Alaska Air Group’s financial results released Thursday fell short of Wall Street’s third-quarter forecasts, largely due to higher fuel prices and lower demand for air travel in the early fall.
Executives said they would reduce planned growth in Alaska Airlines’ Boeing aircraft fleet over the next six months to meet lower expectations for air travel volume.
Alaska Air CEO Ben Minicucci said the airline will “moderate growth as a prudent measure.”
Profit results were hurt by a $50 million decline due to higher jet fuel prices – which are higher on the West Coast than elsewhere – and another $20 million in lost revenue due to the reduction in air traffic to Maui following the deadly wildfires in August.
Additionally, the boom in leisure travel weakened as the summer ended without an offsetting increase in business travel post-pandemic, resulting in lower-than-expected passenger traffic in September.
According to S&P Global Market Intelligence, Alaska reported third-quarter net income of $139 million on revenue of $2.8 billion, while Wall Street analysts expected a profit of $240 million. Earnings per share were $1.08 versus expected $1.87.
The earnings figures were improvements compared to the same quarter last year, but only because Alaska Air subsequently incurred one-time charges of $155 million for Alaska Airlines’ retirement of its Airbus A320 jet fleet and the retirement of its Q400 aircraft. Turboprop aircraft of subsidiary Horizon Air had to write off $90 million to cover last year’s bonus for ratifying the pilot contract.
Fuel higher, traffic lower
On a conference call with analysts Thursday, Minicucci cited fuel costs as the biggest drag on earnings and said Alaska was hit harder than other airlines.
The cost of refining jet fuel rose much higher on the West Coast, where Alaska Air sources most of its fuel, than on the Gulf Coast. “We pay 30 cents a gallon more than anyone else in the country,” Minicucci said.
Other airlines’ earnings results were also hit by high fuel costs. On Thursday, American reported a third-quarter net loss of $545 million. Earlier this month, Delta and United each reported profits of $1.1 billion.
On Thursday’s earnings call, Alaska Chief Commercial Officer Andrew Harrison explained the other factors impacting financial results.
Following the sharp increase in air travel following the COVID crisis, he said: “Demand for leisure activities appears to have normalized and business demand is no longer returning.”
“We have planned our network for relatively strong demand from summer to September, like we experienced last year,” he said. “However, this did not fully materialize.”
In August, the devastating fires on Maui hit the airline. Alaska deploys 12% of its fleet on routes to Hawaii, a third of which to Maui.
The airline provided support and flew in relief supplies during the emergency. After the fires, Harrison said, “bookings became negative and cancellation rates were high.”
He said he expects it will take several quarters for air traffic to Maui to recover. Meanwhile, Alaska has canceled a Maui flight from Seattle and reduced flight capacity to Maui from its other hubs.
Alaska had pursued an aggressive growth plan. The last Airbus jets were finally retired in September and another five 737 MAX 9s with more seats than the planes they replaced were added in the third quarter.
The number of available seats on Alaska Air aircraft was 6% higher in the third quarter than in the same quarter of 2019. For the remainder of this year and early next year, growth will decline to 3% above 2019 levels.
Nat Pieper, Alaska Air’s senior vice president in charge of aircraft fleet planning, said the airline had found common ground with Boeing by slowing planned deliveries of more MAX planes next year.
That’s because the Federal Aviation Administration’s certification of the Boeing 737 MAX 10, the last and largest MAX model Alaska has ordered, is taking longer than expected.
Alaska has not indicated how much MAX jet deliveries will be delayed.
Shane Tackett, Alaska’s chief financial officer, said fleet growth in 2024 will now be “more conservative.”
In addition to limiting fleet growth, Harrison said Alaska is responding to weak demand for business travel by “reducing business-intensive routes and frequencies” for the first quarter of next year.
“We reduced our higher-traffic business seats in the Pacific Northwest and California by 22% compared to January and February of last year,” he said.
On Thursday, Alaska announced a deal to sell its remaining 10 Airbus aircraft, all A321neos, to American Airlines.
With Alaska Airlines once again operating an all-Boeing fleet, all Airbus pilots acquired along with the Airbus jets from its merger with Virgin America in 2016 will have been retrained and converted to Boeing jets by the end of the year.
Shares of Alaska were down nearly $2 on Wednesday and fell another 50 cents to just over $32 in early trading on Thursday following earnings results.