Fuel Hedges To Assist Alaska Air Group’s Earnings In 2022

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The shares of Alaska Air Group (NYSE: ALK) are again observing a downtrend due to rising benchmark prices and macroeconomic uncertainty triggered by the Russia-Ukraine war. The stock has lost $2.5 billion in market capitalization since February 2020 despite multiple rounds of payroll support assistance. Amid growing fears of slow economic growth from rising commodity prices, Alaska Airlines’ earnings are expected to benefit from fuel hedges this year. Notably, the company has a hedge position on 50% of the expected fuel requirement for H1 2022. Per annual filings, the company will observe a hedging gain as the benchmark oil prices breach $71 per barrel. Our interactive dashboard on Alaska Air Group’s valuation highlights the historical trends in revenues, earnings, valuation multiple, and forecast for FY2022.

Before the pandemic, Alaska Air Group’s revenues observed an average growth rate of 5.5% p.a. from $5.9 billion in 2017 to $8.8 billion in 2019. The company primarily earns its revenues from the sale of air tickets and other ancillary services such as freight & mail. Top line expansion has been assisted by continued capacity growth and rising ticket prices. Historically, the company’s net margins have remained relatively flat within the 9-12% range before the pandemic, with a little change in earnings per share as the company was focusing on debt repayments instead of cash return to shareholders.

In 2019, the benchmark oil prices averaged $60 per barrel and Alaska Air Group reported a net margin of 9%. Considering an average WTI price of $120 per barrel for 2022 and the company’s hedge position, the rising fuel costs will lower net margin by 10% (Fuel Cost in 2019: $1.8 billion, Expected Fuel Cost 2021: 150%*$1.8 billion = $2.7 billion, Decline in net income = $2.7 billion – $1.8 billion = $900 million). In this scenario, the company will be able to cover its operating expenses and limit cash burn if the passenger demand remains strong.

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Passenger and Air Cargo Demand Remains Strong

In recent months, investors have been optimistic on Atlas Air stock (NASDAQ: AAWW), a global provider of leased aircraft and aviation operating services. Atlas Air stock has more than doubled from pre-pandemic levels as the air freight market observed a surge in demand. Atlas Air provides air cargo services whereas Alaska Air Group caters to domestic passenger demand. Moreover, Alaska’s domestic business contributes the bulk of its total revenues. Passenger numbers at TSA checkpoints breached the 2 million mark in mid-February despite the broader concerns of rising inflation and supply chain disruptions. (related: Southwest Airlines Stock Poised For Strong Gains?)

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Returns Mar 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 ALK Return -17% -10% -47%
 S&P 500 Return -5% -12% 86%
 Trefis MS Portfolio Return -5% -15% 235%

[1] Month-to-date and year-to-date as of 3/9/2022
[2] Cumulative total returns since the end of 2016

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