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Alaska Air Group: a big loss or a surprising profit?

Post by John Gillie / The News Tribune on Jan. 29, 2009 at 7:14 am with No Comments »
January 29, 2009 7:14 am

Alaska Air Group today released results for its fourth quarter and full year that are either distressing or encouraging, depending on how you view them.

Alaska Air Group, parent company of SeaTac’s Alaska Airlines and Horizon Air, either showed a $16.4 million profit for the quarter or a $75.4 million loss.

The difference is what accountants call “special items,” expense and income items that occurred during the quarter because of special, infrequent occurrences such as radical shifts in oil prices, corporate restructuring and the unscheduled retirement of uneconomic jets.

The company, in its corporate earnings release, led with the $75.2 million loss, but quickly followed with news of the $16.4 million profit.

Wall Street apparently took the positive view. Alaska Air Group shares rose 95 cents or 3.57 percent Thursday to close at $27.56.

Alaska Air’s chairman, Bill Ayer, emphasized the profit:

“In a year of unprecedented volatility that included soaring fuel prices and an economic meltdown, we were pleased to eke out a small profit for 2008, excluding special items, and be one of only a few major airlines to do so,” he said in a prepared statement.

Chief gremlin in this good news-bad news scenario were oil prices that rocketed upward to $147 a barrel in midsummer and then quickly fell to the mid-$30-a-barrel by December.

Airlines trying to guard against predicted oil prices of as high as $200 a barrel bought options or hedges to protect themselves from that contingency only to see oil prices free fall below their hedge values.

Even airlines such as Southwest and Alaska, which had played the oil price game successfully for years accruing benefits to their bottom lines, got caught in the quirky and unusual behavior.

At Alaska, the oil price fluctuations brought these after-tax charges in the fourth quarter: mark-to-market fuel hedge adjustments of $50.3 million and realized losses because of the early termination of fuel hedges for 2009 and 2010 of $31.3 million.

Passenger demand and pricing also went unpredictable in 2008. The year began with steady demand that allowed airlines including Alaska to steadily raise prices step-by-step through mid-year. Then the banking and economic crisis sent business travel down the drain in the later months of the year and frightened leisure travelers into canceling trips.

This whipsaw effect sent prices tumbling again.

At Alaska, mainline passenger traffic declined in the fourth quarter by 4.4 percent, but the company moved quickly and cut capacity more quickly by 7.1 percent.

The result was fuller planes in the fourth quarter of 2008 compared with the same quarter in 2007. The percentage of seats filled increased by 2.3 percentage points to 77 percent in the fourth quarter.

Stock market and investment declines and instability made major changes in the airline holding company’s debt-to-capital ratio, which increased to 81 percent at year’s end compared with 70 percent at the end of 2007.

Alaska attributed much of that change to an increase in the company’s unfunded pension liability which increased some $300 million because of a decline in the value of the pension plan’s assets.

Ayer told analysts that in today’s difficult times, the airline holding company’s guiding principle will be old fashioned common sense.

“If I had to sum up the principles that we’ve been adhering to and that will guide our future decisions, they would sound a lot like something your parents or grandparents probably taught you: Don’t buy things you can’t afford, don’t borrow money you can’t pay back, don’t agree to things you don’t understand, and finally, if it doesn’t seem right, it probably isn’t,” Ayer said Thursday.

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