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How Did Alaska Airlines Grow Its Profits?

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Growing margins of Alaska Airlines

Alaska Airlines’ (ALK) ability to rein in its overhead costs, along with a fall in crude prices, resulted in higher margins. Alaska Airlines had an operating margin of 6.5% in 2010, which almost doubled by 2014 to reach 11.2%.

Alaska Airlines recorded an operating income of $471 million in 2010, which grew to $961 million in 2014. Net income grew from $251 million in 2010 to $605 million in 2014 at a CAGR of 19.2%, outpacing its revenue growth.

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How did Alaska Airlines grow its margins?

Alaska Airlines (ALK) was able to grow its margins by improving the following operating metrics:

Load factor: This is a measure of capacity utilization and is calculated as the number of occupied seats divided by the total number of seats. The load factor for Alaska Airlines is much better than its competitors. This reflects its ability to attract more passengers by offering quality service at relatively low prices. The load factor for Alaska Airlines has grown from 82.4% in fiscal 2010 to 85.1% in fiscal 2014.

Passenger revenue per available seat mile, or PRASM: This is also called unit revenue and is calculated as the passenger revenue divided by the ASM. Despite a higher load factor, Alaska Airlines has a low PRASM due to low passenger mile yield. The PRASM for Alaska Airlines has grown from 11.8 cents in fiscal 2010 to 12.7 cents in fiscal 2014.

Cost per available seat mile, or CASM: This is the operating cost per ASM. Although Alaska Airlines has a low PRASM, it has managed to stay profitable by maintaining the lowest CASM among its peers. The CASM for Alaska has decreased from 13.1 cents in fiscal 2011 to 12.2 cents in fiscal 2014.

Investors can gain broad-based exposure to Alaska Airlines by investing in the SPDR S&P Transportation ETF (XTN), which holds ~25% in airline stocks and ~2.5% in Alaska Airlines.

XTN also holds shares of Alaska Airlines’ peers, including 2% in American Airlines (AAL), ~2% in United Continental Holdings (UAL), ~2.5% in Southwest Airlines (LUV), and ~2.5% in Delta Air Lines (DAL).

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