Alaska Airlines could be set to soar

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Bobby Raines 01/27/2014

Earnings season comes four times a year and not only is there a predictable schedule to when companies will be releasing quarterly reports en masse, there is also a predictable schedule within each earnings season. Companies in the same industry tend to group their earnings together into a relatively small portion of the larger earnings season.

Last week we looked at financial companies, which are traditionally among the first groups to report. This week we're looking at the airlines. That may be surprising to anyone familiar with what has traditionally been a industry associated with relatively frequent bankruptcy, but after several rounds of consolidation and various bankruptcies eliminating or lessening a lot of the pension and other union-related overhead that have been a drag on the industry in the past, the airlines looks like they could be ready to soar.

One of the best performing names in the sector since the Great Recession is probably only familiar to fliers on the West Coast, Alaska Air Group ( ALK ). The company, which is actually based in Seattle, flies between 95 cities in Alaska, Canada, Mexico, Hawaii and the 48 contiguous states. It also operates as a regional airline in the western U.S. and the state of Alaska.  

The company carries a higher percentage of passengers flying for vacation or other leisure activities than other airlines, but that could be a positive if the economy continues to expand. The company is also likely to see higher margins from the low oil prices created by the fracking boom and a continued stagnation in driving.

What has the company done lately? It earned $1.11 per share in the fourth quarter, compared to 61 cents in year-ago quarter. On an adjusted basis, the company earned $1.11 per share, topping estimates for $1.07 per share.

The stock slid after the report was released, largely due to concerns about increased costs in the first part of 2014. Analysts believe those costs are likely to be weighted toward the first part of 2014 and should be lower as the year progresses.  None of those issues: changes to deals with pilots and flight attendants, airport fees and other non-fuel costs seem all that out of the ordinary, and are unlikely to balloon into a real problem for the company.


Chart courtesy of stockcharts.com

Given the relative stability we've seen in oil prices recently, I like the airlines right now. The economy appears to be finding its footing, which is likely to result in more people flying. Unless something happens to drastically alter the price of oil, Alaska Air should be in good shape for a while.

Traders looking to take advantage of the strength in the airlines could consider a March 70/75 bull-put credit spread. That yields a 65-cent credit, which is a 14.94% return, or 101% on an annualized basis (for comparison purposes only). This position returns a full profit so long as the stock closes above $75 at March expiration, giving it about 7.5% downside protection.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: ALK

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