Alaska’s Aeromexico Alliance Will Help Fuel Growth

Alaska Airlines (NYSE:ALK) recently entered into a frequent flier and code share agreement with Mexico-based airline Aeromexico. ^[1] The agreement will allow Alaska to occupy a larger share of the fast-growing U.S.-Mexico air travel market which will add to its revenue growth. This partnership is significant for Alaska as growth in the domestic U.S. market, where it operates the majority of its flights, is moderate.

We currently have a stock price estimate of $42.75 for Alaska, approximately 5% below its current market price.

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Aeromexico agreement to add to Alaska’s revenue growth

1) Reciprocal frequent flier program

Under the Alaska-Aeromexico agreement, passengers of both airlines will be able to earn and burn miles on either airline. The networks of Alaska and Aeromexico are highly complementary and the program will significantly expand the offerings for passengers of both airlines. While Alaska has a significant presence in the western United States and the state of Alaska, Aeromexico flies to 45 cities in Mexico, 11 countries in Central and South America, and a few other destinations.

In effect, for Alaska, the customers of Aeromexico will be propelled to opt for its flights on routes falling outside of Aeromexico’s network and these customers will be able to add to their ongoing mileage programs by flying on Alaska’s flights. This will increase passenger traffic for Alaska, adding to its revenue growth.

2) Code share program

The agreement also features code sharing. Aeromexico’s AM code will be placed on Alaska’s flights between 20 city pairs, including Alaska’s all 8 destinations to Mexico starting from Los Angeles, San Francisco, San Diego and San Jose. This will allow Aeromexico to sell tickets on these flights. Additionally, as the Aeromexico brand is highly recognized among travelers in Mexico, it is anticipated that such a code sharing agreement will allow Aeromexico to add substantial passenger traffic to Alaska’s flights on these routes.

All in all, the Alaska-Aeromexico agreement could increase Alaska’s share of the U.S.-international air travel market.

U.S.-Latin America markets offer high growth potential

The partnership will also allow Alaska to occupy a larger chunk of the passenger traffic between the U.S. and Mexico. This is beneficial as the rate of growth in this market is higher than that in the domestic U.S. market. Several U.S. airlines are taking steps to take advantage of this fast-growing market. For instance, Delta (NYSE:DAL) and US Airways (NYSE:LCC) are cutting their capacity on domestic U.S. routes but adding to their capacity on the U.S.-Mexico and U.S.-Latin America routes.

Alaska through this agreement will be able to increase its share of this growing market and also raise the share of Mexico, a fast-growing market, in its overall operations. Currently, the airline receives around 2% of its mainline traffic from Mexico and more than 85% from the domestic U.S. market. ^[2]

Apart from Aeromexico, Alaska has frequent flier and code share agreements with 12 other U.S. and international airlines, including Delta, American Airlines, Air France and Qantas.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Alaska Airlines and Aeromexico Partner to Make Travel Easier to the United States, December 20 2012, www.alaskaworld.com [↩]
2. 2011 10-K, www.alaskaairlines.com [↩]