Alaska Air Group's Earnings Will Get A Tailwind From Higher Capacity And Passenger Traffic

| About: Alaska Air (ALK)

Alaska Airlines (NYSE:ALK) will announce fourth-quarter and full-year 2012 earnings Thursday, Jan. 24. The carrier posted impressive growth in revenues and earnings in the first three quarters of 2012 on higher passenger traffic. Revenues increased 7.7% y-o-y to $3.5 billion and net income increased 50% y-o-y to $272 million in the nine months ended Sept. 30, 2012.

In the fourth quarter, Alaska continued to raise its flying capacity by adding new routes and raising frequency on certain existing routes. As a result, passenger traffic for the carrier continued to rise. If yield levels do not fall, which is likely as passenger fares were stable, then we will see impressive top line growth in the fourth quarter. Earnings growth is also highly likely as there were no major hikes in prices of jet fuel, which is the single largest cost head for airlines.

We currently have a stock price estimate of $42.75 for Alaska Airlines, approximately 10% below its current market price.

Capacity Redeployment and Addition of New Routes

Alaska started flights from its hubs on the west coast to vacation destinations in Hawaii in November. It started flights on Portland-Kauai, Bellingham-Maui and Anchorage-Kona routes.

Every year before the onset of peak winters, the carrier shifts a certain portion of its capacity from the Pacific northwest and the state of Alaska to these routes. During winters in the state of Alaska and Pacific northwest, the cost of operations rose significantly due to additional expenditure on airplane de-icing, frequent flight cancellations and accommodation costs of displaced passengers. In effect, these flights from the west coast to Hawaii help the carrier reduce the impact from severe northwest winters on its business.

Alaska Airlines also started service between Orlando and San Diego in October. Overall, the flying capacity of the carrier increased in high single-digits in the fourth quarter of 2012, compared to the year-ago period. As a result, passenger traffic increased around 9% y-o-y for the carrier in the fourth quarter, and will contribute toward revenue and earning growth.

Minimal Impact From Sandy

Additionally, the impact from superstorm Sandy on fourth quarter earnings of Alaska will be minimal since the operations of the carrier are focused on north-south service on the west coast, the state of Alaska and flights between the West Coast and Hawaii. Thus, the carrier gets a small portion of its total passenger traffic from northeast United States where the storm struck.

Order for 50 Boeing 737 Aircraft

In October, Alaska Airlines also placed the largest aircraft order in its history. It ordered 50 Boeing 737s (13 Boeing 737ER and 37 Boeing 737MAX) equivalent to around a third of its current fleet size. Deliveries for this order will range from 2015 through 2022. These new aircraft will enable the carrier to continue to expand its capacity over the coming years and also replace aging aircraft in its fleet to save on fuel and maintenance costs.

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