Alaska Air Group Inc. reported profits of just more than $1 billion in 2017 after its first full year owning Virgin America, but is still managing challenges associated with its purchase of the former competitor.
The Seattle-based parent company of Alaska Airlines also posted a $367 million profit for the fourth quarter of 2017, which compared to $814 million full-year 2016 and $114 fourth quarter 2016 profits.
Alaska Air Group executives announced the quarterly and year-end results in a Jan. 25 conference call with investors.
The income came on the back of $7.9 billion in operating revenue for the year, up 34 percent from 2016, and $1.9 billion in revenue for the fourth quarter, a 29 percent increase year-over-year.
The profits translated into $118 million in annual performance bonuses, which were paid out Jan. 26 to Air Group's 23,000 employees.
"This is the ninth consecutive year in which we've proudly shared profits with our employees at levels that have averaged about one month of additional pay," CEO Brad Tilden said. "This year's payout averages 7.3 percent of pay for Air Group frontline employees."
Alaska Air Group stock stayed mostly flat after the earnings call, ending Jan. 25 trading at $62.07 per share. It peaked in early March 2017 at nearly $100 per share.
The company repurchased $75 million of stock in 2017 and also announced an increase to its quarterly dividend to 32 cents per share Jan. 25. It's the fifth time the dividend has been increased since it was started in 2013.
While the airline company's revenue expectedly grew after acquiring Virgin America in the $4 billion deal that closed Dec. 14, 2016, integrating Virgin into Alaska Airlines has not come without significant costs as well.
According to a chart provided by Air Group that blends its premerger 2016 numbers with those of Virgin America for comparison against the 2017 financials, operating revenues were up 6 percent in 2017, but pretax income was down 21 percent from the blended 2016 figures at $1.3 billion. Higher oil prices caused fuel costs to rise $323 million, or 29 percent, but other non-fuel operating expenses were also up $426 million, or 9 percent.
Tilden said the company's earnings are under pressure from step function cost increases along with competitors adding capacity in Alaska's markets — primarily Delta Air Lines out of Seattle.
However, he noted that while Air Group has incurred most all of the costs associated with the extremely complex task of integrating working airlines, it is just starting to see the benefits.
"Of the $300 million original synergy target, we expect to realize $65 million in 2018, consistent with our prior forecast. We continue to believe the revenue potential of the new Alaska network is substantial, and we expect synergies to reach $200 million in 2019," Tilden said. "More important than the synergies, however, is the incredible platform that we'll have to grow revenue and profit in the years ahead and create value for our owners, our customers and our employees, just as we have in the last couple decades."
Alaska Air Group plans to move to a single passenger service system on April 25, which will blend the Virgin America shopping, flight scheduling and airport check-in systems with Alaska Airlines, according to Tilden.
The company received a single operating certificate for Virgin and Alaska from the Federal Aviation Administration on Jan. 11.
Tilden also noted that the airlines' operations had been co-located at 22 of the 31 airports needing consolidation and the rest of that would be done in April.
"We've made all aircraft delivery and interior decisions, and our first Airbus airplane came out of the paint shop yesterday with new Alaska colors," Tilden added Jan. 25.
Alaska Airlines for years had flown only Boeing 737s, of which it has 154, but it is now also flying 67 Airbus A320s, which company leaders have said it will continue to fly at least through 2021 when some of the Airbus leases begin expiring.
On the financial front, the company lowered its debt-to-capitalization ratio from 59 percent to 51 percent during 2017. Chief Financial Officer Brandon Pedersen said the company is committed to having a debt-to-cap ratio in the mid-40 percent range by 2020, noting it is well-positioned if interest rates continue to rise because half of the company's debt is fixed.
Alaska Air Group's debt-to-cap was down to 27 percent at the end of 2015 shortly before buying Virgin America.
The company ended 2017 with $1.6 billion in cash after generating $1.7 billion in operating cash flow and spending roughly $1 billion on capital projects, which left Air Group with $670 million in free cash flow, minus integration costs, according to Pedersen.
Operationally, Tilden said the company is focused on continuing on-time performance improvements made in the fourth quarter.
Alaska Airlines had long been the top domestic carrier in on-time performance, the fundamental operational metric. However — even including Virgin America's 2016 on-time figures for comparison's sake — Alaska's on-time performance fell from 87.3 percent in 2016 to 82.6 percent last year.
As Tilden mentioned, there was significant year-over-year improvement in the fourth quarter, with 83.4 percent of Alaska flights arriving on time compared to just 76.1 percent in the latter portion of 2016.
For Virgin America, the trends were similar but the numbers were worse. Overall, just 70 percent of Virgin flights arrived on time in 2017, but the airline managed an improvement to 82.5 percent in the fourth quarter.
Finally, Air Group has reached joint collective bargaining agreements with Alaska and Virgin pilots and customer service agents and Tilden said management believes it is close to similar agreements with the flight attendant and maintenance technician unions.
In early January, the Seattle Times published a lengthy story detailing employee discontent at Alaska Airlines due to cost-cutting and merger-related actions.