Addition Of Larger Airplanes Will Add Growth To Alaska’s Results In 2014

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Alaska Air Group (NYSE:ALK) follows a growth oriented capacity stance, meaning the carrier raises its flying capacity to drive growth in its passenger traffic. Higher passenger traffic in turn helps lift the carrier’s revenues and profits. Typically, airlines raise their flying capacities by increasing the frequency of their flights and growing their airplane fleets. Alaska is no different as over the last many years it has raised its flying capacity by increasing its departures and growing its mainline fleet count from 115 airplanes at the end of 2009 to 131 airplanes at the end of 2013. [1] However, in the current year, Alaska will drive a significant portion of its capacity growth through replacement of smaller airplanes in its fleet with larger airplanes.

We currently have a stock price estimate of $48.20 for Alaska Air Group, around 3% ahead of its current market price.

See our complete analysis of Alaska Air Group here

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Larger Airplanes Will Drive a Significant Portion of Alaska’s Capacity Growth in 2014

Alaska plans to raise its flying capacity by around 7% in 2014 from last year. [2] However, the carrier does not plan to grow its airplane fleet significantly, as it recently forecast its mainline fleet count to rise only marginally from 131 airplanes at the end of last year, to 134 airplanes at the end of 2014. [1] At the same time, the utilization of Alaska’s airplanes is already high, indicating that the carrier will likely not be able to raise its total daily departures significantly with its existing fleet count. So, in order to achieve the high 2014 capacity expansion target, Alaska is replacing smaller and older 737-400s and 737-700s in its fleet with larger and new 737-900ERs.

The -400s that Alaska is retiring from its fleet have 144 seats each. While the -900ERs, which are replacing these -400s, have 181 seats each. According to estimates from Alaska, this replacement is providing revenue growth of about 14% per trip. Additionally, the replacement of 737-700s, which have 124 seats each, with -900ERs is providing 20% growth in per trip revenues. [1]

Alaska has also installed slimmer Recaro seats in its 737-800s and 737-900s. These seats have allowed for installation of six additional seats on the -800s and nine additional seats on the -900s. This seat project therefore is also helping grow Alaska’s flying capacity in the current year.

Given the current state of Alaska’s business, capacity expansion is one of the key ways available to the carrier to grow its profits. It is crucial for Alaska to maintain its high rate of capacity addition –  the carrier has done well so far this year with its capacity expansion leading all major U.S. carriers. In the first seven months of 2014, Alaska has raised its flying capacity by over 5% annually, compared with around 4% growth in JetBlue’s capacity and further lower rates of capacity addition by other U.S. carriers. [3] [4] At the same time, Alaska is also mindful of the fact that excess capacity addition can weigh on its profitability. So, the carrier is adding capacity to the extent which is not weighing on its fares and load factor – percentage of seats occupied by passengers in a flight.

Separately, the new 737-900ERs being added by Alaska have significantly lower fuel consumption per seat, compared with the 737-400s and 737-700s. So, apart from providing revenue growth opportunities through its higher seating capacity, the -900ER is also saving Alaska’s fuel costs.

In all, by enabling significant capacity addition and cost reduction, the larger 737-900ERs are helping grow Alaska’s results in 2014. And we figure this trend will continue to add growth to Alaska’s results over the next few years, as the carrier plans to replace all 737-400s in its fleet with larger 737s by 2017.

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Notes:
  1. Alaska’s Investor Presentation, May 27 2014, www.alaskaworld.com [] [] []
  2. Alaska’s 2014 Q2 earnings form 8-K, July 24 2014, www.alaskaworld.com []
  3. Alaska’s July traffic results, Aug 2014, www.alaskaworld.com []
  4. JetBlue’s July traffic results, Aug 2014, www.jetblue.com []