With high debt levels, a debilitating dependency on fluctuating fuel prices, and cringe-worthy headline risk, the airline industry has been notoriously difficult for investors to navigate successfully. However, one small airliner, Alaska Air Group (ALK +1.04%), has been at the head of the pack for a while, may be the only airliner worth investing in over the long-term.
An industry leader
With a strong flight brand, industry leading customer service, and a stranglehold on the Alaskan flight market, Alaska Air Group has built a moat for itself and appears set to continue outperforming its mostly larger peers.
The first two points go hand in hand for Alaska Air Group. Ask anyone who flies the airline; the company makes it a priority to lead the industry in customer satisfaction. In May, J.D. Power crowned Alaska Airlines as the top "network" carrier for the sixth year in a row, beating out the closest competitors, Delta Air Lines (DAL +0.12%) and Air Canada .
Since Alaska Air has performed extremely well in this regard for so many years, it has built up strong brand awareness among consumers. Combined with the fact that Alaska Air has been first in regard to on-time performance for the last three consecutive years, as measured by FlightStats, it is apparent that the company's flight brands are exceedingly popular among consumers.
This is not something that is easily countered, even by the lower prices of discount competitors. It is a large part of the reason why customers willingly choose to fly Alaska Air over cheaper competitors like JetBlue Airways (JBLU +0.38%) that have recentlychosen to focus on the coveted Alaskan flight market.
The other reason is that as a regional airliner, Alaska Airlines is able to throw sheer volume at competitors. In the busy summer season, Alaska Airlines has more than 20 flights from Anchorage to Seattle-Tacoma daily; its next most prolific competitor, United Airlines, has only two. This affords customers more choice and flexibility, and simply means that an overwhelming amount of the traffic will go through the better-established and more convenient Alaska Airlines.
The only way for JetBlue, or any other airline for that matter, to realistically compete with Alaska Airlines in the region is to try to match the latter's number of flights. This is not something a non-regional discount airliner wants to do, because it entails dedicating significantly more capital to a niche market.
Despite increasing competition, Alaska Air will most likely remain the dominant airline in the last frontier state, which means the company has a veritable moat in the region that can keep competitors at bay. Such a distinction is exceedingly rare in the airline industry.
An outperformer
As impressively as the company has performed over the years, the stock of Alaska Air Group has fared even better. In the last five years, shares of Alaska Air have climbed almost 500%. The stock is up almost 70% in 2013 alone!
Dependable revenue and earnings-per-share growth, along with best-in-class fundamentals, have fueled this climb. The following is a breakdown of the company's projected growth rates and key fundamental metrics compared to competitors Delta and JetBlue:
|
Company |
Alaska Air |
Delta |
JetBlue |
|---|---|---|---|
|
Projected Revenue Growth 2013 |
6.9% |
2.7% |
8.6% |
|
Projected Revenue Growth 2014 |
5.4% |
3.8% |
8.5% |
|
Projected EPS Growth 2013 |
9.9% |
64.9% |
22.5% |
|
Projected EPS Growth 2014 |
21.7% |
1% |
34.7% |
|
Return on Capital |
16.94% |
16.77% |
0.62% |
|
Net Profit Margin |
9.33% |
4.75% |
2.32% |
|
Total Debt |
924M |
12.52B |
2.85B |
|
Dividend/Yield |
0.80/1.1% |
0.24/0.9% |
NA/NA |
Although Alaska Air's projected growth leads its much larger peer Delta significantly, the company's growth is slower than that of JetBlue on both a revenue and earnings-per-share basis. However, in every other regard, Alaska Air Group leads all listed competitors.
The company's return on invested capital is an impressive 16.94%, which bests the industry average of 8.65% by a wide margin. Additionally, the company has the least amount of debt and a rather robust profit margin of 9.33%. Finally, although the dividend was only recently instated, Alaska Air Group's dividend yield is one of the highest in the industry.
Headed North
In an industry that is prone to turbulence, it pays to locate the strongest companies. None is more formidable in the airline space than Alaska Air Group. The company has outperformed the majority of its peers due to consistently solid management, which has continued to cater to patrons first and foremost.
The results speak for themselves. The company has been able to successfully ward off competitors and maintain its dominance in the state of Alaska. As long as customers continue to identify with Alaska Air's core flight brand, shares of the company are likely to continue heading north.
