Alaska Air Group (NYSE: ALK) is a regional airline with flights to over 100 cities, primarily in North America with a few routes in South America. Over the past five years, from 2010 to 2015, the company added flights to 90 new markets that contributed over $2.1 billion in new revenue. From 2009 to 2014, the company has grown annual earnings from $0.62 per share to $4.18 per share, an increase of approximately 575%. And since 2010, the company has returned about $1.1 billion in cash to shareholders from over $5 billion in free cash flow. In 2015 (year-to-date), Alaska Air had $4.22 billion in revenue, up 4% from the same period in 2014.

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Strong Passenger Demand for Award-Winning Services

For the month of November 2015, Alaska Air reported passenger miles of 2.8 billion, up 13% over November 2014, and consolidated capacity of 3.42 billion, up 14% year-over-year. For 2015 year-to-date (January through November), the company reported revenue passenger miles up 9% year-over-year to 30.6 billion and consolidated capacity up 11% to 36.34 billion on increased passenger demand for flights as the U.S. economy recovers.

For the three months ended September 30, 2015, Alaska Air had total operating revenues of $1.52 billion, up 3% from $1.47 billion in Q3 2014. Total passenger revenue increased 4% on a 10% gain in regional revenue and a 3% gain in mainline revenue. Reported revenue was in line with analysts’ estimates.

Profit Margins Boosted by Falling Fuel Expenses

Management noted that the sharp drop in oil prices helped lower overall expenses and improve profit margins because fuel accounts for about 25% of expenses. Alaska Air saw a positive impact on earnings from the drop in oil prices in 2015, with WTI Crude down from over $65 per barrel in early January 2015 to about $40 at the end of November 2015. In 3Q15, fuel expenses fell 38% year-over-year from $394 million to $245 million. For the fifth year in a row, the International Council on Clean Transportation ranked Alaska Air first in fuel efficiency, and the company improved fuel efficiency by about 3% in 1H15.

For its third quarter, the company reported a 6% decrease in operating expenses, which significantly boosted operating income from $316 million in Q3 2014 to $433 million in Q3 2015. Lower oil and other operational gains helped boost 3Q15 net income by 38% to $274 million from $198 million in 3Q14.

Steady Commitment to Dividends, Dividend Growth and Share Buybacks

On December 3, 2015, Alaska Air paid a quarterly dividend of $0.20 per share, same as in the previous quarter but up 60% from $0.125 in November 2014, as the company tried to restore dividends to earlier levels. In FY 2013, the company paid a total annual dividend of $0.20, and then increased dividends 150% to $0.50 in FY 2014. Alaska Air has paid 8 consecutive quarterly dividends since 2013, totaling over $148 million. The company has an annualized dividend of $0.80 and a dividend yield of 0.99%.

In August 2015, Alaska Air’s Board approved a new $1 billion share repurchase program which will go into effect after the existing $650 million program is used up. Since 2007, Alaska Air has completed nine share repurchase programs with 53 million shares bought back at a total cost of about $1.1 billion.

Alaska Air shares ended the week (12/4/2015) at $84.91, up 42% year-to-date and just below the top of the company’s 52-week range of $54.54 – $85.44. Shares were volatile and range bound in the first half of 2015, then climbed significantly in July and August and moved higher in November. Shares trade at a fairly modest price-to-earnings ratio of 13.3x on earnings of $6.16 per share. For Alaska Air, analysts have a median price target of $90 (upside of about 6%) and a high price target of $98 (upside of about 15%). The company has a manageable debt load with Debt/Equity of 0.30x and Debt/Assets of 0.11x, with EBITDA margin of 28.3% and a Price/Book ratio of 4.6x on a market cap of $10.2 billion.

Route Expansion, New Premium Class Service Will Boost Revenues

Alaska Air launched seasonal flights in multiple segments for the December 2015 to March 2016 travel season, with additions to popular winter destinations and ski areas. For example, passengers can now fly Alaska Air from LAX to Gunnison/Crested Butte, Mammoth, Salt Lake City and Sun Valley at low fares, and get discounts on package deals with mountain resort partners.

Alaska Air plans to further improve its passenger experience with more legroom and amenities through Premium class seating (Starting in 4Q16). Passengers can expect about 4 more inches of legroom than coach seats and better food options. The new category targets well-heeled passengers that are willing to pay more than Coach but less than business class fares. Premium class seating is expected to add about $85 million in operating income by 2018, when it is rolled out across all 737 and E-175 airplanes.

For the eighth year in a row, JD Power ranked the company #1 in customer satisfaction, with the lowest cancellation rate amongst all competing carriers. Alaska Air has doubled its revenue since 2003, with a CAGR of 7.4% that is well above its peers. Recent route expansions and the planned addition of Premium Class seating will continue to boost revenue growth. With manageable debt levels and a BBB- rating from both S&P and Fitch, Alaska Air has relatively inexpensive access to capital for expansion, dividends and buybacks.

 

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