Shares of Seattle, WA-based airline heavyweight Alaska Air Group (ALK) have had a good time on the bourses of late, improving in double-digits over the past three months. The encouraging price performance resulted in ALK outperforming its industry in the said time frame. Moreover, ALK’s price performance compares favorably with that of fellow U.S. airline operators Southwest Airlines Co. (LUV) and JetBlue Airways Corporation JBLU in the past three months.
Three-Month Price Comparison
Given the recent rally, the question that naturally arises is whether ALK stock can sustain its bullish price performance or should investors book profits now. Before that, let's delve deep to unearth the reasons behind this northward price movement.
Upbeat Travel Demand and Fleet Growth: A Major Tailwind
Improvement in air-travel demand following the normalization of economic activities bodes well for Alaska Air's top line. With people taking to the skies again following the end of the pandemic, ALK's total revenues increased 4% in the first nine months of 2024, driven by a 4% uptick in passenger revenues.
To meet the upbeat demand, ALK is boosting capacity. For fourth-quarter 2024, the company expects available seat miles (a measure of capacity) to increase 1.5% to 2.5% in the fourth quarter of 2024 from the fourth quarter of 2023 actuals. ALK expects fourth-quarter earnings per share in the range of 20-40 cents, including results of Hawaiian Holdings, which was acquired on Sept. 18, 2024.
Alaska Air’s fleet-modernization initiatives are encouraging. The inclusion of modern planes in its fleet and the retirement of the old ones align with its environmentally friendly approach. The new inclusions, apart from having all basic amenities, result in an improvement in fuel efficiency. Latest-generation aircraft require up to 30% less fuel than the old ones and emit correspondingly less carbon dioxide.
In March 2023, the company modified its Boeing order to include the bigger MAX 10s and longer-range MAX 8s. The carrier’s contract comprises 145 firm orders and options for Boeing 737-9 aircraft, scheduled for delivery between 2021 and 2026. The $1.9 billion deal to acquire Hawaiian Holdings has been closed. It has boosted Alaska Air's fleet size to 365 narrow and wide body planes.
Impressive Valuation Picture for ALK Stock
From a valuation perspective, ALK is trading at a discount compared to the industry, going by its forward 12-month price-to-sales ratio. The reading is also below its median over the last five years. The company has a Value Score of A.
Image Source: Zacks Investment Research
Rising Expenses Weigh on Alaska Air Stock
Escalating operating expenses due to rising labor and airport costs are hurting ALK’s bottom line. Expenses on wages and benefits increased 9% during the first nine months of 2024. Evidently, operating expenses were up 3% during the first nine months of 2024. Consolidated operating costs per available seat mile (excluding fuel and special items) rose 5% year over year in the same time frame.
For fourth-quarter 2024, consolidated operating costs per available seat mile (excluding fuel and special items) are expected to increase in the high single digits.
Given this headwind surrounding the stock, earnings estimates have been southbound, as shown below.
Image Source: Zacks Investment Research
To Conclude
It is understood that ALK stock is attractively valued and upbeat air travel demand are contributing to ALK’s top line. However, given the headwinds mentioned in the write-up, we do not advise buying this Zacks Rank #3 (Hold) stock at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Instead, investors should monitor the company’s developments closely for a more appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s Zacks Rank supports our thesis.
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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
