Alaska Air Flies Higher Than the Rest


Alaska Air Group may be the best airline available to investors. It's been incredibly successful in its slow, steady expansion plan that not only increases routes but increases revenue per seat along the way. It's no secret either, as the stock has gone up north of 80% in the last 12 months. Yet, even with its tremendous run-up in stock price, the company still trades under 10 times forward earnings. Let's take a look at the first quarter and see if it's time to back up the truck for Alaska Air.

Earnings recap
The company is off to a great start in 2013, achieving profitability in the first quarter for the fourth time in a row, according to CEO Bradley Tilden. The first quarter is typically a difficult one for airlines, as there is typically a sharp drop-off from the fourth quarter's holiday travel season. This quarter was a record first quarter for the airline, hitting $44 million, or $0.62 per share, in net income. Last year, the company managed just $28 million, or $0.39 per share. The Street seemed to expect around $0.56 per share, kicking off a nice beat on the bottom line.

Alaska Air spent a little under $20 million in stock buybacks -- wise considering the valuation of the stock when compared to peers (we'll touch on that later).

Revenues hit $1.133 billion, a 9% gain from the prior year. The boost in sales comes mainly from a boost in capacity. The company is adding routes, both mid- and transcontinental. Passenger revenue per available seat mile (PRASM), the go-to metric for an airline's unit profitability, was admittedly not as appealing as in recent quarters. PRASM was up just 0.3%, driven mainly by a 3.5% gain for regional routes. The industry, meanwhile, averaged 3.5% PRASM growth. Investors need to note, however, that the industry gains were more a matter of increased pricing, while Alaska's gains were a force of capacity and load factor. The latter is a utilization metric of passenger-kilos as a percentage of total seat-kilos.

Tilden cited too much capacity in California and Hawaii routes, as well as the newer, untested, routes as the main culprits for the lagging the industry in PRASM growth.

As of the end of the quarter, the company held $1.3 billion in cash and securities.

Flight path
Fuel costs are heading down, and the company is in a great position to steer toward a record year. Margins improved in the quarter and don't show any signs of reversing in the near future.

Unfortunately for passengers, the company will be adding a net of 2.4% seats to its existing planes via space-saving seat designs. At the likely expense of some comfort, this will help lower unit costs and is necessary to more directly compete with the legacy carriers.

Management expects positive free cash flow, more share buybacks, and continued ROIC performance. April comps are expected to trend down, though investors should not be too concerned. It is likely a result of government sequestration, flight delays, and some now-fixed capacity issues.

At 9.5 times forward earnings, Alaska Air is priced far cheaper than another grower, Allegiant Air Travel Group , which trades at more than 14 times earnings. Allegiant Air does operate a large travel booking service, which may warrant higher valuations, but the core airline business does not have as attractive long-term metrics as Alaska Air's. Another favorite among investors and travelers, JetBlue, trades much closer to Alaska Air at 9.4 times forward earnings. I like both companies, but am more attracted to Alaska's growth prospects as it is still mainly a West Coast airline with plenty of room for expansion.

Though some of the bargain has been erased by market gains, Alaska Air still offers investors a shareholder-friendly business with strong potential for long-term capital appreciation. You may be delayed at the airport, but don't wait too long before checking out this stock.

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