As revenues and profits soar, have Alaska Air’s fares peaked?

Following flush earnings reports at other U.S. airlines this month, Alaska Air Group on Tuesday reported a profit of $240 million in the second quarter, up 73% from the same quarter a year ago.

Still, the profit figure, which amounts to $1.86 per share, came in 30% lower than financial analysts projected. And on a conference call with Wall Street analysts Tuesday morning, Chief Financial Officer Shane Tackett said that, while fares for July forward remain very high relative to 2019, they are down compared with the peak of previous months.

The past quarter “could prove to be a high-water mark for the industry,” Tackett said.

In reaction to fears that Alaska may have added too much capacity if traffic declines sharply, the airline’s stock sank more than 12% after the market opened to below $47 per share.

On the conference call, Chief Commercial Officer Andrew Harrison said the “unprecedented surge in international demand” this summer that lifted the profits of the bigger U.S. carriers has pulled away many travelers who would otherwise have been flying domestically, causing a “disproportionate” reduction in Alaska’s domestic fares.

He said enough Alaska frequent flyers to fill 18 Boeing 787 Dreamliners have been redeeming Alaska miles daily to fly on international partner airlines.

With fares high and demand for international air travel soaring, Delta, United and American earlier this month reported profits of $1.8 billion, $1.1 billion and $1.3 billion, respectively. These factors suggest a relative dip in profits for July and August, though CEO Ben Minicucci said the third quarter will still be “strong.”

Profits peak in second quarter

Minicucci called the second quarter “fantastic.”

Revenue for the quarter was a record $2.8 billion, up 7% from a year ago, as the airline group consisting of Alaska Airlines and Horizon Air carried 11.6 million passengers, 5% more than a year ago.

Air travel demand was phenomenal.

Minicucci said that on June 30, Alaska flew more passengers in a single day than on any in the airline’s history. The revenue raked in for that day was surpassed only by the Sunday after Thanksgiving last year.

The growth in passenger numbers came even though Alaska had 1.3% fewer departures in the second quarter compared with a year earlier. Most of the capacity growth came from flying larger airplanes, especially the new Boeing 737 MAXs, and flying them on longer routes.

Last month, Alaska took delivery of its 53rd MAX.

Alaska expects to stop flying its remaining 10 Airbus A321 aircraft and revert to an all-Boeing fleet by the end of September. The MAX 9s coming into Alaska’s fleet have on average 28 more seats than the 72 Airbus A320s and A321s they will replace, Harrison said.

That transition has been costly. Alaska recorded spending $186 million last quarter to retrain its between 400 and 500 Airbus pilots to fly the MAXs. Tackett said Alaska has been retaining as many as 75 extra captains on the A321s “relative to what we would normally need to fly 10 aircraft” to ensure reliable service continues.

After severe setbacks last spring and early summer, when Alaska passengers were slammed by multiple cancellations due to pilot shortages, the airline’s management has prioritized operational reliability.

“We ran one of the best operations in the country” last quarter, Minicucci said.

“Over the Fourth of July weekend, we led the industry,” he said citing a cancellation rate in that period of 0.2% with 85.1% flights on time, all while flying 90% full.

Alaska has “rebuilt our foundation of operational excellence,” Minicucci said.

Alaska’s stock price recovered somewhat during the day, closing down $5.16 for the day, or 9.7%, at $48.17 per share.