Alaska Air's Path Shows Brief Turbulence, Smooth Future

With costs rising up ahead, the airline may not post the best financials. In the long run, though, this is still a fantastic airline to own.

Jan 31, 2014 at 10:01AM

The widely detested airline industry saw a surprisingly strong year in 2013, but will its run continue this year? One of the strongest of the pack, Alaska Air Group (NYSE:ALK), showed the precious combination of route growth and increasing unit level revenue. In its recent earnings report, though, the company frightened investors and analysts with tepid guidance and a warning that costs will lift off, at least for a little while. Still, this is one great airline that features an incredibly fuel-efficient fleet and strong brand loyalty for its niche routes. In the coming year, Alaska Air will continue to grow, just with some some associated growing pains. Is that a reason to sell?

Earnings continue to climb
It wasn't the recently reported quarter that sent the airline stock down. Alaska Air again beat estimates on both the top and bottom lines.

In its fourth quarter, the company hauled in $1.2 billion in sales -- a 7% gain over the prior year's number -- and an adjusted $78 million in net income, or $1.10 per share. The latter number comes in at an impressive 77% premium to the year-ago quarter, as well as $0.03 more than the analyst consensus, according to Reuters.

Besides greater ticket sales, a 5% drop in fuel costs helped give the numbers a nice boost.

Alaska Air continues to add a list of awards and accolades to its already impressive shelf. The company has a variety of "Best Airline" and "On Time" credits from sources such as The Wall Street Journal and the U.S. Transportation Department. As mentioned in management's conference call, the company completed 87% of its flights on time for the year. The company boosted its shiny image even more recently when it announced that employees would receive more than one-month's pay in bonus.

The company launched 10 new routes in the quarter and announced seven more new routes.

Storms ahead?
Though the numbers looked great, Wall Street shied away as Alaska Air delivered tepid first-quarter guidance. The cause is rising costs across the board. Alaska Air has two recently negotiated labor deals, one with pilots and one with flight attendants, that are expected to immediately increase costs.

As reported in Barron's, Cowen analysts cited higher fees at the Port of Seattle, which manages Alaska Air's hub airport, and a recent switch between ground handler companies on the East Coast as two sources damaging costs for the company.

The thing is, the headwinds all speak to short-term pressure. There was little talk of Alaska Air's competitive position eroding (because it isn't), or of its prized fuel efficiency deteriorating. On a fundamental level, the company remains incredibly attractive. Management forecasts a 5.5% bump in capacity for the coming year. The company has a public image that is only improving. Its employee relationship appears strong in light of the record bonuses and revised agreements.

For an airline, or any asset-heavy business for that matter, Alaska Air has a great looking balance sheet. The company has a pension fund that is more than 100% funded. It carries zero net debt. That's not because the company isn't investing in itself. Alaska Air's average fleet age is under 10 years old. Compare that to American Airlines, which is pushing 14 years. Alaska also has dozens of firm commitments for new aircraft going forward.

In the coming quarter or two, Alaska Air may not blow estimates out of the water like it has in the past, but this is still a long-term industry winner. Any use of the term "winner" in the airline industry deserves special attention.

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