Industry-leading margin performance
Alaska Air Group (ALK) has been able to get its costs in line with the industry’s costs, due to its excellent fiscal discipline. The company’s margins have been better than its peers and even better than 90% of the S&P 500 companies.
As shown in the chart above, Alaska Air Group had a 34% EBITDA (earnings before interest, tax, depreciation, and amortization) margin in 3Q15, the highest among its peers that have reported their 3Q15 results.
The company recorded an ROIC in the trailing 12 months of 24.2%, up from 17.2% a year ago. This was primarily driven by higher revenues, strong non-fuel cost performance, and lower fuel costs. Fuel costs fell from $3.15 a gallon to $1.82 a gallon during 3Q15.
Growth in ALK’s mileage plan and credit card
Alaska Air Group has seen a strong brand affinity with its mileage plan and its credit card, both growing by more than 41% in the past five years, as visible in the graph above.
The company’s mileage plan generates more than $500 million in cash annually. About 40% of the seats on the new flights are filled with mileage plan members, indicating the airline’s passenger brand loyalty.
New Embraer 175 jets added
Alaska Air Group (ALK) announced the introduction of the Embraer 175 aircraft through its partner Skywest Airlines. Although the Embraer 175 is smaller than the Boeing 737 currently used by Alaska Airlines, it is better suited to the airline’s routes than the Bombardier Q400, which is used on similar routes as the E175. The E175 offers longer range than the Q400 and has the ability to operate more flights per day due to its higher cruising speed.
The Embraer 175 allows the company to gain access to additional routes in Portland, Oregon, as well as Minneapolis, Omaha, Dallas, and Kansas City, as planned for the coming year.
Portland is a relatively untouched yet booming economy that could become Alaska Air Group’s next big bet. All three E175 markets have performed better than expected, with very high load factors that consistently approach 90% and achieve profitability in their first quarter of operation.
Alaska Air Group (ALK) announced that a free first checked bag would be a permanent feature of its Visa Signature affinity credit card. The airline also started offering upgrade options for its Preferred Plus Seating. This feature would offer passenger features such as bulkhead and exit-row seating selections 24 hours in advance of their flight, priority boarding, and a complimentary alcoholic beverage.
Investors can gain exposure to airlines like Delta Air Lines (DAL), American Airlines (AAL), United Continental Holdings (UAL), Southwest Airlines (LUV), Alaska Air Group (ALK), and JetBlue Airways (JBLU) through the SPDR S&P Transportation ETF (XTN). These airlines form ~17% of XTN’s portfolio.