Why Has Alaska Air’s Stock Price Fallen 20% Since The Beginning Of The Year?
Alaska Air’s stock price has fallen almost 20% in the year so far, despite strong quarterly performance.
In the following note, we list some of the key reasons behind the decline in Alaska’s stock price.
- Pressured Unit Revenues
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At the beginning of the year 2016, the Seattle-based carrier hit rough waters. As it reported its fourth quarter and full year 2015 results in January, it saw its stock price tumble. The airline’s passenger revenue per available seat mile (PRASM) came down far below the company’s original guidance, at -6.6% in Q4, -9.9% in December, and -9.3% in the full-year 2015. The company attributed the majority of the decline in PRASMs to low introductory fares offered from Seattle to new markets. Further, so far in the year headwinds in the top-line have continued. The management expects the full year unit revenues to come down at -8% year-over year.
- Impact Of Brexit
After a gradual, recovery in the stock price, the stock plunged again in June. June was the month when Britain finally decided to separate itself from European Union (Brexit). All airlines saw their stock prices falling, and the S&P Composite 1500 for airlines fell almost 7% post the announcement of the exit. However, the decline in Alaska’s stock price is hard to explain as it hardly has any presence in the U.K. or Europe. Being a domestic airline, it did not merit the over-reaction that other airlines got from Britain’s vote in favor of exiting the EU.
- Inefficient Capacity Management
Due to rapid, double-digit capacity growth, Alaska Air’s unit revenues came under the pump. Although, some of this can be attributed to the general weakness in the industry, most of this is due to the airline’s inefficient capacity management.
- Recovery In Oil Prices
Further, the oil prices rose almost 37% in a period of six months, between January-June. This rise is attributable to a range of factors, such as production cuts in the U.S., geopolitical disturbances in Venezuala and Nigeria, and a wild-fire in Alberta, Canada. This caused Alaska to raise its forecast for fuel price for the second half of year. In addition, the investor update provided by the company was disappointing as it saw the downtrend in revenue per available seat mile (RASM) continue. The two factors in coming into play made investors wary of the company.
- Overpaying For Acquiring Virgin America
Another reason for the company losing almost 20% of its value since the beginning of the year, is Alaska’s decision to acquire Virgin America. The motivation behind the acquisition can be understood by the carrier’s desire to become a premier airline for travelers on the West Coast, and get the biggest chunk of California’s air market. However, the $2.6 billion Alaska agreed to pay for Virgin is nearly double the latter’s value before the merger rumors heated up. Please see “Has Alaska Air Paid A Fair Price For Acquiring Virgin America?” for our analysis on the deal between Alaska Air and Virgin America.
- Competition In Seattle
The tough competitive environment in the Seattle region due to competition from Delta Airlines compelled Alaska to offer cheaper tickets to its passengers, pressuring its unit revenues. Total competitive capacity in Alaska’s markets rose 11.2% in Q1 and 13% in Q2. It is expected to moderate in the future, although so far in Q3, capacity has been seen increasing in the 9%-10% range.
Have more questions about Alaska Air (NYSE:ALK)? See the following links:
- Why Are The Air Fares Offered By The U.S. Airlines Falling?
- What Is The Role Of Passenger Airlines In The Air Cargo Industry?
- How Did Alaska Air Perform Operationally In August?
- Why Have We Revised Alaska Air’s Price Estimate To $69 Per Share?
- Alaska Air Reports Another Strong Quarter Backed By Rapid Capacity Growth And Lower Fuel Costs
- Alaska Air Q2’16 Earnings Preview: Capacity Growth, Fiscal Discipline To Support Earnings
- How Will The Virgin America Deal Impact Alaska Air’s Share Repurchase Program?
- Will Alaska Air-Virgin America Face Antitrust Issues?
- How Will The Virgin America Merger Impact Alaska Air’s Cost Of Capital?
- How Will Alaska Air’s Market Share Change Post The Virgin America Deal?
- Why Is Alaska Air Acquiring Virgin America?
- How Will Alaska Air Benefit From The Virgin America Deal Operationally?
- How Will The Expected Return On The Alaska Air-Virgin America Merger Compare With The Previous Deals In The Sector?
- How Will The Virgin America Deal Alter Alaska Air’s Capital Structure?
- Has Alaska Air Paid A Fair Price For Acquiring Virgin America?
- Alaska Air’s Earnings Rise On The Back Of Rapid Capacity Growth And Lower Fuel Costs
Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Alaska Air Group
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