MIAMI — Alaska Airlines, JetBlue, and Hawaiian Airlines all posted record results for the second quarter (Q2) of 2016, even as the four largest carriers in the United States experienced headwinds during the same period.

Alaska and JetBlue did face some of the same revenue concerns as their larger peers whereas Hawaiian escaped those pressures. But all three carriers delivered truly excellent financial performance

Alaska Earnings Highlights 


  • Operating Revenue of $1.49 billion, up 4.0% Year-over-Year (YOY)
    • Passenger revenue up 2.6% YOY to $1.26 billion
  • Operating Expenses of $1.08 billion, up 1.0% YOY
    • Labor expenses up 8.9% YOY to $332 million
    • Fuel expenses down 23.0% YOY to $201 million
    • Maintenance up 25% YOY to $65 million
  • Operating Profit of $418 million; operating margin of 28.0% vs. 25.9% in Q2 2015
  • GAAP Net Income of $260 million
  • Capacity up 11.2% in available seat miles (ASMs), demand up 11.2% in revenue passenger miles (RPMs)
    • Load factor flat at 84.9%
  • Unit revenue per ASM (PRASM) down 7.7% to 11.42 cents, cost per ASM (CASM) excluding fuel and special charges down 3.7% to 7.78 cents

Notes and Observations from Alaska’s Quarterly Earnings Call


The headline for Alaska is what’s next? That is not meant as a slight on Alaska’s management team, they have obviously built a magnificent business over the last seven years even as a global powerhouse airline has built a hub from scratch at Alaska’s home base and largest connecting complex.

However, since the first quarter of 2010, Alaska has added 100 new markets to its network and outpaced industry revenue growth by a factor of 3. There is a sense that Alaska is now moving out into the long tail of new route additions, building out focus cities in San Diego and San Jose (with added long haul flights), and opening long and thin routes from Seattle and Portland.

Are those routes consistent with a business model that enjoys (a ridiculous) 28% operating margin?Our take is no, but we support Alaska’s move to broaden it’s route network further and grow its network at say a 20% margin.

The big question is how does Alaska’s spectacular model scale with the addition of Virgin America? On the earnings call, Alaska CEO Brad Tilden outlined an integration process beginning with close of the merger in Q4 2016. From then until Q1 of 2018, Alaska and Virgin will operate as separate brands until they receive a single operating certificate.

We love Alaska’s core business model — it is in our view the best in the industry. We are less bullish about Virgin’s business model in the same hands, but if any airline is poised to stand up to legacy competition at SFO and LAX, it’s Alaska with its experience of fighting Delta.

Here were some other takeaways from the call:

  • Like their opponent in the Seattle market, Alaska saw excellent operational performance in Q2 – 88.7% on time arrivals and 99.8% completion factor. That is an excellent figures and it pays off in Alaska’s industry-leading  customer satisfaction scores that have risen continuously over the last eight years.
  • 97% of Alaska’s markets by revenue would be profitable over the last 12 months even with oil prices 33% above their present day levels
  • Alaska’s trailing 12-month return on invested capital (ROIC) of 25.9% puts it in the top 10% of all S&P 500 companies
  • Membership in Mileage Plan is up 11% YOY while the credit card portfolio grew 12% – Mileage plan generated $200 million in cash in Q2

Hawaiian Earnings Highlights 


  • Operating Revenue of $594.6 million, up 4.1% YOY
    • Passenger revenue up 3.8% YOY to $518.6 million
  • Operating Expenses of $475.7 million, down 0.9% YOY
    • Labor expenses up 9.6% YOY to $269.5 million
    • Fuel expenses down 25.5% YOY to $83.8 million
    • Maintenance down 4.4% YOY to $54.6 million
  • Operating Profit of $118.9 million; operating margin of 20.0% vs. 16.0% in Q2 2015
  • GAAP Net Income of $79.6 million
  • Capacity up 2.5% YOY in available seat miles (ASMs), demand up 7.2% in revenue passenger miles (RPMs)
    • Load factor up 3.7% percentage points to 84.5%
  • Unit revenue per ASM (PRASM) down 1.6% to 13.06 cents, cost per ASM (CASM) down 3.2% to 10.45 cents, CASM excluding fuel and special charges up 4.1% to 8.61 cents

Notes and Observations from Hawaiian’s Quarterly Earnings Call


Hawaiian Airlines is a fundamentally different business today than it was even 3-4 years ago, with a stronger international presence that has been right sized. After betting heavily on Asia in the early part of this decade, Hawaiian was quick to pull the trigger on routes that didn’t work while doubling down on markets (like Tokyo) that did.

As Hawaiian CEO Mark Dunkerley noted on the carrier’s Q2 earnings call, Hawaiian is now one of the dominant carriers in the U.S. – Japan market, building a presence from scratch even as other US carriers have reduced Japan capacity by an average of 27%.

However, at the same time, Hawaiian was smart about cutting markets that didn’t work (like Taipei) and re-deploying the aircraft to domestic routes of strength to the West Coast like direct Lihue/Kona to Oakland/Los Angeles.

Hawaiian is also in a weird place in terms of having revenue results that are counter-cyclical to those of the industry. While most of the U.S. industry saw relatively flat competitive capacity growth and pricing pressure from 2010-2014, Hawaiian was dealing with a massive buildup from both Alaska on shorter haul routes to the West Coast and from international carriers like Korean Air on trans-Pacific routes.

Nevertheless, in the last two years, Alaska’s growth has leveled off (it ran out of viable markets to add), and some new entrants like Allegiant have retreated. On the international front, Asia’s macroeconomic woes have put the brakes on expansion, all of which allowed Hawaiian to break with industry trend and report a very modest decline in PRASM and expand margins to a never before achieved (in Q2) 20.0%.

Here were some other takeaways from the call:
  • The majority of premium cabin traffic is advance sales and was upgrades
  • Hawaiian is adding two new Boeing 717s to its fleet to increase park hour frequency during the midday connection window on the highest demand days of the year
  • Ancillary revenue growth was only up a modest 1.3% YOY to $23.25 – Hawaiian’s mix of long and ultra short haul routes does not create a fertile environment for ancillary revenues. Either they are short 20-30 minute hops where no drinks/service is totally fine, or they are flights long enough that passengers expect additional service.

 JetBlue Earnings Highlights 


  • Operating Revenue of $1.64 billion, up 2.0% YOY
  • Passenger revenue down 0.6% YOY to $1.49 billion
  • Operating Expenses of $1.33 billion, flat YOY
    • Labor expenses up 10.6% YOY to $415 million
    • Fuel expenses down 26.1% YOY to $274 million
    • Maintenance up 10.9% YOY to $140 million
  • Operating Profit of $313 million; operating margin of 19.1% vs. 17.5% in Q2 2015
  • GAAP Net Income of $180 million
  • Capacity up 11.1% YOY in available seat miles (ASMs), demand up 10.3% in revenue passenger miles (RPMs)
    • Load factor down 0.6% percentage points to 85.0%
  • Unit revenue per ASM (RASM) down 8.2% to 12.09 cents, cost per ASM (CASM) down 9.9% to 9.78 cents, CASM excluding fuel and special charges down 0.8% to 7.76 cents

Notes and Observations from JetBlue’s Quarterly Earnings Call


JetBlue isn’t being penalized for massive (11.1%) capacity growth in the same way that some of its peers are despite more or less the same RASM results, and our take is that investors are bullish enough on the margin improvements from JetBlue, adopting checked bag fees and other ancillary revenue initiatives that they’re willing to take that hit.

Some of that is also the track record that JetBlue has built with previous expansions, such as its shift from a pure New York JFK focus to a dual New York – Boston approach.

Indeed results in Boston are excellent, with 6% improvement YOY in RASM, and two of the five most profitable markets in JetBlue’s system in June being business travel ones in Boston. Fort Lauderdale is a huge growth market, with a plan to reach 140 daily flights, and interestingly JetBlue is now fighting back in Long Beach against Southwest, re-adding 9 daily flights that it had previously let lapse.

It’s just hard to reconcile JetBlue’s capacity plans and Wall Street’s relatively placid acceptance of them vis a vis its treatment of, say, plans from Southwest, or American including much more modest capacity growth figures. For the record, we are 100% on board with JetBlue continuing to expand at those growth rates, as they have built a track record of profitable growth. We just think the other US carriers should get the benefit of the doubt too.

Here were some other takeaways from the call:
  • Boston short haul saw the highest RASM growth across the system while San Juan was the weakest
  • Post Labor day capacity in Puerto Rico is going to be cut by at least 5% though the business unit is still profitable.
  • Colombian revenue has also turned soft for JetBlue, the first we have seen that diagnosis from a US carrier. Other airlines with high exposure to Colombia like American and Delta  might be next in revenue contagion, so we are watching this closely.
  • JetBlue’s fare options are on track to drive $200 million in incremental profits this year.