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What Alaska Air Group Must Do to Expand Its Margins through Year End

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Analyst estimates

For 3Q16, analysts are estimating Alaska Air Group’s (ALK) EBITDA[1. earnings before interest, tax, depreciation, and amortization] to grow ~2.7% to $500 million with an EBITDA margin of 32%. For 4Q16, its EBITDA is expected to fall 3.3%. ALK’s EBITDA margins are expected to fall to 26% in 4Q16.

Alaska Air Group is expected to record fiscal 2016 EBITDA growth of 6% with an EBITDA margin of 30%. For 2017, analysts are estimating EBITDA growth to slow to 2.3% and Alaska Air Group’s margin to fall to 28%.

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Fuel costs

Declining oil prices have been the key reason for profitability improving for the airlines. Alaska Air Group had expected to maintain fuel costs at $2 per gallon for 2016 and 2017. Its peers Delta Air Lines (DAL), American Airlines (AAL), and United Continental (UAL) have similar fuel costs.

However, OPEC and Russia have recently agreed to cut production of crude oil, which resulted in crude oil prices rising to more than $50 per barrel. Given this scenario, it may be difficult for Alaska Air Group to maintain its expected fuel cost unless it can pass on the increased costs to customers.

Increased competition

Increasing competition in routes served by Alaska Air Group (ALK) could adversely impact its future margins. Delta Air Lines’s aggressive expansion in Seattle, Alaska Air Group’s largest market, has resulted in the cheapest fares among large airports in the US.

Investors should closely watch the airlines’ utilization in 2016 and analyst estimates for margins. Alaska Air Group forms 2.1% of the First Trust Industrials/Producer Durables AlphaDEX ETF (FXR) portfolio.

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