What Will Drive Alaska Air’s Near Term Growth?

Alaska Air Group (NYSE:ALK) at the end of 2017, had released quite a horrific forecast for 2018. In fact, management had announced that the company would be lucky to break even in Q1. Fortunately though, Alaska has managed to outperform its initial expectations modestly. Despite struggling with profitability issues, the company was able to post optimistic earnings figures in both Q1 and Q2. In this respect, we expect to see both, the earnings and revenue figures, to consistently improve over the remainder of the year, and into 2019.

We have created an interactive dashboard What Is The Outlook For ALK on the company’s expected performance in 2019. You can adjust the revenue and margin drivers to see the impact on the company’s overall revenues and earnings.

As mentioned previously, over the past few quarters, the company has been suffering from profitability issues. The reason for the fall in earnings is the bump in operating and fuel costs, both of which have jumped significantly in the recent past. While fuel costs, like in the case of most competitors, has taken out a big chunk of the margins, Alaska also saw its bottom line take a hit on higher wage and integration costs. That said, the company expects these costs to taper off through the remainder of the year, with the second half showing better results.

Additionally, in the latest quarter, it was announced that nearly 85% of the work needed to integrate Virgin into Alaska has now been completed. The completion of the integration, which is expected to be concluded in Q3, is something investors have been eagerly waiting for, for some time now. Many are of the opinion that the integration process was too slow and extremely distracting for the management, leading to hurt financials over the past few quarters. That said, management is eager to put this behind them, and focus on improving margins and the top line going forward. In general, we expect this step to provide over $200 million in potential revenue and cost synergies over the next two to three years.

Further, like most of its competitors, the airline has also decided to implement its very own version of the “basic economy” fares. Such a move is expected to bring in more revenues through higher traffic. In addition, this will also help the airline compete better in an oversupply environment.

Lastly, the company is continuing with its strategy to cut underperforming routes, while shifting capacity to higher yielding markets. In this respect, the company decided to cut capacity on the extremely competitive routes from New York to California, while adding a third daily flight to Seattle, its strongest market.

All in all, it looks as though there is a definite positive reversal in the trend for Alaska. While the company suffered at the hands of increased costs and distractions from the Virgin inclusion, we expect to see better results going forward on improved revenue building initiatives and cost management strategies.