Operational Clouds Have Opened Another Window At Alaska Air

Airlines in the U.S. have shown an uncommon level of discipline for the past decade, setting the stage for a nice boom period where most industry participants have been able to make some good money. Nothing that good lasts forever, though, and there are emerging signs that airlines are getting a little loose with capacity in the interests of competition.

With Alaska Air (ALK), there are concerns that go beyond that competitive industry backdrop. The integration of Virgin America (NASDAQ:VA) hasn't been completely smooth and it looks as though the company might be slipping a bit on much-vaunted metrics like cost control and customer experiences. All of that has led to a roughly one-third drop in the share price from its early 2017 peak and underperformance relative to some of its larger rivals.

I'm cautiously bullish on Alaska Air now. I'm bullish because I think modest growth can support a fair value in the $70s based upon both DCF and EBITDAR. I'm cautious because individual stocks don't often outperform when the entire sector goes into disfavor, and I think there could be some more bumps in the road as Virgin America is fully integrated and as rivals respond to the new, larger, more competitive Alaska Air.

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Operational Clouds Have Opened Another Window At Alaska Air

Investopedia: AMR's Attempt To Avoid Bankruptcy Stalls Out

With quite a lot of debt, thinning liquidity, untenable costs and a worsening global economic outlook for 2012, AMR (NYSE:AMR), parent of American Airlines, bowed to the inevitable and filed for Chapter 11 bankruptcy. At this point there is virtually no chance that the company will disappear or liquidate (it doesn't even believe it needs debtor-in-possession financing), but common shareholders are almost certain to take a total wipeout here. Although a new and improved AMR will likely emerge from this process, it is yet another reminder that airlines are miserable investments in most cases.

A Surprising Filing
There have been rumors about a potential AMR bankruptcy for some time now, and as labor negotiations dragged on it seemed increasingly possible that management would use Chapter 11 reorganization as its final bit of leverage. That said, this filing is still something of a surprise - Bank of America's analyst Glenn Engel was in print just two weeks saying that bankruptcy was not imminent here, and both Morgan Stanley and Barclays had positive ratings on the stock - including an $8 price target at Barclays. (For related reading, An Overview Of Corporate Bankruptcy.)

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