Last Wednesday, JetBlue Airways (NASDAQ: JBLU) bumped up its unit revenue guidance range for the second quarter, implying that profitability will beat expectations this quarter.
Just a day later, Alaska Air (NYSE: ALK) followed suit. The Alaska Airlines parent also reduced its cost forecast for the current quarter. The sunny outlooks from these two low-fare airlines suggest that domestic travel demand remains quite strong despite signs of slowing growth elsewhere in the economy.
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Alaska follows JetBlue with a favorable revenue guidance update
In an investor update published on Thursday, Alaska Air indicated that it expects a strong 3.5% to 5% increase in revenue per available seat mile (RASM) this quarter. For comparison, its original quarterly forecast called for RASM to rise 2% to 5%. In other words, Alaska's unit revenue is on track to surpass the midpoint of management's initial outlook.
JetBlue made a similar guidance revision last week. It now expects RASM to increase 2% to 4% this quarter, whereas in April it had projected 1% to 4% RASM growth.
This represents a big shift from just three months earlier. In March, both Alaska Air and JetBlue slashed their first-quarter forecasts, primarily blaming unusually low fares on last-minute tickets for transcontinental flights. This pocket of pricing weakness seems to have disappeared, based on the carriers' positive guidance revisions this quarter. After all, Alaska Airlines and JetBlue compete very little outside of the transcontinental market, as JetBlue mainly operates on the East Coast and Alaska focuses on the West Coast.
Costs will also come in better than expected
While JetBlue only provided a revenue update last week, Alaska Air also revised its cost forecast for the second quarter. Here, too, the news was good for investors.
Management now expects adjusted nonfuel unit costs to increase approximately 4% this quarter. That's a full percentage point better than its initial outlook. Alaska also reduced its fuel cost estimate from $2.30 per gallon to $2.25 per gallon, reflecting the sharp drop in oil prices over the past month.
To be fair, Alaska Air did not change its full-year forecast for nonfuel unit costs in its recent investor update. This would imply that some costs have shifted from the current quarter to the second half of the year. That said, Alaska has a long track record of successful cost containment. Expenses that at first appear to be delayed often end up being eliminated by year-end.
A strong spring -- and all signs point toward an even better summer
Alaska Air's investor update effectively raised the company's pre-tax margin forecast by nearly 2 percentage points, based on the midpoints of its old and new guidance ranges. The new forecast implies that adjusted earnings per share will come in around $1.93 this quarter, solidly above the average analyst estimate of $1.85. Adjusted EPS was just $1.66 in the year-ago period.
Furthermore, Alaska Airlines' rebounding revenue momentum bodes well for the summer peak season. The carrier is just starting to reap the bulk of the revenue synergies from its takeover of smaller rival Virgin America. The combination of a favorable industry supply-demand balance and revenue synergies could enable Alaska to post another solid low- to mid-single-digit RASM increase in the third quarter.
This level of RASM growth would pave the way for a huge uptick in profitability. First, Alaska Air should get the full benefit of the recent pullback in oil prices next quarter. Second, the carrier's initial guidance for the year called for nonfuel unit cost growth to slow to around 2.5% in the third quarter. The net result is that total unit costs are likely to decline next quarter, so Alaska's earnings would rise even without any unit revenue growth.
Analysts are currently calling for Alaska's adjusted EPS to soar 20% year over year to $2.29 in the third quarter. That projection is unchanged from a month ago. But with oil prices falling and RASM trends improving, Alaska Air has a good chance of surpassing these bullish forecasts to earn a record profit next quarter.
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