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Spokane, Washington  Est. May 19, 1883

Alaska Air earnings plunge without 2017’s tax-cut boost, but CEO declares a ‘turning point’

Brad Tilden, chief executive of Seattle-based Alaska Airlines parent company Alaska Air Group, hailed the fourth quarter’s results as a “turning point” in the company’s financial fortunes at the end of a difficult year. (Tribune News Service)
By Dominic Gates Seattle Times

About 21,800 employees nationwide at Alaska Airlines and Horizon Air were to share a total of $120 million in annual performance bonuses in their paychecks Friday, an average payout of approximately $5,500, the company said.

Employees in Washington state will get $66 million of that total.

And shareholders will get a 9 percent increase in their quarterly dividend, now at 35 cents per share, the company said Thursday as it reported 2018 earnings.

Brad Tilden, chief executive of Seattle-based parent company Alaska Air Group, hailed the quarter’s results as a “turning point” in the company’s financial fortunes at the end of a difficult year.

This was despite the fact that net profits were drastically down compared to a year earlier, when earnings were artificially boosted by the big federal tax cut. His optimism was based on Alaska’s fourth-quarter revenue rising 6 percent, the fastest rate since 2011 and significantly higher than the increase in costs excluding fuel.

“At this time last year, we faced multiple headwinds from aggressive competition, our own growth, new higher-cost labor agreements and rising fuel prices. Today, that picture looks very different,” Tilden said on a teleconference call with Wall Street analysts. “Our growth has slowed. Newer parts of our network are maturing.”

He said fuel prices have moderated and passenger demand is solid. And he said the burden of integrating the employees and airplanes Alaska Airlines absorbed two years ago when it acquired Virgin America is now 95 percent complete.

Reservations and ticketing are already a single system. Tilden said the two separate cabin crews begin operating as a single unit next week, and management is now working to integrate the separate pilot schedules.

Alaska has repainted 39 of 71 Airbus aircraft and will soon repaint the remainder of the Virgin America fleet.

“We’re rapidly becoming a better version of ourselves with greater reach and scale,” Tilden said. “We have good momentum heading into 2019.”

In the two key metrics by which financial analysts assess airline performance, Alaska’s revenue per passenger per mile carried was up 5.2 percent in the fourth quarter compared to the previous year, while cost per passenger per mile carried was up 10.6 percent.

Excluding fuel and merger-related costs from that last metric – which is how financial analysts make projections for the future – Alaska’s cost per passenger per mile carried rose just 3.1 percent.

Net profit for the fourth quarter was just $23 million or 19 cents per diluted share, compared with $315 million or $2.55 per diluted share a year earlier.

However, the previous year’s results were inflated by a $237 million benefit from the Trump tax cut, and the 2018 fourth quarter included a one-time write-off of $20 million for terminating an engine-maintenance contract inherited from Virgin on the Airbus airplanes.

Adjusting for those two one-time numbers, the real comparison would be a fourth-quarter profit of $43 million versus $78 million a year earlier.

The biggest driver of the decline is the price of fuel. Fuel was up 35 cents per gallon year-over-year on 208 million gallons – that’s a $73 million hit to Alaska’s fuel expense in the quarter.

Excluding one-time costs including merger costs and fuel-hedging costs and last year’s tax benefit, Alaska said its adjusted net income was $93 million or 75 cents per share, which beat the First Call Wall Street analyst consensus projection of 71 cents per share.

Alaska’s fleet grew significantly in 2018, when it added eight Boeing 737s, four Airbus A321s and 25 Embraer E175s, the regional jets flown by Horizon – a total increase in seat capacity of 5.3 percent.

Management has decided to slow growth in the year ahead, projecting just a 2 percent capacity increase, which will restrain 2019 costs.

And recently introduced changes should boost revenue. Last month, Alaska raised the cost of checking one bag to $30. This month, it has fully implemented across its network new “Saver” fares – cheaper tickets with restrictions such as no seat assignment until check-in.

Ahead of the results, Alaska’s stock closed Thursday up $2.07, or 3.3 percent, at $65.78. After the results posted, shares fell back in after-hours trading more than $2 to $63.75, all but canceling out the day’s gains.

A previous version of this story posted online used a different figure for the Trump tax boost to Alaska’s earnings in 2017. A new accounting standard introduced during the year revised the 2017 quarter’s net profit and tax benefit.