3Q Earnings Preview: Alaska Air In For A Stellar Performance On The Back Of Capacity Expansions And Lower Fuel Prices

+14.76%
Upside
43.01
Market
49.36
Trefis
ALK: Alaska Air logo
ALK
Alaska Air

Despite increasing concerns over an excess supply of seats in the domestic market, Alaska Air (NYSE:ALK) continued to aggressively expand its system capacity in the last three months, which is likely to be one of the key highlights in the third quarter results that are expected to be released on Thursday, 22nd October 2015 [1]. The Seattle-based airline, much like the other airlines, will continue to benefit from the lower fuel costs even in this quarter, resulting in a significant rise in its earnings for the September quarter. However, the airline remains focused at maintaining its operational excellence and cost advantage over its peers to be prepared for the oil market recovery,  when it occurs. Thus, while the weak oil prices will continue to drive its short term earnings, we anticipate Alaska Air to outperform its competitors in the long run through its industry leading operational performance and deliver strong margins due to its low cost structure. Let’s take a look at the key trends that we expect to see in the airline’s third quarter results.

ALK-Oct-Price

Source: Google Finance

Capacity Expansions Will Positively Impact Top Line

Relevant Articles
  1. Should You Pick Alaska Air Stock At $37 After Q4 Beat?
  2. Will Alaska Air Stock Rebound To Its Pre-Inflation Shock Highs of $70?
  3. What’s Next For Alaska Air Stock After A 24% Fall This Year And A Downbeat Q3?
  4. Which Is A Better Pick – Alaska Air Or UAL Stock?
  5. What’s In The Cards For Alaska Air’s Q2?
  6. Should You Buy Or Avoid Alaska Air Stock At $52?

While most of the airlines restricted their capacity additions due to fears of oversupply of seats in the market, Alaska Air continued to grow its total system capacity at a high rate of approximately 8% to achieve its full year capacity target of 10% growth. This is the second highest capacity addition carried out by any airline in the September quarter, after JetBlue. Further, the airline managed to proportionately increase its passenger traffic during the quarter, unlike its counterparts. However, much like its peers, the rising domestic competition, coupled with the foreign currency headwinds, is likely to weigh heavily on the airline’s unit revenue. Accordingly, we forecast the lower unit revenue to dampen the positive effect of the capacity increase, resulting in flat or marginal growth in Alaska Air’s third quarter revenue.

Declining Fuel Prices Continue To Boost Earnings

Although the crude oil prices had bounced back to more than $60 per barrel in the second quarter, the volatility in the commodity markets over a potential slowdown in the Chinese economy washed out the entire recovery, resulting in multi-year low oil prices. As a result, Alaska Air expects its fuel price to average at around $1.90 per gallon during the September quarter. The airline also aims to keep a check on its unit cost (excluding fuel) to meet its annual target of 0.5% reduction. Hence, we expect Alaska Air to report a huge jump in its earnings in this quarter as well.

ALk-cost-oct

Alaska Air’s Cost Advantage Over Its Peers  (Source: Cowen Transportation Conference, September 2015)

Focus On Improving Operational Excellence And Maintaining Cost Advantage

Over the last few quarters Alaska Air has been outperforming its competitors due to its operational excellence and low cost structure. At a time when most of its peers are enjoying the benefits of lower fuel prices, the Seattle-based airline has been proactively working towards reducing its non-fuel unit costs and enhancing its operational performance to be well placed when the oil market rebounds. For this, the airline has appointed John Ladner, a veteran with 26 years of experience, as the Managing Director of its fleet, standards, and operational control processes. The airline has reappointed Mr. Ladner to the position to further improve its operational efficiency and strengthen the airline’s position in the market. Further, Alaska Air also appointed Wayne Newton, having 25 years of association with the airline, as the Managing Director of its Seattle Airport operations. He has been brought in to take care of the day-to-day operations at the airline’s largest hub and reduce the non-fuel units costs over the years. Thus, we figure that Alaska Air is fully focused at maintaining its industry leading position and becoming a preferred airline for its customers.

ALK_scorecard

Source: Cowen Transportation Conference, September 2015

We would end by saying that aggressive capacity expansion, along with the lower fuel costs, will drive Alaska Air’s 3Q performance. Going forward, we figure that the airline’s exceptional operational performance and cost advantage will enable it to stay ahead of its competitors.

See our complete analysis for Alaska Air Group Here

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

Notes:
  1. Alaska Air Announces 3Q Results, 6th October 2015, www.alaskaair.com []