Alaska Air's flight path of profitability goes off course in quarter

Alaska Air Group looked more than a little shrewd three months ago. Though oil was selling above $70 a barrel, it had locked up cheaper fuel prices for many jets in advance. Passenger fares were climbing, and planes relatively full. Second-quarter profit tripled.

But the latest quarter was a different story, the Seattle-based company said Tuesday. The parent of Alaska Airlines and Horizon Air reported a quarterly loss of $17.4 million, or $0.44 a share, in the quarter ended Sept. 30, down from a profit of $90.2 million, or $2.71 a share, in the same period a year ago.

The company blamed the performance on 475 union-employee buyouts, the expense of ending leases for five relatively inefficient MD-80 jets, and accounting charges related to its fuel-hedging strategy.

Without those charges, Alaska said, it would have turned a $77.9 million profit, or $1.93 a share. Analysts expected better, about $2.10 a share.

Shares of Alaska Air, which recently have set seven-year highs, lost 7 percent of their value after the news, closing at $41.36, down $3.20.

Alaska Chairman and Chief Executive Bill Ayer said the company's revenue per available seat mile, a key industry measurement of efficiency, has weakened month by month.

In July, Alaska posted a 6.6 percent gain in that category, followed by a 5.6 percent gain in August and 2.3 percent in September.

Increases in passenger fares, which drove Alaska's profitability earlier in the summer, have slowed.

"The revenue environment has softened somewhat and bears watching," Ayer said on a conference call with analysts.

The company said it continues to focus on trimming costs and improving customer service. Ayer said the company is trying to save money by replacing the MD-80s with Boeing 737-800s, which are more fuel-efficient.

Fuel remains a concern. As oil prices have declined, closing at $59 a barrel Tuesday, Alaska's fuel-cost advantage over other carriers has narrowed.

Hedging contracts give Alaska the right to buy one-third of its fuel at $46.10 per barrel in the fourth quarter, and one-third of its fuel at $56.63 per barrel in the first quarter of 2007.

Ayer said the company spent $300 million per year on fuel just four years ago and expects to shell out $900 million this year.

If oil closes the year at $60 a barrel, the company said its hedging strategy will have saved it $9 million in the fourth quarter and $101 million for the year.

For employees, Ayer said Alaska has set aside $24 million as part of its incentive-payment plans. The payouts have not been determined and will be based on full-year results, but Ayer said employees are on track for significant payments.

The company said it spent $238.6 million on wages and benefits in the quarter, up 9.4 percent from a year ago.

Part of that came from hiring 704 new employees over the past year, raising its total head count to 13,173.

The company also reported it had squirreled away $1.1 billion in cash and investments by the end of September, up from $983 million at year end.

Chief Financial Officer Brad Tilden said Alaska has amassed the stockpile partly because it has unfunded pensions of $225 million to $300 million, and it plans to spend $1.9 billion on capital improvements over the next three years.

Luke Timmerman: 206-515-5644 or ltimmerman@seattletimes.com