Intercontinental Flights And Hawaiian Integration Will Open 12 Global Destinations

Key Takeaways

• Expanding into international markets and premium seat offerings could drive higher revenue and improve net margins through diversified demand sources.
  
• Integration and cargo operational growth enhance efficiency and earnings, while a substantial share buyback program could bolster EPS and reveal undervalued potential.
  
• Volatile macroeconomic conditions and fuel cost uncertainties threaten revenue stability and profitability amid competitive market pressures and integration challenges with Hawaiian operations.

Catalysts

Through its subsidiaries, operates airlines.

• Alaska Air Group plans to launch its first intercontinental flights from Seattle to Tokyo-Narita and aims to serve at least 12 intercontinental destinations by 2030. This expansion into international markets could drive high-value demand and increase revenue.
  
• The integration of Hawaiian Airlines is ahead of schedule, with synergies tracking slightly above plan and strong performance in Hawaiian assets boosting operational efficiency and net margins.
  
• The company is set to expand its premium seat offerings, aiming to increase premium seat exposure to 29% by next summer. This could enhance revenue and improve net margins given the higher yields from premium seats.
  
• Alaska Air Group's cargo operations are expanding, with a 36% year-over-year increase in cargo revenue and new Amazon A330 freighters. As cargo operations ramp to full capacity, this diversifies revenue streams and can contribute to overall earnings growth.
  
• The commitment to accelerating a $1 billion share buyback program over the next four years, coupled with the belief that the stock is undervalued, could lead to EPS growth and supports the view that the market may not yet fully recognize the company's forward potential.

Alaska Air Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alaska Air Group's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 8.1% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $9.06) by about April 2028, up from $361.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $939.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.5x on those 2028 earnings, down from 14.9x today. This future PE is lower than the current PE for the US Airlines industry at 8.5x.
• Analysts expect the number of shares outstanding to decline by 3.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.57%, as per the Simply Wall St company report.

Alaska Air Group Future Earnings Per Share Growth

Risks

• The company's reported GAAP net loss of $166 million and adjusted net loss of $95 million in the first quarter indicates financial struggles, which could put pressure on future earnings.
  
• The volatile macroeconomic environment has led to a downturn in air travel demand, complicating revenue predictions and posing risks to maintaining stable revenue growth.
  
• The competitive landscape, particularly in key markets like San Francisco, poses risks to market share and could lead to pressure on margins and revenues.
  
• High levels of uncertainty regarding fuel costs and refining margins add volatility to operating expenses, impacting net margins and profitability.
  
• Integrated operations and achieving efficient synergies between Alaska and Hawaiian are crucial yet time-sensitive, and any delays could impact cost savings and earnings growth.

Valuation

• The analysts have a consensus price target of $62.823 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 $83.0, and the most bearish reporting a price target of just $49.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $16.8 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $43.7, the analyst price target of $62.82 is 30.4% 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.