Alaska’s return on investment doubles as profit margins rise



High profit margins

Alaska Air Group (ALK) has consistently maintained remarkably high margins over the past few years, although its unit revenue is lower compared to its peers. An increase in trip length and gauge contributed to its lower unit revenue apart from lower airfares offered by the company. However, due to its unique cost advantage, Alaska Air Group posted the highest profit margin among its peers for almost four consecutive years, as seen in the chart below.

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In 2013, Alaska Airlines’s operating profit margin was ~16%, the highest among its peers. The next highest margin was Delta Air Lines’s (DAL) 9%, a gap of 7%. The other airlines’ margins were less than half of Alaska’s, including JetBlue Airways’s (JBLU) 7.9%, Southwest Airlines’s (LUV) 7.2%, American Airlines’s (AAL) 5.2%, and United Continental Holdings’s (UAL) 3.3%. Even the company’s net margin was higher than most of its peers.

Return on invested capital

Alaska Airlines is able to generate high returns on invested capital due to its high margins. As long as returns are high, companies are encouraged to increase their investment and expansion plans. Alaska’s after-tax return on invested capital (or ROIC) has more than doubled in the last four years to 13.6% in 2013 from 6% in 2009. In the last 12 months ending September 2014, the company’s ROIC increased to 17.2%.

As returns and profit margins increase, trading volumes and share prices of airline stocks also increase. Several ETFs holding these stocks such as the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN) hold Alaska Airlines’s shares have benefited from the rising prices.


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