Alaska Airlines Looks Good To $42 On Higher Passenger Traffic

ALK: Alaska Air logo
Alaska Air

Alaska Air Group (NYSE:ALK) posted record second quarter net income, excluding special items, of $110.8 million compared to $89.6 million in Q2 of 2011. [1] On a GAAP basis, which includes special items, net income was $67.5 million, up 135% from $28.8 million the same period a year ago. The growth was driven by increasing demand for flights aided by significant capacity additions during the quarter, partially offset by higher fuel expenses. In addition, the airline received a ratings upgrade from stable to positive by S&P, aided in part by a decline in its debt-to-capitalization ratio. On the whole, this was a good quarter for Alaska Air Group.

Capacity expansion and rising passenger traffic drive growth in top line

The airline started flights on 10 new non-stop routes, including Oakland, San Jose, San Diego, Portland and Seattle, in the second quarter. As a result, its capacity increased 6.3% y-o-y. Coupled with a 2.2 point increase in load factor and 0.9% increase in passenger yield, the Revenue Passenger Miles (RPM), an indicator of passenger traffic increased 9.2% y-o-y. As a result, passenger revenues increased 10.2% to $1.05 billion in Q2 from $953 million in the year-ago quarter. The airline plans to continue to add capacity and has announced the launch of flights on 7 new non-stop routes in the second half of 2012.

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Along with passenger revenue, revenue from freight and mail also increased 5.2% y-o-y. And, as a result, total operational revenue in the second quarter increased 9.3% y-o-y to $1.2 billion.

Higher fuel prices impact margins

However, higher fuel expenses impacted margins for the quarter. Fuel expenses rose on account of higher average fuel price per gallon and increased fuel consumption from higher capacity. The airline incurred an average fuel price of $3.40 per gallon in Q2 2012, up 3.7%, compared to $3.28 per gallon in the year-ago quarter. And, the number of gallons of fuel consumed increased 6.7% y-o-y.

Rating upgrade by S&P

The airline also received an upgraded Standard and Poor’s outlook from Stable to Positive during the second quarter. The upgrade was driven in part by a decline in the airline’s debt-to-capitalization ratio by 4 points, from 62%:38% to 58%:42% over the past 6 months.

On the whole, the airline posted strong numbers for Q2, and we anticipate continuing growth in its top-line over the remainder of 2012, if demand for flights does not decline. However, in case passenger traffic declines on a worsening euro-crisis and slowing growth of developing economies, our positive forecast could be impacted.

We currently have a stock price estimate of $42 for the airline, approximately 25% above its current market price. We are in the process of incorporating second quarter results and shall update our analysis shortly.

See our complete analysis for Alaska Air Group here

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  1. Alaska Air Group Reports Record Second Quarter Results, July 26 2012, []