Acquisition Of Hawaiian Airlines Will Unlock Significant Synergies And Expand Global Reach

Key Takeaways

• Integration with Hawaiian Airlines and network expansion are key strategies to boost revenue and earnings growth through synergies and international market reach.
  
• Strategic initiatives like the Alaska Accelerate plan and a share repurchase program indicate confidence in future performance and aim to enhance customer loyalty and shareholder value.
  
• Acquisition integration risks, rising fuel costs, delivery delays, and labor challenges threaten margins, while reliance on premium revenue faces economic demand uncertainties.

Catalysts

Through its subsidiaries, operates airlines.

• The integration of Hawaiian Airlines provides significant synergy opportunities, potentially unlocking $300 million in synergies and $1 billion in incremental pretax profit over the next three years, driving future earnings growth.
  
• Alaska Air Group's Alaska Accelerate strategic plan focuses on maximizing scale, relevance, and loyalty, which includes expanding premium products and experiences, likely to improve revenue and net margins by enhancing customer retention and satisfaction.
  
• The newly authorized $1 billion share repurchase program demonstrates management's confidence in future performance and could significantly drive earnings per share growth.
  
• The expansion of the network, including new routes such as Seattle to Tokyo, supports international market growth, enhancing revenue potential through expanded customer reach.
  
• Enhanced loyalty programs and strength in managed corporate travel are driving strong cash flow and revenue growth, suggesting future growth in market share and earnings stability.

Alaska Air Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alaska Air Group's revenue will grow by 11.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.4% today to 7.6% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $10.09) by about April 2028, up from $395.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.8x on those 2028 earnings, down from 14.0x today. This future PE is lower than the current PE for the US Airlines industry at 8.4x.
• Analysts expect the number of shares outstanding to decline by 3.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

Alaska Air Group Future Earnings Per Share Growth

Risks

• The acquisition of Hawaiian Airlines poses integration risks, including potential challenges in achieving planned synergies and cost efficiencies, which could impact future earnings.
  
• Rising fuel prices are affecting the core business, and the company's projections depend on successful mitigation, which could impact margins if not achieved.
  
• The reliance on premium cabins and corporate travel for revenue growth may be risky if consumer demand changes or there is an economic downturn, impacting revenue forecasts.
  
• Potential delays in new aircraft deliveries from Boeing could constrain capacity growth and disrupt the revenue-generating potential of planned expansions.
  
• The high cost and complexities of aligning collective bargaining agreements and potential labor unrest during this transition may lead to increased operational costs, affecting net margins.

Valuation

• The analysts have a consensus price target of $68.489 for Alaska Air Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $16.3 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 8.5%.
• Given the current share price of $44.94, the analyst price target of $68.49 is 34.4% higher.
• 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.