MIAMI — Alaska Air Group posted a record $89 million profit, or $1.28 per diluted share, in the first quarter profit of 2014, shrugging off growth from rival Delta Air Lines at Alaska’s largest hub at Seattle. The results marked another record quarter for Alaska (up from $44 million a year prior), though it must be noted that Alaska was barely impacted by the winter weather that ravaged the financial results of its larger nationwide peers.

Operating revenues grew 7.8% year-over-year (YOY) to $1.22 billion, up from $1.13 billion the year prior. Consolidated passenger revenues, which includes mainline Alaska and regional Horizon, grew 6.3% YOY to $1.04 billion. Mainline passenger revenue grew 7.3% YOY to $854 million, while regional revenues were up a more modest 2.2% to $186 million. Freight, which accounts for an important but otherwise small financial segment, saw revenue slide 7.7% YOY to $24 million.

Passenger revenue per available seat mile (PRASM) grew 1.7% YOY to 12.45 cents, with yields up 2.2% to 14.70 cents on a 4.6% YOY increase in capacity as measured in overall available seat miles (ASMs). More specifically, mainline yields grew 3.4% over 2013 to 13.34 cents as PRASM increased 3.1% to 11.40 cents on a 4.1% increase in ASMs. Regional operations, saw a 6.8% YOY decrease in PRASM as ASMs increased 9.9%, forcing a 5.4% drop in yields to 27.53 cents. The increases in PRASM came despite a 7% increase in competitive capacity in Alaska’s markets. Alaska Air also estimates that it received nearly a point worth of PRASM boost from traffic that came to Alaska from other airlines during storm related cancellations.

Consolidated expenses, meanwhile, grew a meager 1.1% over 2013. In particular labor costs rose only 3.0% YOY to $272 million, and 4.2% including incentive pay. Rises in several other line items, including landing fees and contracted services, were offset by a 6.4% decrease in fuel expenses to $358 million (down from $381m) and aircraft maintenance costs, which fell 22.7% YOY to $51 million. Operating costs per ASM (CASM) fell 3.3% to 12.66 cents; while CASM excluding fuel rose 0.5% YOY to 8.66 cents.

Alaska ended the quarter with $1.42 billion in cash and marketable securities, up from $1.33 billion at the end of Q1 2013. Its total debt was a healthy $824 million, with a healthy debt to equity ratio of 39.8%. Alaska Air Group has by far the best financial profile of any US carrier not named Southwest Airlines, and the balance sheet absolutely reflects that. And Alaska continues to return cash to shareholders, this time via yet another $0.25 quarterly dividend. The airline recorded an operating profit of $141 million for the quarter, for an operating margin of 11.5% (up from 5.6% a year prior). Commensurately, Alaska led its niche and network peers in terms of operating margin during the quarter, and also recorded an excellent return on invested capital (ROIC) of 14.8% over the past 12 months (up from 13.4% in the twelve months preceding March 31, 2013. Free cash flow came in at $156 million on $93 million in capital expenditures and $249 million in operating cash flow. This represented industry leading free cash flow figures.

Looking forward into Q2 and the rest of the year, the major challenge to Alaska’s earnings will of course come from Delta in Seattle. According to the quarterly earnings call, competitive capacity will be up 8% in Q2, 7% in Q3, and 7% in Q4 on a weighted average basis. However, it is important to note that competitive capacity largely ignores the effect of Delta’s international growth, which will be its key weapon in attempting to win away Seattle based frequent flyers and corporate contracts.

Alaska Air expects its own CASM to rise 1.5% on a 4.5% increase in ASMs in Q2. Full year capital spending is expected to be between $530 – $545 million due to the delivery of 10 Boeing 737-900ERs. Alaska expects to return roughly $350 million to shareholders through dividend and share repurchase programs.

Of course the big question is whether or not Alaska can sustain this level of profitability as Delta grows into its summer schedule. Alaska CEO Brad Tilden remarked during the quarterly earnings call that he was “confident” his airline would pull through.  “We’ve had a couple of big competitive onslaughts over the last 20 years and we’ve come through just fine and I’m very confident that we’re going to come through this and as I said earlier come through this as a stronger company.” Director of network planning Ben Munson noted that Delta’s competitive capacity with Alaska was up 12% YOY in Seattle on an ASM basis, which will increase to 40% YOY by the fourth quarter.

For Alaska, the rise of Delta in Seattle presents a challenge, in particular because Seattle is Alaska’s highest margin hub. Certainly the two airlines can co-exist with a Delta hub of say 175 – 200 flights per day in Seattle, but the challenge for Alaska is going to be protecting margins. To some degree, Delta’s evaluation of Seattle is going to be on an overall contribution to network basis (because it will become their Asian gateway), and what that means in practice is that Delta will stomach lower margins, especially on domestic flights (where it directly competes with Alaska). The two airlines could certainly co-exist in Seattle with say 5-7% margins for Alaska, and 3-5% for Delta. But for Alaska, that is a huge challenge because today in Seattle they likely drive 12-15% margins. Turning increasingly to Portland makes some sense, but the Portland market, while growing, is lower margin as well. There are no easy answers to Alaska Air Group’s travails in Seattle.

On a brighter note, Executive VP and President of Horizon Air Glenn Johnson noted on the conference call that the Q400 flying in Alaska (primarily between Anchorage and Fairbanks) is paying dividends. And in terms of partnership revenues, Alaska’s partner revenues with Delta declined 5% YOY (total annual revenue exposure is $200 million), but were offset by a 20% increase in Q1 revenues from American.

Alaska Air Group once again delivered outstanding financial results. The question is whether it can continue to do so moving forward.