Alaska Air cuts annual profit forecast on higher fuel costs

Alaska Air significantly lowered its 2025 adjusted profit per share forecast to at least $2.40 from over $3.25 and projected fourth-quarter adjusted EPS of at least 40 cents, substantially below analyst expectations of 88 cents. This downward revision is primarily driven by higher fuel costs due to West Coast refinery outages and persistent operational challenges, including adverse weather. Despite missing Q3 adjusted EPS estimates ($1.05 vs. $1.13), the carrier reported stronger-than-expected Q3 operating revenue of $3.77 billion and anticipates positive unit revenues in Q4 with sequential improvement in unit costs.

Analysis

Alaska Air (ALK) significantly lowered its 2025 adjusted profit per share forecast to at least $2.40 from its previous guidance of over $3.25, alongside a fourth-quarter adjusted EPS projection of at least 40 cents, substantially below analyst estimates of 88 cents. This downward revision is primarily attributed to higher fuel costs, driven by West Coast refinery outages, and persistent operational challenges, including adverse weather and air traffic control constraints. The company's third-quarter adjusted EPS of $1.05 also missed analyst expectations of $1.13.

CFO Shane Tackett highlighted fuel volatility as a key management challenge, while operational disruptions, including a major July IT outage, have pressured U.S. carriers this year. Despite these headwinds, the industry's efforts to curb seat supply are yielding results, with ALK expecting positive unit revenues in Q4. Management also anticipates meaningful sequential improvement in unit costs from Q3 levels.

While unit costs excluding fuel rose 8.6% in Q3, total Q3 operating revenue increased 23% year-over-year to $3.77 billion, slightly exceeding expectations of $3.76 billion. This indicates underlying demand strength, further supported by a 1.4% rise in yields, a key gauge of pricing power, in the quarter through September. The revised guidance reflects a challenging operating environment despite some positive revenue trends.

Key Decisions for Investors

• Investors should closely monitor ALK's ability to mitigate fuel cost volatility and operational disruptions, as these factors are central to the revised profit outlook.
• Evaluate the sustainability of positive unit revenue trends and the promised sequential improvement in unit costs, which could signal a potential stabilization or recovery in profitability.
• Consider the impact of broader industry capacity management efforts and the resilience of travel demand, evidenced by strong Q3 revenue, against the backdrop of significantly reduced profit guidance.