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The Bull Case for Alaska Air Group

By Motley Fool Staff - May 4, 2018 at 8:15AM

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The carrier has been posting weak results recently, but its low cost structure and high-quality service give it the fundamental tools for a comeback.

Alaska Air's (ALK -1.47%) profit margin has collapsed over the past year and a half. However, the company has meaningful opportunities to get profit growing again over the next few years.

In this episode of Industry Focus: Energy, the team discusses some of Alaska Air's biggest profit growth opportunities. Merger synergies and other revenue initiatives could drive hundreds of millions of dollars of incremental annual earnings by 2021. Fleet renewal could also produce substantial savings. Finally, Alaska Airlines has plenty of room to grow, particularly in California.

A full transcript follows the video.

This video was recorded on April 26, 2018.

Sarah Priestley: Adam, I know that you are an Alaska Air shareholder and bullish on the company, and I have to say I'm very impressed by everything I've seen. But, what underlines your thesis?

Adam Levine-Weinberg: I think it's important to realize that Alaska Air has been producing results recently that have been worse than what the market expected and worse than what I expected. But I still think it has a bright future. The key competitive advantage is lower cost structure relative to the legacy carriers. Alaska estimates its unit cost advantage at 18%, and that's really pretty significant.

Another major point in favor of Alaska Air is that you're going to have merger-related synergies and some of the revenue initiatives that were announced just this week kicking in between 2019 and 2020 for the most part. And that could deliver hundreds of millions of dollars to the bottom line by 2020, all else equal. Obviously, if there's a huge jump in oil prices between now and then, or if you have a big increase in competition in some of its markets, those gains could get eroded. But, assuming all else is equal, I think you're going to see a pretty nice improvement in profitability after 2018.

There's also lots of long-term growth opportunities in California. As Alaska has noted, the market size there is 3-4X bigger than its historical market in the Pacific Northwest, but it's still actually smaller in California than it is in the Pacific Northwest. So there's really quite a lot of room to grow in places like San Francisco and LA.

And then, the last one is, in the longer-term, especially after 2020, there should be some pretty significant cost savings opportunities by updating Alaska's fleet, particularly the former Virgin America Airbus fleet, which doesn't have as good a unit cost profile as some of the larger planes that are available and will be available with new engines in the next few years.

Priestley: Yeah, they're just getting increasingly more and more efficient. It's fascinating to watch. I think also, you've definitely touched on this before when we've talked about airlines, it's such a cyclical industry, it's so representative of the health of the economy that it's tied to. With Alaska, that would be the U.S. economy. If you're bullish on the near-term and long-term future of the U.S. economy, then it's definitely worth looking at. I know a lot of investors were spooked by the volatility that we experienced earlier this year, but air travel is certainly only going to increase. And especially as Seattle, its major hub, becomes more and more tech-focused and it expands its reach further down the West Coast, too, and across the country, it's definitely going to become more crucial.

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Alaska Air Group, Inc. Stock Quote
Alaska Air Group, Inc.
ALK
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