Alaska Air Group ( ALK ) managed to post a better than expected earnings this time around. This comes at a time when the company has been struggling in maintaining good profitability over the last few quarters. In the previous earnings call, the airline operator released quite a horrific forecast for 2018. In fact, management had announced that the company would be lucky to break even in Q1. Fortunately though, Alaska managed to outperform its initial expectations announced in the previous quarter. However, the company expects profitability issues to hurt earnings figures in Q2, before improving through the second half of the year.
The company's stock is now trading at around $65, and we believe it is undervalued in comparison to our price estimate of $71. We have created an interactive dashboard elaborating on our valuation process. Please click on the link to adjust drivers and arrive at your own price estimate.
- After many struggles, Alaska and Virgin will finally be integrated into a single airline under the Alaska Airlines brand, by the end of the week. In general, we expect this step to provide over $200 million in potential revenue and cost synergies over the next two to three years.
- Further, like most of its competitors, the airline has also decided to implement its very own version of the "basic economy" fares. Such a move is expected to bring in more revenues through higher traffic. In addition, this will also help the airline compete better in an oversupply environment.
- Lastly, the company is continuing with its strategy to cut underperforming routes, while shifting capacity to higher yielding markets. In this respect, it was revealed that the company will cut capacity on the extremely competitive routes from New York to California, while adding a third daily flight to Seattle, its strongest market.
- The key metric is also expected to benefit greatly from easier year ago comparisons and merger synergies that are expected to be realized through the second half of 2018.
Given everything mentioned above, the company actually managed to post decent numbers in the quarter. Earnings, while falling significantly short of last year's figure of $0.99, came in at $0.14, 2 cents ahead of the consensus estimate. Further, revenues rose by a modest 5% to $1.83 billion. In contrast, the RASM figure in the quarter declined by about 2.1% year over year. Profitability in the quarter was hurt on increased costs. In this respect, non-fuel costs rose by about 5.1% on heavy wage increases, while fuel costs jumped by about 20% to $2.14 per gallon.
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