The plunging price of oil, combined with rising consumer sentiment and accelerating economic recovery, spell enormous growth opportunities for several industries — but especially for regional airlines.
The crown jewel of the regional airline sector is Seattle-based Alaska Air Group (NYSE:ALK), which today posted strong earnings that beat expectations. As this hardy airline operator leverages lower fuel and labor costs in 2015, ALK stock should continue its upward trajectory.
For years, smaller airlines have been the redheaded stepchildren of the aviation sector. Saddled with high fuel and labor costs and brutal competition from the majors, regionals experienced their high times in the years immediately leading up to the Great Recession, then in 2008 took a nasty nosedive as overcapacity, rising operating costs and slackening demand wiped many players off the map.
One of the strongest survivors was Alaska Air Group.
Alaska Air Group is the parent company of Alaska Airlines, which together with its partner regional airlines serves 95 cities through Alaska, the contiguous United States, Hawaii, Canada and Mexico. Alaska Airlines is the seventh-largest U.S. airline measured by passenger traffic and it carries more passengers between Alaska and the lower 48 than any other airline.
Alaska Airlines contributes 81% of the parent company’s total revenues, and its sister airline, Horizon Air Industries, accounts for the remaining 19%. Horizon provides complementary service for Alaska Airlines along shorter routes.
Alaska Air Group has been on a tear in recent quarters and yet again it beat Wall Street estimates.
This morning before the bell, ALK reported record fourth-quarter earnings of $125 million, for earnings per share (EPS) of 94 cents, compared to earnings of $77 million and EPS of 55 cents in the same quarter in 2013. The analysts’ consensus had called for EPS of 93 cents.
Revenue in the quarter reached $1.3 billion, in line with expectations. Passenger revenue leaped by 8% compared to the fourth quarter of 2013, and by 7% compared to full year 2013.
Alaska Air also reported record earnings for full fiscal year 2014 of $571 million, for EPS of $4.18, compared to earnings of $383 million and EPS of $2.70 in 2013. For the full year, earnings hit $605 million, for EPS of $4.42, on revenue of $5.4 billion.
ALK Stock: Plenty of Gas Left
Since the beginning of the year, ALK stock has risen about 9%. Over the last 12 months, it has jumped 62%. All of which begs the question: Does Alaska Air still have enough mojo left?
The evidence points to “yes.”
First, let’s look at the price of ALK stock, which now trades at a 12-month trailing price-to-earnings (P/E) ratio of 16.8, compared to a P/E of 38.3 for its industry of regional airlines. Analysts expect Alaska Air Group’s EPS for 2015 to jump 25% on a year-over-year basis to $5.12, which more than justifies the stock’s P/E.
Global economic recovery is certainly a tailwind but the big jackpot for ALK stock in the coming months will be the unexpectedly low cost of jet fuel. After trading in a relatively narrow and stable zone for four years of about $105 per barrel, oil now hovers below $50, more than 50% off its highs in June.
Fuel is the second greatest operating expense for airlines, after labor. The global glut of oil and concomitant boost in economic growth and consumer spending power is a special bonanza for airlines — especially those that were already in good shape, such as Alaska Air.
But Alaska Air also enjoys the benefit of peaceful labor relations, as opposed to the expensive workplace acrimony that plagues most other airlines. In the fourth quarter, ALK signed multi-year contracts with the various labor groups that represent pilots, flight attendants and mechanics, ensuring a tight lid on future operating costs.
Cheap Fuel as Manna
Alaska Air also has been investing in advanced aircraft that are fuel -efficient, quieter and cleaner. Increasing regulatory restrictions on air pollution to curb climate change are putting the onus on airlines to jettison their aging, dirtier aircraft for newer models that are not only “greener” but also better for the bottom line.
Alaska Air’s more cost-efficient fleet, combined with the plummeting price of oil, will be manna for the company’s bottom line into the foreseeable future.
What’s more, Alaska Air has a lock on its territory, with “brand name” recognition among its clientele for on-time service and safety, with decades of experience flying in rugged terrain. ALK is tantamount to an Alaskan mass transit system, with virtually no competitors.
If you’re looking for a growth play on the rising cyclical fortunes of the transportation sector that also provides the relative safety of a near monopoly, ALK stock is the flight to book.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
