After A 17% Fall This Year Is Alaska Air A Better Pick Than United Airlines Stock?

Given its better prospects, we believe Alaska Air stock  (NYSE: ALK) is a better pick than its peer, United Airlines stock (NASDAQ: UAL). UAL is trading at a marginally lower valuation of  0.3x revenues than 0.4x for ALK. In the sections below, we discuss why we believe that ALK will offer better returns than UAL in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in an interactive dashboard analysis of United Airlines vs. Alaska Air: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

UAL stock has seen a decline of 10% from levels of $45 in early January 2021 to around $40 now. In comparison, ALK stock has suffered a sharp decline of 30% from levels of $50 in early January 2021 to around $35 now, vs. an increase of about 25% for the S&P 500 over this roughly three-year period.

However, the decrease in UAL and ALK stocks have been far from consistent. Returns for UAL were 1% in 2021, -14% in 2022, and 9% in 2023 (YTD), while returns for ALK stock were 0% in 2021, -18% in 2022, and -17% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 20% in 2023 (YTD) – indicating that both UAL and ALK underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including BA, UNP, and UPS, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UAL and ALK face a similar situation as they did in 2021 and 2023 and underperform the S&P over the next 12 months – or will they see a recovery? We expect a rebound in both stocks in the next three years, but ALK will likely fare better between the two.

Alaska Air stock has declined 6% this month after its announcement of Hawaiian Air acquisition for $1.9 billion, reflecting a 270% premium to the market price before the announcement. While this figure optically appears to be high, it is 0.7x sales, including Hawaiian Air’s debt.

1. United Airlines’ Revenue Growth Is Slightly Better

• United Airlines’ revenue growth has been slightly better, with a 26% average annual growth rate in the last three years, compared to 23% for Alaska Air.
• The rise in revenues for both airlines over the recent years can be attributed to a rebound in air travel demand, with passenger traffic and ticket yield rising meaningfully in recent years.
• For perspective, United Airlines’ available seat miles (ASM) plunged 37% between 2019 and 2021, but surged 39% y-o-y in 2022. The company’s passenger revenue per available seat mile (PRASM) declined 37% between 2019 and 2021 before rising 43% in 2022.
• In comparison, Alaska Air’s ASM declined 21% between 2019 and 2021 but surged 16% in 2022. Similarly, its PRASM fell 11% between 2019 and 2021 but rose 35% y-o-y in 2022.
• Looking at the last twelve months, United Airlines’ 29% sales growth has fared better than 14% for Alaska Air.
• The demand for air travel is expected to remain high in the near term, boding well for both stocks in the near future. However, the average yield has cooled in the recent past while overall capacity has expanded.
• For perspective, United Airlines’ revenue of $14.5 billion in Q3’23 was up 12.5% y-o-y. The company reported a 16% rise in available seat miles, while the load factor was down 90 bps, and passenger revenue per available seat mile also declined 1%.  Similarly, Alaska Air’s revenue of $2.8 billion in Q3’23 was also flat y-o-y. Although the company reported a 14% rise in available seat miles, the load factor was down 190 bps, and yield declined 10%, weighing on its overall top-line growth.
• Our United Airlines Revenue Comparison and Alaska Air Revenue Comparison dashboards provide more insight into the companies’ sales.
• Looking forward, we expect United Airlines to see better revenue growth than Alaska Air.

2. United Airlines Is More Profitable 

• United Airlines’ operating margin slid from 9% in 2019 to -49% in 2020 before recovering to 1% in 2022. In comparison, Alaska Air’s operating margin plunged from 12% in 2019 to -50% in 2020 before recovering to 1% in 2022.
• Looking at the last twelve-month period, United Airlines’ operating margin of 5% fares better than 1% for Alaska Air.
• Alaska Air’s margin metric is partly being weighed down by the costs associated with the retirement of its Airbus fleet. Looking forward, the company is likely to have a better margin profile with lower costs associated with pilot training.
• Our United Airlines Operating Income Comparison and Alaska Air Operating Income Comparison dashboards have more details.

3. Both Airlines Have High Debt Levels

• Looking at financial risk, both are risky bets. Alaska Airlines’ 148% debt as a percentage of equity is lower than 220% for United Airlines, while its 16% cash as a percentage of assets is lower than 23% for the latter, implying that Alaska Air has a comparatively better debt position, but United Airlines has a better cash cushion.
• The high debt-to-equity figures for both airlines can be attributed to much higher debt levels compared to their market capitalizations ($13 billion for UAL and $5 billion for ALK).
• United Airlines’ total debt increased from $15 billion in 2019 to $31 billion in 2022, while its total cash increased from around $2 billion to $9 billion over the same period. However, the rise in cash balance is partly due to additional debt raised, given the $4 billion negative operating cash flows in 2020.
• In comparison, Alaska Air’s total debt increased from $3.2 billion in 2019 to $4.1 billion now, while its cash increased from $1.5 billion to $2.5 billion over the same period. The rise in cash balance is partly due to additional debt raised, given the $4 billion negative operating cash flows in 2020.

4. The Net of It All

• We see that United Airlines has seen superior revenue growth and is more profitable. On the other hand, Alaska Air has a comparatively better debt position.
• Looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Alaska Air will likely offer better returns over the next three years, primarily due to its better expected revenue growth.
• If we compare the current valuation multiples to the historical averages, ALK fares better. United Airlines stock trades at 0.3x sales compared to its last five-year average of 0.6x, and Alaska Air stock trades at 0.4x revenues vs. the last five-year average of 1.1x.
• Our United Airlines (UAL) Valuation Ratios Comparison and Alaska Air (ALK) Valuation Ratios Comparison have more details.
• The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 9% for United Airlines and 29% return for Alaska Air over this period, based on Trefis Machine Learning analysis – United Airlines vs. Alaska Air – which also provides more details on how we arrive at these numbers.

While ALK may outperform UAL in the next three years, it is helpful to see how United Airlines’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Month-to-date and year-to-date as of 12/11/2023
[2] Cumulative total returns since the end of 2016

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