Accelerate Strategy And 29% Premium Seats Will Expand International Reach

Key Takeaways

• Integration synergies and strategic expansion initiatives could enhance margins and diversify revenue streams, boosting profitability despite current demand challenges.
  
• Confidence in future valuation and potential per share growth is demonstrated through a substantial share buyback plan.
  
• Economic pressures and rising costs, coupled with uncertain demand, challenge Alaska Air Group's market share and revenue stability amid a landscape of potential financial instability.

Catalysts

Through its subsidiaries, operates airlines.

• Alaska Air Group is executing its Alaska Accelerate strategy, aiming to unlock $1 billion in incremental profit, which could positively impact future revenue despite current challenges in demand.
  
• Integration synergies from the acquisition of Hawaiian Airlines are tracking ahead of plan, contributing to a 7-point margin improvement, potentially improving net margins moving forward.
  
• The company is launching intercontinental flights, such as Seattle to Tokyo-Narita, to capture high-value international demand, which could enhance revenue and diversify earnings.
  
• Alaska Air Group plans to increase premium seat exposure on its fleet to 29% by next summer, aiming to drive higher-margin revenue through premium services.
  
• The company's commitment to a share buyback plan of $1 billion over the next four years indicates confidence in its valuation and potential for earnings per share growth as the buybacks are executed.

Alaska Air Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Alaska Air Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Alaska Air Group's revenue will grow by 9.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.9% today to 5.8% in 3 years time.
• The bearish analysts expect earnings to reach $948.4 million (and earnings per share of $8.33) by about July 2028, up from $361.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.4x on those 2028 earnings, down from 18.1x today. This future PE is lower than the current PE for the US Airlines industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 3.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.85%, as per the Simply Wall St company report.

Alaska Air Group Future Earnings Per Share Growth

Risks

• Alaska Air Group reported a GAAP net loss of $166 million in the first quarter of 2025, with an adjusted net loss of $95 million, which could impact investor confidence and earnings.
  
• The demand for air travel has diverged from the earlier strength, leading to a challenging and unpredictable landscape that may affect revenue forecasts and profit margins.
  
• The macroeconomic environment remains uncertain, with potential impacts on revenue; the company refrained from updating its full-year guidance, indicating possible future financial instability.
  
• Rising unit costs, particularly in the second quarter, driven by increases in wages and real estate, could pressure net margins despite attempts to stabilize expenditures.
  
• Economic pressures, potentially triggered by a recession, and increased competition in key markets such as San Francisco might adversely affect Alaska Air Group’s ability to maintain or grow market share and generate desired revenue.

Valuation

• The assumed bearish price target for Alaska Air Group is $49.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Alaska Air Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $83.0, and the most bearish reporting a price target of just $49.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $16.4 billion, earnings will come to $948.4 million, and it would be trading on a PE ratio of 7.4x, assuming you use a discount rate of 9.9%.
• Given the current share price of $53.88, the bearish analyst price target of $49.0 is 10.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.