- Alaska Air Group's Q3 financial results have fallen short of expectations, primarily due to higher fuel prices and lower air travel demand after the summer season.
- The airline plans to moderate the growth of its Boeing aircraft fleet over the next six months to align with the subdued outlook for air travel volume.
- Factors affecting the earnings include a $50 million impact from increased jet fuel prices, $20 million revenue loss due to reduced travel to Maui post-wildfires, and slower leisure air travel demand as corporate travel has not fully rebounded.
SEATTLE — Alaska Air Group's third-quarter financial results, revealed on Thursday, have failed to meet Wall Street's expectations, largely due to challenges like heightened fuel prices and reduced air travel demand. In response, the airline is taking steps to adapt and reevaluate its growth strategies.
Moderated Fleet Growth and Prudent Measures
Alaska Air CEO Ben Minicucci indicated that the airline will exercise caution in the growth of Alaska Airlines' Boeing aircraft fleet. This adjustment is a response to the lowered expectations for air travel volume. While planning for growth, the earnings took a hit, with a $50 million impact from increased jet fuel costs, which were notably higher on the West Coast compared to other regions. An additional $20 million was lost due to decreased air travel to Maui following the devastating August wildfires on the island.
Minicucci specifically noted that fuel costs posed the most significant challenge to earnings, especially given the situation in Alaska's primary fuel region, the West Coast. The cost of refining jet fuel in the West Coast exceeded that of the Gulf Coast, leading to a substantial difference of 30 cents per gallon. This significantly impacted the airline's financial performance.
On the earnings call, Alaska's Chief Commercial Officer, Andrew Harrison, highlighted that they had been operating under the assumption of strong demand from summer through September, much like the previous year. However, the actual scenario didn't align with those expectations.
Harrison acknowledged that it might take several quarters for air travel to Maui to recover fully. As a response, the airline reduced one of its Seattle to Maui flights and trimmed flight capacity to Maui from its other hubs.
The available seat capacity on Alaska Air planes for Q3 was 6% higher than the same period in 2019. However, to adapt to the current challenges, growth for the rest of this year and early next year will be scaled back to be 3% above the 2019 level.
Alaska Air’s Senior Vice President responsible for aircraft fleet planning, Nat Pieper, mentioned that they found common ground with Boeing to slow down the scheduled delivery stream for the MAX aircraft next year. This adjustment was due to a longer-than-expected Federal Aviation Administration certification process for the 737 MAX 10, the largest model in Alaska's order.
The specific delays in the MAX jet deliveries were not disclosed, but the airline's Chief Financial Officer, Shane Tackett, emphasized that fleet growth in 2024 would be "more conservative."
In response to the subdued demand for corporate travel, Harrison detailed that Alaska is making alterations, including "reducing business-heavy routes and frequencies" in the first quarter of the following year. There has been a 22% reduction in higher-frequency business seats for routes in the Pacific Northwest and California compared to January and February of the previous year.
Challenges in the Air Travel Landscape
The airline's financial results for Q3 were impacted by a combination of factors. The strong surge in leisure air travel experienced post-COVID has moderated as summer transitioned into fall, and a substantial return of corporate travel post-pandemic has not materialized. This led to lower-than-anticipated passenger volumes in September.Minicucci specifically noted that fuel costs posed the most significant challenge to earnings, especially given the situation in Alaska's primary fuel region, the West Coast. The cost of refining jet fuel in the West Coast exceeded that of the Gulf Coast, leading to a substantial difference of 30 cents per gallon. This significantly impacted the airline's financial performance.
Challenges Shared by the Industry
While Alaska Air Group grappled with the effects of higher fuel costs and decreased demand, other airlines faced similar challenges. American Airlines, for instance, reported a net loss of $545 million for the third quarter. In contrast, earlier in the month, Delta and United Airlines had reported profits of $1.1 billion each. The common thread in these financial reports was the impact of soaring fuel prices.On the earnings call, Alaska's Chief Commercial Officer, Andrew Harrison, highlighted that they had been operating under the assumption of strong demand from summer through September, much like the previous year. However, the actual scenario didn't align with those expectations.
Addressing the Hawaii Factor
In August, the airline's operations were significantly affected by the wildfires in Maui, which is a key destination. Alaska Airlines allocates 12% of its fleet to routes to Hawaii, and approximately one-third of that capacity serves Maui. After the wildfires, there was a surge in cancellations, leading to a negative turn in bookings.Harrison acknowledged that it might take several quarters for air travel to Maui to recover fully. As a response, the airline reduced one of its Seattle to Maui flights and trimmed flight capacity to Maui from its other hubs.
Reevaluating Growth and Operations
Alaska Air had been pursuing an aggressive growth plan. In September, the airline completed the retirement of its Airbus jets and added five 737 MAX 9 aircraft during the third quarter. These MAX 9s have more seats than the aircraft they replace.The available seat capacity on Alaska Air planes for Q3 was 6% higher than the same period in 2019. However, to adapt to the current challenges, growth for the rest of this year and early next year will be scaled back to be 3% above the 2019 level.
Alaska Air’s Senior Vice President responsible for aircraft fleet planning, Nat Pieper, mentioned that they found common ground with Boeing to slow down the scheduled delivery stream for the MAX aircraft next year. This adjustment was due to a longer-than-expected Federal Aviation Administration certification process for the 737 MAX 10, the largest model in Alaska's order.
The specific delays in the MAX jet deliveries were not disclosed, but the airline's Chief Financial Officer, Shane Tackett, emphasized that fleet growth in 2024 would be "more conservative."
In response to the subdued demand for corporate travel, Harrison detailed that Alaska is making alterations, including "reducing business-heavy routes and frequencies" in the first quarter of the following year. There has been a 22% reduction in higher-frequency business seats for routes in the Pacific Northwest and California compared to January and February of the previous year.
