Airline bankruptcies are like celebrity divorces: They're only surprising when they don't happen. We were reminded of this last week when American Airlines' parent AMR (NYSE: AMR ) filed for Chapter 11, bringing the total number of industry bankruptcies since 1990 to 189. Wow, that's a lot! Can anyone make money in this business?
Actually, yes. Alaska Air Group (NYSE: ALK ) has managed to buck the trend that's put so many of its competitors in the poorhouse.
A break in the fog
Though Southwest Airlines (NYSE: LUV ) has become a darling of customers for its low fares and zero bag fees, Alaska is the one who's been pleasing its shareholders in an industry that's been woeful since deregulation in 1978. Even before post-9/11 problems such as increased security, fear of flying, and rising fuel prices, airlines struggled to make a profit. Heavy competition, high union membership, consumer price sensitivity, and federal regulations, among other issues, continually plague the industry.
Since hitting bottom at $11.80 in July 2008, however, the west coast provider has gone up about six times in value. The numbers below help explain how Alaska continues to do well in this traditionally terrible industry.
Net Income Margin
Return on Assets
|Alaska Air Group||5.8%||5.9%||110.1%|
|Delta (NYSE: DAL )||1.3%||2.6%||1,195.8%|
|Jet Blue (Nasdaq: JBLU )||1.7%||2.9%||179.1%|
|US Airways (NYSE: LCC )||0.6%||3.5%||2,811.9%|
|United Continental (NYSE: UAL )||1.8%||5.2%||569.1%|
Source: S&P Capital IQ. N/A = not applicable; AMR has negative total equity. All figures from last 12 months.
As you can see from the chart, Alaska is the leader in net margin and return on assets. These are important figures because they show how much more profitable Alaska is compared to its competitors, and that it's generating income from its assets more efficiently. Only Southwest beats Alaska in debt-to-equity -- meaning a smaller percentage of Southwest's funding is borrowed -- but Alaska has notably spent cash on share buybacks instead of paying down debt, buying $51.4 million in shares in the last four quarters.
How the west was won
Starting in 2006, Alaska began focusing on maximizing return on invested capital, a move that other airlines were slow to follow. The airline has also succeeded in smoothing out its seasonality, matching capacity to demand and reducing costs. Its specialization on a single region and consistent excellence in customer service have also helped it become the best-performing airline in its class.
It has won "Highest in Customer Satisfaction" in the traditional network carrier segment from J.D. Power and Associates for the last four years and was named "Top Performing Airline" in 2010 by Aviation Week Magazine.
The 10-K report further spells out its strategy: "We believe that concentrating our service offerings in a few key markets, including Seattle, Portland, Los Angeles and Anchorage, allows us to maximize our investment in personnel, aircraft, and ground facilities, as well as to gain greater advantage from sales and marketing efforts in those regions." In other words, Alaska is wisely using economies of scale and brand power to build market share in its home region.
The company has also taken measures to fight rising fuel costs through financial hedges and investing in a more efficient fleet. Between 2006 and 2010, available seat miles flown per gallon improved by about 16% for Alaska Airlines, its principal subsidiary.
Have we reached cruising altitude?
After its supercharged rise from June 2009, Alaska's stock price has slowed of late, running flat over the last seven months.
Airlines are highly cyclical -- a rise in earnings one year hardly promises an increase in the next, and they are prone to a number of potent risk factors. Higher fuel costs made 2008 a year to forget. 9/11 sent the industry into a tailspin that it's still arguably recovering from. And just a simple downturn in the economy can keep revenues below breakeven as more passengers stay home.
So airlines are always a risky investment, but as Alaska proved in the last few years, a savvy investor can still benefit from a smart bet here.
The industry does have one more thing going for it, however -- operational leverage. On just an 11.3% increase in revenue from 2009 to 2010, Alaska more than doubled its earnings. The same fixed costs -- capital expenditures, gate fees, and union contracts, among others -- that drown the industry in red ink during bad times mean that in good times a large chunk of that new revenue goes straight to the bottom line.
What, no peanuts?
2011 has been a tougher year on airlines than 2010, and Alaska's net income from the last two quarters is off from its 2010 levels. But share prices measure future prospects, after all, and Alaska's rise has generally tracked with its growth in earnings. Its trailing P/E is still low at 10.6 with a forward price-to-earnings ratio of 7.7, meaning decent earnings growth should push the stock price higher.
If you're not too pessimistic about the direction of the economy and think fuel prices will stay in check in the near future, Alaska could prove to be a winner for you.
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