Alaska Air Group, Inc. (ALK) – New Markets: A Positive or a Negative for the Airlines?

Page 1 of 2

Lately, the airline sector has been flying and has seen 40% appreciation since the start of the year versus the S&P 500, which has risen only 15%. One of the keys to this growth has been the proactive approach of some carriers that have been investing into new markets. The performance of new markets is of particular interest for carriers that are demonstrating growth, such as Alaska Air Group, Inc. (NYSE:ALK) and JetBlue Airways Corporation (NASDAQ:JBLU), or re-allocating capacity into new markets like Southwest Airlines Co. (NYSE:LUV).

Alaska Air Group, Inc. (NYSE:ALK)

Let’s have a look into how these new markets are developing for those three carriers.

Executive summary

The conventional growth opportunities for Alaska Air Group, Inc. (NYSE:ALK) are off to a weaker start and some Hawaii markets are showing signs of softness, likely as a result of competitive capacity. For JetBlue Airways Corporation (NASDAQ:JBLU), Boston, Hartford, and San Juan continue to screen well. Finally, while Southwest Airlines Co. (NYSE:LUV)’s markets are generally developing inline with expectations, smaller cities look to be out-performing larger cities. Atlanta stands out as a weak start for new Southwest flying (separate from AirTran flying). However, Southwest is addressing this with code-share capability with AirTran and a revamped schedule toward the end of the year.

A bad deal for Alaska

In a note published by Barclays PLC (ADR) (NYSE:BCS), the analyst commented that with the ‘Hawaii void’ filled, Alaska Air Group, Inc. (NYSE:ALK)’s growth will revert to more conventional markets (connecting cities like Seattle and San Diego to other markets.) Those market opportunities would not generate the early relative RASM premiums that Hawaii markets had produced. (For those who don’t know, RASM is revenue per available seat mile and is considered a key metric when discussing revenue growth of airline sector.) Hence, the reversion to conventional growth would be more RASM and margin dilution than Alaska’s growth in past years.

Barclays has given a price target of $38, which is almost a 30% downside from the current price level of $52.

Revenue generation for JetBlue is just okay

JetBlue Airways Corporation (NASDAQ:JBLU)’s new markets in Boston and San Juan appear to be developing well, although San Juan is proving a bit less consistent than Boston. Where we have seen some weakness is in markets with notable competitive capacity pressures (Transcon, for example), and some recent New York to Florida markets that look to be slow in developing.

On an overall note, the carrier’s revenue generation is generally fine. However, the revenue performance has yet to result in relative earnings and margins that match the industry’s improvements. With 10% capital appreciation for the year (vs. S&P 15%), the stock has under-performed the market. However, consensus estimates show a 25% annual increase in earnings for the next five years, which bodes well for the stock.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!