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Alaska Air Group: ALK Stock is Heading North

The Great Recession was particularly brutal to the regional airline sector, which was flying high before the financial crisis sent most of its operators into a tailspin. Rapid expansion during the go-go days leading up to the recession left these smaller airlines overextended and vulnerable. A shakeout ensued, with many filing for bankruptcy.

Alaska Air Group ALK StockBad news for them, but great news for Seattle-based Alaska Air Group, Inc. (ALK), which not only survived but now thrives amid an expanding market in Alaska that it dominates with scant competition.

The company’s virtual monopoly in the frozen north has kept ALK stock on an upward trajectory that should continue into 2015. ALK has always been a lean operator but these days it’s enjoying a trifecta of benefits: falling fuel costs, broad economic recovery and aviation renaissance.

ALK’s flagship operator is Alaska Airlines, a wholly owned subsidiary. With its partner regional airlines, Alaska Airways serves nearly 100 cities through Alaska, Hawaii, the continental U.S., Canada and Mexico. Measured by passenger volume, Alaska Airlines is the seventh-largest airline in the U.S. and transports more people between Alaska and the contiguous states than any other airline.

Alaska Airlines generates about 80 percent of the parent company’s total revenues, and its partner operator, Horizon Air Industries, Inc., contributes the remaining 20 percent. Horizon’s routes serve as short feeder spokes into Alaska Airlines’ hub.

After labor, an airline’s biggest cost is fuel. Today, with the price of oil at five-year lows, the entire airline industry is reaping a huge windfall in savings. For companies such as Alaska Air Group, the plummeting price of oil has been an early Christmas present that will keep on giving to holders of ALK stock into the new year.

The balance sheets of many airlines are burdened by aging, fuel-hogging aircraft. However, as good times return to the aviation sector, airlines are using their newly generated cash to replace inefficient planes with newer models that burn less fuel, fly farther and faster, and require less maintenance.

Even before the recent collapse of oil prices boosted the industry’s cash flows, Alaska Airlines was prosperous enough to begin its buying spree before the rest of the pack. Alaska Airlines recently transition to a 115-aircraft fleet entirely composed of advanced 737 passenger jets made by Boeing Co (BA). Sister operator Horizon recently sloughed off its older planes in favor of an all-Bombardier, Inc. (BBD.B) Q400 turboprop fleet.

The airline sector also is plagued by chronic labor woes, another obstacle that Alaska Airlines has circumvented by negotiating mutually favorable labor contracts with pilots, mechanics and flight attendants. Alaska Airlines enjoys sanguine relations with its workforce, a rare amity that not only makes for a happier company but also helps the bottom line of ALK stock.

Alaska Airlines has a lock on territory that’s characterized by rugged topography and inclement weather. The airline has extensive experience with these challenging conditions; it traces its origins to the early 1930s and over the decades has earned the trust of its clientele.

Indeed, Alaska Airlines serves as a form of “mass transit” for the oil and gas, logging, tourism, and fishing industries, all important job generators in the Alaska region. At the same time, Alaska Airways is expanding into new and lucrative markets, such as service between Seattle and Salt Lake City.

The Bottom Line

Alaska Air Group reported record third quarter 2014 earnings of $200 million, an increase of 27% compared to the same quarter a year ago. Earnings per share (EPS) came in at $1.47, an increase of 32% compared to the same year-ago quarter and handily beating Wall Street’s estimates of $1.42 in EPS.

Passenger revenue grew year-over-year by 7%. The company also increased fuel efficiency, as measured by seat-miles per gallon, by 2.8% in the quarter on a year-over-year basis.

Efficient operations, state-of-the-art aircraft, plummeting fuel costs, economic growth, and market dominance all add up to high times for ALK stock. In an industry given to cyclical ups-and-downs and susceptibility to external shocks, Alaska Airways and its parent Alaska Air Group should carry investors safely through any market turbulence.

As of this writing, John Persinos did not hold a position in any of the aforementioned securities.

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