Airline Pilot Central Forums - Alaska Air good fortunes

Posted on Thu, Nov. 17, 2005

Alaska Air flies above industry turmoil

Associated Press

CHICAGO - In the turbulent U.S. airline sector, Alaska Air Group Inc. is doing something few in the sector can claim - staying on a steady course to post a profit this year and in 2006.

Only Southwest Airlines Inc. has a better track record than Seattle-based Alaska Air, the parent of Alaska Airlines and Horizon Air.

Multiyear losses at the other major carriers have pushed many into bankruptcy. Two that have avoided Chapter 11, AMR Corp.'s American Airlines and Continental Airlines Inc., are expected to finish 2005 in the red. Following losses in 2002 and 2003, Alaska started turning the corner in 2004.

Alaska Air is "big enough to achieve economies of scale, but small enough that little things - such as eliminating paper tickets - can make a difference," said Jamelah Leddy, an analyst with McAdams Wright Ragen in Seattle.

Alaska Air has a good technology track record. Ten years ago, it was the first airline to sell tickets on its own Web site. Today it sells 35 percent of tickets on its site, and 11 percent through other travel sites such as Travelocity, according to Bill Ayer, the chief executive.

"It's always been an interesting company," said consultant Bob Mann, of R.W. Mann & Co. In an industry struggling with crippling labor costs, "they've been ahead of the pack, because they saw competition on the West Coast from Southwest Airlines in the mid-1990s. They knew then that they would have to restructure their costs, and they have maintained a good dialog with their union labor groups."

But analysts disagree on whether the financial health of Alaska Air, the nation's seventh-largest airline by revenue, can provide the fuel to push its stock price higher.

The shares closed Wednesday at $34.04, close to the 52-week high of $35.72 seen on Aug. 3 and a lot better than the low of $25.55 reached April 29.

Analysts, on average, expect earnings of $1.68 a share this year and $3.66 a share next year, according to Thomson Financial. They see revenue of $2.9 billion this year and $3 billion in 2006.

For 2004, Alaska Air lost $15.3 million, or 57 cents a share, on revenue of $2.72 billion.

Ayer said during a recent conference call that the airline is well on the way to meeting its long-term goal for a sustained annual profit margin of 10 percent, with a profit growth rate of 8 percent to 10 percent a year. The airline expects to reach this goal by 2010.

But with fuel and labor costs still overshadowing the industry - and the success of Southwest overshadowing Alaska Airlines - analysts' feelings are mixed: two rate Alaska Air shares a "strong buy," three rate them a "buy," three at "hold" and one at "underperform."

Peter Jacobs, an analyst with the Ragen Mackenzie division of Wells Fargo, has a "neutral" rating on the stock. "If the U.S. economy remains strong, and the price of fuel stabilizes, this could well be a $40 stock next year," he said. "But airline stocks are volatile. It doesn't take much to move them around. So, we are remaining cautious. We've had the best results with airline stocks when we buy them at book value - which for Alaska is $25.50 - and hold them for a while."

With most of its new union labor contracts in place, Alaska's major cost-cutting work has been completed, Jacobs said. "What they have to do now is a thousand little things, like adding technology."

Leddy notes that Alaska Air has "one of the best balance sheets in the airline industry." The airlines' 76 percent debt-to-capitalization ratio is equal to that of JetBlue Airways Corp., but well behind Southwest, the industry leader at 32 percent.

Its strong financial underpinning meant that, following the 2001 terrorist attacks, it could expand operations at a time when other airlines were cutting back service, flying for the first time to cities outside its home turf in the Pacific Northwest.

Alaska recently added flights between Seattle and Dallas, and Los Angeles and Mexico City. Delta Air Lines Inc., now in bankruptcy, had cut its flights there to save money.