PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
Few companies come to mind when the words airlines and profits are mentioned in the same breath. Among them are sleek upstart Jet Blue (JBLU
) and no-frills bellwether Southwest (LUV
). A third to report profits in the most recent quarter is Alaska Air Group (ALK
), which runs Alaska Airlines and regional carrier Horizon Air.
The third quarter is traditionally Alaska Air's strongest, since good weather in the summer months brings more tourists to the northernmost state. On Oct. 23, the company reported third-quarter net income of $10.6 million, or 39 cents per share. That's down from $25.3 million, or 95 cents per share a year ago, but impressive considering the deep losses at other airlines.
With its relatively low-cost structure and strong position in the West Coast market, the Seattle-based outfit is expected to return to consistent profitability sooner than most. However, that may not be reason enough to jump into the stock. To some investors, Alaska Air may appear one of the strongest long-term airline investments, but most analysts recommend taking a cautious approach, since no carrier is immune to the fallout if the economy stalls or fuel costs spike as a result of a war with Iraq.
BAD TIMING. "Thankfully, from our standpoint, our cost structure is low enough where we can [discount] and still make money," says John Kelly, the airline's chairman, president, and CEO (for more comments from Kelly, see this BW Online Video View). It also helped Alaska Air that travel along the West Coast, where most of its routes are located, was hit less hard by the aftermath of the September 11 terrorist attacks. "If you live in Alaska or want to visit, you have to fly to get there. That has helped them," says Jim Corridore, Standard & Poor's equity analyst.
Alaska Air is "well run and well positioned," says Corridore, who recommends that investors hang on to their shares. But in general, he adds, "it's a horrible time to own airline stocks. Investor sentiment is negative, and we've seen equity stakes shrink dramatically."
Ray Neidl, an analyst at Blaylock & Partners, says he likes Alaska Air's outlook, but he's "fence-sitting" for now, rating it a hold since clouds continue to loom for air travel. The stock has had a bumpy ride over the past year. Trading around $23 per share as of Nov. 7, it had hovered above the $30 mark before September 11, climbing back to that level over the few months after the terrorist attacks.
BRANCHING OUT. In recent months, it has fallen along with the rest of the airline industry, which has seen few signs of a significant rebound. Still, while the Dow Jones airline stocks index is down 42% so far this year, Alaska Air is off only 25%. The Street hasn't punished Alaska Air as much as many of its peers, in part because investors like its long-term strategy of gradually increasing routes beyond core destinations.
The leading low-cost airlines, Jet Blue and Southwest, are both adding modestly to capacity next year. Alaska Air's Kelly sees his company in a position to do the same: "We said we're going to grow the airline while others are shrinking by 20% or so. We say it's a great opportunity to grow." In all, the airline expects to add 6% to 7% more capacity in 2003 -- a move most analysts applaud. "It's definitely a good move," S&P's Corridore says. "It's a unique time for those with balance-sheet strength to gain share while some of the weaker players have to shrink."
Kelly is making his moves on long-haul routes, where major carriers cut back after September 11. In late October, 2002, Alaska Airlines started flying from Seattle to Newark, N.J., and it plans to add Miami in November. Other destinations under consideration include Salt Lake City, Pittsburgh, and Orlando.
FROM SOUP TO NUTS. The idea is to add capacity on the routes where demand remains relatively strong -- typically in higher traffic markets -- and to do so despite the overall travel slowdown. The move also offsets slower traffic to Alaska Air's own core route structure. So far, the company is seeing solid demand for the new flights. Load factors, the percentage of occupied seats, are higher on the new flights to non-West Coast destinations like Boston, Denver, and Washington, D.C., than on traditional north-to-south routes, Kelly says.
Still, while it usually makes enough money in the tourist-season third quarter to show a profit for the year, it won't come close in 2002. Alaska Air is holding up relatively well vs. most of the industry, but analysts, on average, expect it to lose $1.02 per share in the fourth quarter, traditionally its worst, and a total loss of $2.13 per share for 2002. Next year is looking better, with analysts expecting 2003 earnings per share to come in at 83 cents.
Alaska Air has had its rough patches over the past 10 years. In the 1990s, it went head-to-head with low-cost rival Southwest, which began running flights on the West Coast. At the same time, other small regional carriers such as Morris Air, which was acquired by Southwest in 1993, started offering cut-throat fares. After two years of brutal losses in 1992 and 1993, Alaska Air had no choice but to cut costs. It lowered the number of attendants, cut back sharply on meals, and increased its planes' airborne hours from around 8 hours per day to more than 11.
HOLDING PATTERN. Another painful period may actually have left it better prepared for the current tough market. After Alaska Air Flight 261 crashed in January, 2000, with the loss of 88 lives, the airline missed the wave of expansions that swept through the ranks of the major carriers. Now, those rivals are slashing capacity and costs as they struggle to survive. As for the tragic Air Alaska crash, about half of the passengers' families declined to settle and are awaiting trial, says Kelly, who expects no further financial impact, since any additional costs should be covered by insurance reserves.
Glenn Engel, airline analyst at Goldman Sachs, likes Alaska Air, but he remains cautious about the near-term outlook. "Relative to its size, it has the biggest cash position of the majors," he says. "So, in terms of ability to ride out the storm, they're in better shape than others." Engel believes results will improve over the long term, but with the economic and travel rebound murky at best, he can't recommend the stock.
For Alaska Air and the rest of the industry, better performance depends largely on an improved economy, one in which passengers are both willing and able to pay more for their tickets. Meanwhile, investors remain jittery about a possible war or a fresh terrorist attack. But while most carriers are figuring out how to reduce capacity, Alaska Air is one of a special few doing the opposite. And that gives investors with a long-term horizon something to pin their hopes on.
Tsao covers financial markets for BusinessWeek Online in New York Edited by Beth Belton
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2002, by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
