When it comes to airline stocks, few have outperformed as much
Alaska Air Group, Inc.
has in 2014. The stock is up 27.8% year to date as I write
Can the rally continue? An increasingly turbulent operating
environment, coupled with Alaska's own missteps, could make that
Taking off from Denver. Credit: The Motley Fool.
Problems getting out of the gate
Competition is a big part of the problem. After Alaska expanded
in Salt Lake City last year,
Delta Air Lines
-- which operates a hub in Salt Lake -- began
adding flights in Seattle-Tacoma
, one of Alaska's home airports.
"Sea-Tac" is a particularly attractive market for Alaska, which
uses that hub to fly profitable long-haul routes to Hawaii, Mexico,
and most of the continental United States. Delta is already
skimming some of the excess. As Andrew Harrison, Alaska's senior
vice president of planning of revenue management, put it in last
month's earnings call:
Competitive flying in Seattle increased 9%, with nearly all of
that growth coming from Delta's additions, offset slightly by
modest pull downs from other carriers. Delta will continue to
grow in Seattle based on announced schedules. To put that growth
in context, today, Delta's Seattle flying overlaps with 41% of
our ASMs. We expect that to grow to 50% by next summer, with
roughly 30 more daily departures in overlapping markets. Despite
the increasing competition, we will still have 55% of the
domestic seats in Seattle versus our closest competitor at 16% at
the end of this year.
Sound bad? It gets worse. Delta isn't some everyday competitor.
The carrier topped the ranks of Airfarewatchdog's
of the nation's best airlines, scoring best in terms of canceled
flights (only 0.11%) and second-best, behind Alaska, for on-time
arrivals (84.41%). Delta ranked fifth in terms of customer
satisfaction, a point ahead of Alaska. Keeping customers loyal
could prove to be a challenge -- especially if on-time performance
continues to drop from recent highs.
In July, Alaska flights arrived on schedule just 83.7% of the
time, down from 85.69% in June and sixth among the major carriers.
Delta flights delivered passengers on time 85.29% of the time over
the same period, according to data from FlightStats.com
Puget Sound Business Journal
Landing in Kona, Hawaii. Credit: The Motley Fool.
Why Alaska is a target
So why is Delta after Alaska, and why now? Revenge is one
theory, but I think profit is the bigger motivator. Alaska has
long flown minimally contested routes, allowing for pricing power
and higher margins, as the following table shows:
Revenue Growth (
Earnings Growth (
Operating Margin (
Alaska Air Group
Delta Air Lines*
*Includes significant one-time items.
TTM = trailing 12 months.
In contesting Seattle, Delta is chasing fatter fares that might
not be available in tighter, volume-driven markets such as New York
to Los Angeles -- the same sorts of fares that have allowed Alaska
to produce such high margins, and correspondingly outstanding
returns for investors. And it won't give them up without a fight.
The carrier is cutting prices and offering incentives to its most
"We are making some tactical network changes as we've done many
times before to preserve and enhance the long-term value of this
incredible franchise, but we're not going to take the eye off the
ball in other areas like customer service or low-cost or returns
for investors," CEO Brad Tilden said during the earnings call.
An ambitious strategy, to be sure. Yet I like Tilden's chances.
At the very least, it's worth noting that he's been through 21
years of airline wars. This time, Alaska gets to spar with Delta
over space at Sea-Tac. The stock may take a hit in the short term,
ending the 2014 rally.
Over the long term, this is the rare airline with a solid base
and good management. And at 10.4 times trailing earnings, it trades
for a cheaper multiple than many of its similarly sized peers. To
me, that's a combo worthy of a five-year hold in my CAPS
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Why Alaska Air Group, Inc. Has Skyrocketed 28% in
originally appeared on Fool.com.
is a member of the
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