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Can Alaska Air Achieve Its 2017 Revenue Growth Target?

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Analyst estimates

In 1Q17, analysts estimated that Alaska Air Group’s (ALK) revenue would grow 32.2% YoY (year-over-year) to $1.8 billion. The company reported a slightly lower growth of 29.8% YoY to $1.7 billion.

Now, for 2Q17, analysts are estimating Alaska’s revenue to grow 40.0% YoY to $2.1 billion. Its 2017 revenue growth is estimated to be 36.9% YoY—slightly slower than its previously estimated growth of 37.1% YoY. This would mean total revenues of $8.1 billion for 2017.

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This abnormally high revenue growth is due to Alaska Air’s acquisition of Virgin America in December 2016. The 36.9% growth figure includes organic as well as inorganic growth, but investors will likely focus on the organic growth, as it represents the company’s ability to grow going forward and has the potential for mispricing. The benefits of the inorganic growth have long been priced into the stock.

Alaska is expecting to report organic revenue growth of 7% YoY for 2Q17. According to the Reuters consensus estimate, analysts are expecting 8.5% organic growth, and the management’s forecast for organic growth is higher than the growth it has been able to report for the past two years.

However, the data released so far in 2017 shows that Alaska may be on the path to achieving this growth. Its traffic growth was far higher than its capacity growth in the first two months of the quarter, and unit revenue trends are looking up. In April, Alaska’s RASM (revenue per available seat mile) increased by 5.6% YoY to 13.37 cents, and in May, it rose 3.2% to 12.99 cents.

Outlook

Alaska Air is thus expecting its unit revenues to increase in the second quarter, but these are expected to decline in the second half of 2017, due to Alaska’s expected double-digit capacity growth.

Investors can gain exposure to airlines through the iShares Transportation Average ETF (IYT). IYT has 5.8% of its portfolio in Alaska Air (ALK), 4.65% 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).

Continue to the next part of this series to learn about Alaska’s increased labor costs.

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