with the “big four” domestic airlines — American, Southwest, Delta and United — which through mergers of their own have grown to hold nearly 70 percent of the domestic air travel market, according to the Bureau of Transportation Statistics.

When combined, Alaska and Virgin America make the fifth-largest domestic carrier with about 6 percent of the market.

Alaska Air Group CEO Brad Tilden said during a Feb. 8 investor call that the company expects to have a single operating certificate from the Federal Aviation Administration to fully meld Alaska and Virgin in about a year.

Virgin America founder Richard Branson said shortly after the deal was announced that he would restart Virgin America if Alaska Air Group ultimately discarded the name.

“2016 was a remarkable year for Air Group. Doing a good job with integration while also running a strong operation takes a tremendous amount of work and I want to take this opportunity to recognize and thank our people,” Tilden said during the investor call. “We have incredible frontline folks and they are driving this terrific operational performance and guest service.”

The fourth quarter and full 2016 results were 4 percent better for quarter and an 8 percent improvement for the full year compared to 2015. They translate into quarterly earnings of $1.56 per share and year-end earnings of $7.32 per share.

Alaska Air Group stock sold for $97.35 per share on the New York Stock Exchange at the end of trading Feb. 10. The per-share stock value has returned to the level it was at prior to a two-for-one stock split the company executed in June 2014.

Air Group also announced a 9 percent increase in its quarterly dividend payment to 30 cents per share Feb. 8.

For the year, the company reported $5.9 billion in operating revenue, a 6 percent increase over 2015.

Operating expenses, including merger-related costs, were up 7 percent for an overall 4 percent increase in operating income.

Fuel costs were up 12 percent for the fourth quarter but down 13 percent overall in 2016.

Alaska Air Group Chief Financial Officer Brandon Pedersen said the company finished 2016 with a 21.3 percent return on invested capital, or ROIC. The Virgin America acquisition added about $3.5 billion to Air Group’s invested capital, bringing its total invested capital to about $7.5 billion.

He noted the company’s 12-month trailing ROIC would gradually fall in 2017 until the deal is annualized, but added, “If you simply took Alaska and Virgin America’s full-year earnings for both companies for 2016 and calculated ROIC using the $7.5 billion invested capital base, ROIC would be about 15 percent.

“We remain committed to producing returns that are well above our cost of capital,” Pedersen said.

Air Group finished the year with more than $9.9 billion in total assets, up from $6.5 billion a year ago.

Financing the merger and assuming roughly $1.4 billion of Virgin America’s debt pushed Alaska Air Group’s debt-to-capitalization ratio up to 59 percent at year-end, compared to 27 percent at the end of 2015.

Tilden has long emphasized the corporate goal of holding an investment grade balance sheet despite being in the volatile airline industry.

Pedersen said the company is in a good financial position if interest rates rise because half of its debt is fixed and Air Group will again focus on getting its debt-to-cap ratio back to about 40 percent. As a result, he said near-term distributions to shareholders would likely be limited to quarterly dividend and a scaled back share repurchase program.

“Overall I’m extremely pleased with where we are today,” Pedersen said. “We closed the biggest acquisition in this company’s history without using any equity and did this while maintaining a strong investment grade balance sheet. This is a testament to the financial discipline that’s part of the DNA of this company and it provides us with a strong foundation as we head into the future.”

On Feb. 10, the company announced $100 million of bonus pay would be distributed to Alaska and Horizon employees — the eighth year in a row employees will receive bonuses roughly equal to a month’s pay.

About $9 million of that will go to workers in the state of Alaska. Virgin America employees will be eligible for the Air Group’s Performance Based Pay program in 2017.

Alaska Airlines also kept its title as the top on-time domestic airline in 2016 for the seventh year in a row, with 87.3 percent of its flights arriving on time, Tilden noted.

Specifically in Alaska in 2016, Alaska Airlines revealed plans for $100 million of investments in the state over several years through remodels and expansions to its 11 company-owned rural terminals and a new $40 million maintenance hangar at Ted Stevens Anchorage International Airport to accommodate the newer, larger Boeing 737 aircraft the airline is shifting to.

On the flipside of all the good news surrounding Alaska Air Group, the union representing Horizon Air pilots sued the regional carrier Jan. 27 in a Seattle federal District Court contending the airline is breaking its contract with the union by offering new-hire pilots $10,000 signing bonuses that are outside the scope of the contract.

Representatives of the Airline Professionals Association Teamsters Local 1224 have threatened a strike by Horizon pilots if the airline does not rectify the issue.

Alaska Air Group has said it is working to resolve the dispute without a disruption of service.

Horizon Air operates flights between Fairbanks, Anchorage, and Kodiak for Alaska Airlines.

Elwood Brehmer is a reporter at the Alaska Journal of Commerce and can be reached at elwood.brehmer@alaskajournal.com.


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