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Strong balance sheet complements Alaska’s operational efficiency

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Low leverage, sound liquidity position

Previously in this series, we saw that Alaska Airlines outperforms its peers in operational efficiency. Higher investments in capital assets and business expansion support a company’s revenue growth and operational performance. The capital requirement for such investments is financed either through internally generated cash or through debt and other sources of external financing.

Airlines usually have high amounts of debt because cash generated from operations is not sufficient to meet huge investments on aircraft and other obligations. These factors contribute to a credit rating of below investment grade.

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Investment-grade rating

Alaska Air Group (ALK) and Southwest Airlines (LUV) are the only two US airlines that have an investment grade rating. Both these companies are part of ETFs that hold transportation stocks, such as the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN).

Alaska received BBB- ratings by both Fitch and S&P. This is another important milestone for Alaska Airlines, which reduced debt as a percentage of capital to 27% in 3Q14 from 58% in 2010. Alaska’s leverage is now very low compared to American Airlines’s (AAL) 78%, United Continental Holdings’s (UAL) 76%, JetBlue Airways’s (JBLU) 50%, and Delta Air Lines’s (DAL) 45%.

Negative net debt

Alaska Airlines has a negative net debt, which means its cash balance exceeds its debt. The company had the highest cash and marketable securities as a percentage of trailing 12-month revenue of ~26% in 3Q14, while its peers’ cash ranged between 11% to 20%.

In the next article, we will see how the combined advantage of a strong financial position and high operational efficiency resulted in higher returns to shareholders.

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