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Investment Overview for Alaska Air Group (NYSE:ALK)
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Below are key drivers of Alaska Air Group that present opportunities for upside or downside to the current Trefis price estimate.
Alaska Airlines US
- Fuel Expense % Revenues for Alaska's Flights: Fuel Expense % Revenues for Alaska's Flights decreased from 46% in 2008 to 23.6% in 2009 as crude oil prices had declined significantly due to the financial crisis. However, fuel expenses rebounded to 39.8% of passenger revenues in 2012 due to rise in crude oil prices. Currently, we estimate this figure to rise marginally to 40.8% by the end of the Trefis forecast period.
If however, fuel expenses as a percentage of passenger revenues increase to around 43% by the end of the Trefis forecast period due to higher-than-expected rise in crude oil prices then there could be a potential downside of around 8% to the ${trefisprice}. On the other hand, if fuel expenses remain constant at their current levels driven by benefits from passenger fare hikes offsetting the impact from higher crude oil prices, then there could be a potential upside of nearly 5% to the ${trefisprice}.
Fees and Cargo
- Fees and Cargo EBITDA Margin: Alaska's Fees and Cargo EBITDA Margin increased from 53.2% in 2008 to 61.8% in 2012 driven by benefits from cost cutting initiatives. We currently anticipate margins to remain stable at their current levels.
If however, they rise further to reach 65% by the end of the Trefis forecast, then there could be a potential upside of around 4% to the ${trefisprice}.
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Alaska Air Group is a Delaware corporation incorporated in 1985 and it has two principal subsidiaries: Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon). Through these subsidiaries, it provides passenger air service to more than 23 million passengers per year to around 100 destinations. It also provides freight and mail services, primarily to and within the state of Alaska and on the west coast. Although Alaska Airlines and Horizon both operate as airlines, their business plans, competition, and economic risks differ substantially.
Alaska Airlines offer extensive north/south service within the western U.S., Canada and Mexico, as well as passenger and dedicated cargo services to and within the state of Alaska. It also provides long haul east/west services to Hawaii and thirteen cities in the mid−continental and eastern U.S. This is primarily from Seattle, where it has its largest concentration of departures, although it does offer long haul departures from other cities as well.
Horizon Air is a Washington corporation that first began service and was incorporated in 1981. Horizon was acquired by Air Group in 1986. It is the largest regional airline in the Pacific Northwest and serves a number of cities in six states, five destinations in Canada, and two destinations in Mexico.
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The US segment is the most valuable to the company because of the following reasons.
Higher amount of Available Seat Miles (ASM) in the US
Alaska Airlines has a significantly higher amount of ASM in the United States compared to the international routes it operates in. Available Seat Miles in the US for Alaska Airlines are more than nine times the ASM on international routes.
Higher passenger yield in domestic flights
Alaska Airlines' US operations have historically earned nearly twice the passenger yield than its international segment. In the airlines business a higher occupancy rate has a very high impact on the revenues and profitability of a division.
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Oil prices significantly impact Alaska Air's bottom line
Fuel expense is the single largest cost head for airlines accounting for over 30% of their total costs. Thus, a sharp rise in fuel prices impacts the bottom lines of airlines severely.
Additionally, severe competition among airlines impacts their ability to pass on higher costs to passengers through fare hikes. Thus, like all other airlines Alaska too undertakes cost cutting measures to keep its non-fuel costs from rising.
Weak macroeconomic conditions
The state of the global economy determines the demand for flights. At present, Europe’s sovereign debt crisis and slow economic growth in the U.S. has created enormous uncertainty and is expected to impact the overall profitability of the sector.
Growth in ancillary revenues
With profitability declining for the overall airline sector, many of the carriers are figuring out ways to improve income by increasing ancillary forms of revenues. Baggage fees have been one of the main drivers of profitability for many airlines. Airlines are adding various new features to help boost revenues such as WiFi, in-flight entertainment, and improvements in lounge facilities.
Growing preference for low-cost carrier model
During the past decade, low cost carriers have gained a lot of prominence in the overall airline industry. And going forward, as demand for travel grows in developing markets, it is quite inevitable that low cost airlines will play a large role in meeting the needs of the growing population.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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