Alaska Air Can Continue To Outperform As Travel Recovers

The pandemic has crushed air travel demand, and there's very little that airlines can do about other than to reduce costs and run as efficiently as possible ahead of the eventual recovery - a situation that plays relatively well to Alaska Air's (ALK) strengths where cost control is concerned, though much of Alaska Air's efficiency is still tied to actually flying jets with passengers.

I liked Alaska Air back in August, arguing that this well-run carrier would make it through the downturn in better shape than most and would go into the recovery with a better, more profitable fleet. I still believe that. These shares have outperformed since my last article, rising more than 50% and beating peers (the U.S. Global Jets ETF (JETS)) by about 20% and specific rivals like Delta (DAL) and Southwest (LUV) by about 10% to 15%, while Spirit (SAVE) has done about 15% better.

I continue to like Alaska Air here and think it's worth buying/holding, but investors should note the likelihood of above-average volatility.

 

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Alaska Air Can Continue To Outperform As Travel Recovers

Alaska Air Standing Out A Bit, Though Far From Fully-Valued

The last three months have been a little kinder to Alaska Air (ALK), as the shares have outperformed its peer group by close to 10%. Deciding on the “why” for such a short-term move is always dicey, but I would like to think that maybe Alaska Air is finally getting a little credit for its strong ongoing execution, even in the face of growing concerns about excess industry capacity late in 2019 and into 2020.

Although I’m considered about the potential impact of a combination of less industry-wide discipline on capacity and a slowing U.S. economy, I believe Alaska Air is still trading below its fair value. If long-term revenue growth around 5% with high single-digit FCF margins, and/or a forward EBITDAR multiple of 6x, are credible inputs, these shares remain undervalued below $80.

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Alaska Air Standing Out A Bit, Though Far From Fully-Valued

Alaska Air Focusing On Execution, But The Shares Are Lagging

Alaska Air (ALK) enjoys a good reputation for the quality of its operations and management execution, but the "what have you done for me lately?" world of Wall Street doesn't reward that on a consistent basis. To that end, while I had some concerns in my last article about weaker sentiment across the airline sector, Alaska Air has underperformed, largely on what I believe to be concerns about near-term weakness in fares in its West Coast and Hawaiian operations.

Alaska Air's concentration on the West Coast remains a risk factor, but I believe the quality of the operation is still undervalued, and with a significant upturn in free cash flow on the way (barring a major deterioration in the sector), I believe management will be in a good place to return more capital to shareholders. Below $80, I think the shares are worth a look.

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Alaska Air Focusing On Execution, But The Shares Are Lagging

Alaska Air Doing Its Part, But Investors Seem More Nervous About Airlines

Alaska Air (ALK) did its part, and a little more, for the fourth quarter, and guidance for 2019 looked fine, but I suspect investors didn't like management's comments about recent volatility in fares, and I think concerns related to the ongoing government shutdown are playing into the stock as well. While I do believe Alaska Air is undervalued and well-positioned to generate above-average growth in 2019 as it leverages the benefits of the Virgin deal and pursues some new ancillary revenue opportunities, a weaker economy and a more competitive airline sector loom as risks, and investors shouldn't underestimate the challenge it can be to outperform a weaker sector.

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Alaska Air Doing Its Part, But Investors Seem More Nervous About Airlines

After A Year Of Heavy Lifting, Alaska Air Looks To Get Back To Business

This was a challenging, and likely frustrating, year for Alaska Air (ALK) management, as the company still had a lot of the heavy lifting to do in integrating the Virgin acquisition, but didn’t really get to see the benefits yet. At the same time, competitive actions from other airlines like Delta (DAL), United (UAL), and Southwest (LUV) have made managing capacity in the company’s key West Coast markets a little more challenging. All told, then, it’s been a challenging year for the stock (down about 15%), though Alaska Air has fared better than the sector as a whole.

I was lukewarm on Alaska Air back in June mostly due to sentiment and the risk of further negative earnings revisions. The shares are down slightly since then, while EBITDA expectations have fallen about 10%. I believe that sets the stage for a better 2019, and I believe Alaska Air is poised to generate some of the best growth in earnings spread (the difference between RASM, or revenue per available seat mile, and CASM, or cost per available seat mile) in the sector, as Alaska Air gets back to its normal operating prerogatives. A weaker economy and a less disciplined sector are still threats, but I believe Alaska Air should be trading in the $70s today.

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After A Year Of Heavy Lifting, Alaska Air Looks To Get Back To Business

Alaska Air Fighting Some Competitive Headwinds

I described myself as “cautiously bullish” on Alaska Air (NYSE:ALK) earlier this year, as I was concerned that the generally positive long-term outlook for this well-run airline could be overshadowed by near-term cost/synergy and competitive capacity worries, not to mention overall late-cycle weakness in airlines. Shares have lost a little ground since then, more or less keeping pace with Delta Air Lines (NYSE:DAL) and bracketed by Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU) on the weaker end and United (NYSE:UAL) on the better-performing end.

My basic outlook on Alaska Air really hasn’t changed that much. Higher labor costs and fuel costs are a drag on results, but management seems to be switching back to a network optimization footing, and history suggests that will generate some positive results for shareholders. I’ve been concerned for a little while that a prolonged stretch of good behavior from airlines would eventually end, and I think that may be happening now with capacity growth along the West Coast. Even so, I think low-to-mid single digit growth from Alaska Air can support a fair value above $70 and double-digit total annualized returns from here.

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Alaska Air Fighting Some Competitive Headwinds

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

Alaska Air Undervalued On Uncertainty

It's been a while since I've written on Alaska Air Group (NYSE:ALK) and a lot has changed since then. A company praised and valued for going its own way and sticking to a different plan than many of its rivals is trying to go down the familiar route of growth through M&A. With that, the company is taking on risks tied to the deal approval process, integrating the two businesses, mixing up its fleet, and possibly wrecking the things that made merger target Virgin America (NASDAQ:VA) distinct and popular.

I do think there are valid concerns regarding the Virgin America deal, not to mention ongoing concerns about competitive capacity increases and pressures on yields. Outside of Virgin America, none of these concerns are new, though, and I think management here has earned the benefit of the doubt. I'm taking a cautious view on valuation given the present uncertainties, but Alaska Air still looks at least 10% undervalued on that basis, with more upside that can be driven by solid execution on synergy targets and/or less onerous conditions for deal approval.

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Alaska Air Undervalued On Uncertainty

Seeking Alpha: Alaska Air Making The Most Of Its Opportunities

I hate avoiding the shares of really good companies just because they look a little pricey, and Alaska Air Group (NYSE:ALK) is a good example of why that is. I liked the company back in February and thought that the shares had upside into the $70s, but the stock has managed to touch the high $80s this year and sits more than 25% higher than when I wrote that last article. Since that time, Alaska Air has continued to compete very effectively - not only withstanding Delta Air Lines' (NYSE:DAL) aggressive expansion in Seattle, but also adding several new routes of its own and leveraging its cost advantages.

And now we come back to the perpetual issue with Alaska Air's shares - valuation. At a 5.5x multiple to EBITDAR, the shares are about fairly valued, while a 6x multiple (still within the bounds of normal for an airline) adds about $8/share to the fair value and bumps the undervaluation up over 10%. Looking at free cash flow, today's price seems to be pricing in mid-to-high single-digit annualized FCF growth from 2015's estimated end point, and that's pretty generous for an airline.

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Alaska Air Making The Most Of Its Opportunities

Seeking Alpha: Alaska Air Thriving In More Crowded Skies

Alaska Air Group (NYSE:ALK) was supposed to get walloped in 2014, as Delta Air Lines (NYSE:DAL) aggressively expanded its Seattle-based operations, pressuring revenue and margins for the smaller regional carrier that relies upon Seattle as a major hub. As it happened, though, Alaska Air had a pretty good year from a revenue, margin, and stock performance perspective as careful cost management, revenue enhancement, and competitive efforts paid off.

It's tough for me to call Alaska Air a great bargain today. I think it is an exceptionally well-run airline and I like the prospects for higher payouts as the company returns surplus cash to shareholders. While the shares do seem undervalued on the basis of next year's projected EBITDAR, it takes an averaged double-digit FCF margin over the next decade to support a low-to-mid $70's fair value by discounted cash flow and that's more aggressive than I'm comfortable with from an airline. That said, investors don't seem to often buy or sell airlines on the basis of long-term cash flow, so more aggressive investors may still find a good trading opportunity here.

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Alaska Air Thriving In More Crowded Skies

Seeking Alpha: Alaska Air Continues To Hold Its Own

Airlines are making the most of an atypical outbreak of sane, responsible management across the industry, and Alaska Air Group (NYSE:ALK) has certainly been among the beneficiaries. While the company has done pretty well for itself (and its shareholders) over the last few years, the stock has been a relative underperformer more recently on worries that Delta Air Lines' (NYSE:DAL) aggressive expansion into Seattle will start to impact the company's performance. Trading below industry-average multiples and doing better than the bears predicted, Alaska Air still appears to offer some upside but readers may want to note that the airline rally could be getting a little long in the tooth.

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Alaska Air Continues To Hold Its Own

Seeking Alpha: Ugliness In Venezuela Creating An Opportunity With Copa Holdings

There are exceptions to every rule, including the generally sound advice to steer well clear of airline stocks. Alaska Air Group (ALK) has done well for investors by focusing on the disciplined operation of regional routes, and Copa Holdings (CPA) has followed a broadly similar strategy in across North, Central, and South America.

Investors expect certain risks with airline stocks, namely volatile fuel prices and revenue uncertainty stemming from often irrational competition and the macroeconomic client. The ongoing mismanagement of Venezuela has created another significant risk for Copa, as devaluation imperils the company's significant cash holdings in the country and an escalating spat with the government of Panama could threaten even more.

No airline is a safe investment, but Copa looks well positioned to take advantage of growing traffic across Latin America for many years to come. The market appears to be all but writing off Copa's Venezuela operations, and the shares look too cheap today.

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Ugliness In Venezuela Creating An Opportunity With Copa Holdings

Seeking Alpha: Alaska Air Looks To Withstand Healthier Rivals

The great story that is Alaska Air Group (ALK) has continued to roll on, with the stock racking up almost 60% gains over the past year. What makes Alaska Air special among the airlines isn't really a big mystery anymore - the company has limited itself to a somewhat narrow geographic focus, established a low cost base, and then leveraged good customer satisfaction into strong market share, good profitability, and an uncommonly strong balance sheet.

If there is a problem with top performers, it is in figuring out what more they can do to excel. To be sure, Delta (DAL) is putting some pressure on Alaska Air, as are JetBlue (JBLU) and Virgin America. Alaska Air has the option to expand its service into incremental markets, and that should be a positive for growth. These shares remain undervalued by conventional industry metrics, though, and I don't think the ride is going to be over soon.

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Alaska Air Looks To Withstand Healthier Rivals

Seeking Alpha: Alaska Air Still Different, Still Undervalued

I'm not sure any industry has a worse long-term reputation than airlines, but given that it is not so long ago that about 70% of the U.S. airline industry was in bankruptcy I'm not sure you can argue that reputation is undeserved. With that, I think the market has always waited in expectation for the other shoe to drop on Alaska Air Group (ALK), but the company stubbornly continues to out-execute and show that there is a better way to run an airline business.

Certainly Alaska Air is no longer any sort of hidden gem. The shares are up more than 80% over the past year, more than 500% over the past five years, and up almost 1,000% from the mid-2008 low. The company is facing more competition in some of its key routes, but returns and margins remain solidly above-average. I'm not naïve enough to believe that Alaska Air will ever get its full due, but I do still see some additional potential in these shares.

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Alaska Air Still Different, Still Undervalued

Investopedia: Alaska Air Almost Too Good To Be True

Airlines have built a well-deserved reputation for being terrible investments. Not only does the industry have high ongoing capital demands, but a tradition of beggar-thy-neighbor operating philosophies that lead to cut-throat pricing and minimal (if not negative) real returns across the industry.

And then there's Alaska Air (NYSE:ALK). This is an unusual airline in so many ways. Although it covers a huge geographic footprint (from Alaska to Hawaii to the continental U.S. to Mexico), it's relatively focused in terms of airports and routes served. In an industry where customer loathing is palpable and employee-employer relations harken back to the French Revolution, Alaska Air seems to actually be well-liked by both fliers and those doing/supporting the flying.


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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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Investopedia: AMR - No Bankruptcy Today ... Yet

"The rule is, jam to-morrow and jam yesterday-but never jam to-day." Carroll, Lewis. "Through The Looking Glass"

Airlines are lousy businesses. Even heralded success like Southwest Airlines (NYSE:LUV) and Ryanair (Nasdaq:RYAAY) have plateaued in recent years, and the airline industry has bedeviled otherwise successful investors like Warren Buffett. Now, with rumors swirling around about financial difficulties at AMR (NYSE:AMR), the financial health of the industry is getting another skeptical look from the market.

The Latest Troubles 

AMR, better known as American Airlines, actually has a relatively rare distinction to its credit. This is one of the few airlines that has not gone bankrupt. Still, with the company seemingly left out in the cold in the merger wave, that saw Northwest absorbed into Delta Air Lines (NYSE:DAL) and the merger of United and Continental into United Continental (NYSE:UAL), there have been worries for some time now that the company would struggle to compete. 

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