Alaska Airlines and Rewards

Alaska Air Group filed their 2013 10-k yesterday, and even that fickle Mr. Market seems impressed.

2013 saw Alaska Airlines expanding rapidly into new markets, acquiring nine new aircraft (“new 737-900ER’s with the Boeing Sky Interior”), buying back $159 million in stock, increasing their social engagement (“We saw healthy increases in both of our primary social communities with Facebook growing by 45.9% and Twitter by 43.2%”), and enhancing their culinary flair [ok, that last one is a project for 2014].

From my seat, I was struck by the huge growth in per-share GAAP earnings (from $4.40 per diluted share in 2012, to $7.16 per share), as well as the large proportion of those gains attributable to a “one-time, non-cash Special mileage plan revenue item.”  As they advise:

“Our consolidated net income for 2013 was $508 million, or $7.16 per diluted share, compared to net income of $316 million, or $4.40 per diluted share, in 2012. Significant items impacting the comparability between the periods are as follows:

• Both periods include adjustments to reflect the timing of net unrealized mark-to-market gains or losses related to our fuel hedge positions… 

• In 2013, we recognized a one-time, non-cash Special mileage plan revenue item of $192 million ($120 million after tax, or $1.70 per diluted share) that resulted from the application of new accounting rules associated with the modified Bank of America Affinity Card Agreement, and the effect of an increase in the estimate of the number of frequent flier miles expected to expire unused.” (p. 29)

Of course, I mean not to suggest anything nefarious here, and their disclosures are quite consistent and explicit.

However, the gears of the mind begin to turn, for it reveals that the most impactful thing an enterprising airline executive could do in 2014 to boost GAAP earnings would be to modify their reward program.  In fact, if one were clever, such modifications–suitably tempered–could be a consistent, recurring, valuable treasure trove.  You could take $192m today, though would it not be more useful to take 40m each year over the next 5?

Disclosure: No position.

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