Earnings: Alaska Airlines results fly past forecast

Propelled by higher fares, fuller airplanes and a savvy fuel-purchasing strategy, Alaska Airlines exceeded Wall Street's profit expectations for the year by about 20 percent.

Although several extraordinary items resulted in a net loss of $5.9 million for 2005, excluding those charges the company earned $55 million. That compared with a profit of $5.2 million in 2004 when special charges are excluded.

Investment analysts normally do not consider such special items when forecasting airline profits, because they are difficult to predict.

Consequently, analysts had expected a profit of $46 million, according to a survey by Zack's Investment Research.

Alaska's robust results were aided by salary cuts negotiated with its pilots union last summer, as well as the outsourcing of ramp personnel at Seattle-Tacoma International Airport. The latter eliminated 472 jobs, caused flight disruptions and contributed to ground mishaps that damaged at least two airplanes.

"It's been a very difficult year for the employees that have been affected. But we are now seeing the benefit of these decisions," said Bill Ayer, Alaska's chairman and chief executive in a conference call.

Ayer said he's optimistic Alaska can further increase profitability by continuing to cut costs, while also taking delivery of 12 new jets and nudging fares higher.

Yet improving the efficiency and care of Alaska's day-to-day operations is his top concern, he said.

"I want to say unequivocally that safety is our number one priority," Ayer said. "Nothing will ever compromise that."

For the fourth quarter of 2005, Alaska lost $33 million, an improvement over a loss of $44.9 million in the same period of 2004.

The extraordinary items that affected the year's results included a one-time accounting change, restructuring charges and a refund of certain navigation fees.

Analysts mostly applauded Alaska's results and agreed with its view of the future.

"We believe that there is much upside potential both on the cost-cutting side ... and on the revenue side," Ray Neidl, an analyst with Calyon Securities, wrote in a report.

Alaska's ability to raise fares without losing passengers is especially noteworthy.

As the U.S. economy has rebounded, most airlines have seen traffic return to levels before 9/11.

But many carriers, particularly traditional stalwarts like United, American and Delta, have continued to lose money, because ticket prices have been too low for them to recover their costs.

The struggle to make money intensified as fuel prices jumped and competition from low-cost carriers such as Southwest and JetBlue intensified.

Alaska's "revenue-per-available-seat-mile" — a common measure of sales generated by each passenger — increased 8.4 percent in the fourth quarter, indicating higher prices.

Yet Alaska filled 75.9 percent of its seats in 2005, up from 72.9 percent in 2004.

"The steady demand for our product in the face of fare increases indicates that the market currently is less price-sensitive that it has been in the past," Ayer said. "It also tells us that we are hitting the mark in delivering customer value."

The single biggest influence on Alaska's profitability in 2005 was its use of futures contracts to lock in much of its jet-fuel needs before oil prices soared in the summer and fall.

Alaska and Horizon Air, which are subsidiaries of Alaska Air Group, collectively saved $125 million by hedging fuel in 2005, said Brad Tilden, Alaska's chief financial officer.

Fuel hedging will continue to benefit Alaska in 2006 and 2007. The company has 46 percent of this year's fuel needs hedged at just under $41 per barrel, and 20 percent of next year's fuel needs hedged at $45 per barrel.

If crude oil averages $63 per barrel in 2006, Alaska's savings will be around $100 million, Tilden said.

A Seattle Times story Wednesday carried headlines referring to a profit of $46 million for the year. They should have made clear, as the story did, that the figure was a forecast by analysts and the company's results had not yet been reported.

Alaska will expand its fleet substantially next year. It will take delivery of 12 new Boeing 737-800s and retire two MD-80s and two older 737s, for a net gain of eight aircraft.

"They're planning to grow capacity around 6 percent, which is a lot, given that they haven't done a stellar job of growing capacity in the past," said Helane Becker, a transportation analyst with The Benchmark Co.

Becker cited the past month's ramp mishaps at Sea-Tac as the type of operational difficulties Alaska must avoid as it adds so many seats.

Ayer said he is confident Alaska can operate the new airplanes profitably.

Gregg Saretsky, executive vice president of operations, said the planes will do a lot of flying out of Sea-Tac.

"Our focus is very much Seattle-centric," he said, "so we are going to be looking at filling in frequencies in markets where we are seeing growth along the West Coast."

Alaska likely will also use the new capacity to add nonstop flights between cities it currently serves but does not connect with direct flights.

David Bowermaster: 206-464-2724 or dbowermaster@seattletimes.com