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Can Alaska Air’s Margins Expand in the Rest of 2016?

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Analyst estimates

For 2Q16, analysts are estimating Alaska Air’s (ALK) EBITDA (earnings before interest, tax, depreciation, and amortization) to increase by 9.5% to $4.9 billion with an EBITDA margin of 33%. EBITDA margins are expected to increase slightly to 33.7% in 3Q16 and then decline 25% in 4Q16.

Alaska Air is thus expected to record 2016 EBITDA growth of 7.4% with an EBITDA margin of 30%. For 2017, analysts are estimating EBITDA growth to slow down to 5% and EBITDA margins to decline to 29%.

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Falling fuel costs

Declining crude oil prices have been the key reason for profitability improving across airlines. However, Alaska Air doesn’t expect any more fuel savings and expects to maintain fuel costs at $2 per gallon for 2016 and 2017. Peers Delta Air Lines (DAL), American Airlines (AAL), and United Continental (UAL) have similar fuel costs.

Analysts are also estimating that the airline cycle has peaked, and thus they don’t expect ALK to see significant incremental benefits from fuel costs. However, the greater risk is from increasing crude oil prices if the airline can’t pass them on.

Fuel prices have declined significantly, and it’s only a matter of time before crude oil bounces back. In fact, analysts may already be factoring this in since they expect EBITDA margins to decline in 2017. However, if fuel prices fall further, analysts may revise their estimates upward.

Increased competition

Increasing competition in routes served by Alaska Air will adversely impact ALK’s future margins. Delta’s aggressive expansion in Alaska Air’s largest market—Seattle—has resulted in the cheapest fares between large airports in the United States.

Investors should thus closely watch Alaska Air’s utilization in 2016 and analyst estimates for its margins.

Investors can gain exposure to airlines through the iShares Transportation Average ETF (IYT). IYT holds 5.4% in Alaska Air (ALK), 4.7% in United Continental (UAL), 4.3% in Delta Air Lines (DAL), 3.9% in Southwest Airlines (LUV), 3.6% in American Airlines (AAL), and 1.9% in JetBlue Airways (JBLU).

Alaska also forms 0.53 of the SPDR Russell 1000 Momentum ETF (ONEO).

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