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Analysts Forecast Higher Revenue Growth for ALK in Next 2 Years

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Analyst estimates

It is important to look at analyst estimates, as they serve as an effective first screener for investors. They also act as a proxy for what is being priced into a stock.

For 4Q15, analysts are estimating Alaska Air Group’s (ALK) revenue to grow by 5.73%, higher than the growth seen in the last three quarters and leading to a full-year revenue growth of 4.39%. Analysts expect ALK’s revenue growth to increase to 5.67% and 7.8% for 2016 and 2017, respectively.

Key factors supporting analyst estimates are global economic growth and Alaska Air Group’s network expansion to previously unserved markets. Falling passenger yields and low fuel surcharges may subdue this growth.

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Passenger demand

According to the International Air Transport Association (or IATA), there is a strong correlation between growing economic growth and passenger travel demand. IATA expects passenger travel to grow by 6.9% on the back of a 3.6% growth in GDP. This is higher than the 6.7% growth projected for 2015.

For the past five years, Alaska Air Group’s demand has grown faster than the overall industry. This is in contrast to peers Delta Air Lines (DAL), American Airlines (AAL), and United Airlines (UAL).

For the full year 2015, Alaska Air Group (ALK) showed a 9.3% traffic growth. ALK’s sticky demand should continue to support its demand growth. The company was able to maintain its 50% market share in Seattle despite aggressive expansion by its peers.

Capacity expansion and price wars

Alaska Air Group added 20 new markets in 2015, growing its capacity by about 10.6%. This could help the airline’s revenue growth. The airline announced its plans to add capacity in markets where it sees strong, unfulfilled demand coupled with higher margins. In fact, ALK has seen better demand from new routes being continually added to its network. However, utilization fell slightly to 85.1% at the end of the year.

Declining load factors and unbridled capacity expansion resulted in pricing wars in the industry, which was the case seen throughout 2015. Along with falling fuel surcharge revenue for airlines, this pressurized passenger yields.

However, airlines seem to have learned from their past mistakes and most airlines are slowing down their capacity growth plans. Some airlines are actually cutting capacity, as the high industry concentration made the task easier. The first price hike of 2016 also shows that the price wars seem to have subdued.

The key growth factors would remain Alaska Air Group’s focus on higher ROIC markets, natural revenue streams, and new aircraft types.

Alaska forms 1.67% of the Industrials/Producer Durables AlphaDEX ETF (FXR).

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