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Alaska Air posts good performance post-acquisition, stock holds $55 PT at Barclays

EditorIsmeta Mujdragic
Published 11/01/2024, 11:58 AM
ALK
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On Friday, Barclays maintained an Overweight rating and a $55.00 price target for Alaska Air Group Inc. (NYSE: NYSE:ALK), following the company's better-than-expected third-quarter results. The results come on the heels of the airline's recent acquisition of Hawaiian Airlines, which has contributed to a more favorable revenue and margin outlook for the fourth quarter.

Alaska Air's management has indicated improved consolidated unit revenue performance for the fourth quarter, which is expected to enhance margins for the legacy Alaska business and bring Hawaiian Airlines close to break-even. This marks a significant turnaround from the substantial operating losses experienced the previous year. The improved outlook is attributed in part to lower competitive capacity growth in the industry.

The significant margin improvement for Hawaiian Airlines is seen as a result of overcoming several challenges, including the grounding of A321 aircraft due to GTF engine issues, the introduction of B787 and A330F aircraft to the fleet, and the recovery from reduced travel to Maui caused by wildfires.

Additionally, Alaska Air's third-quarter financials benefited from the lack of a finalized flight attendant labor contract within the legacy network. The absence of an agreement meant that the company did not accrue for anticipated higher wage rates, which positively impacted non-fuel unit costs by approximately 2%.

Barclays anticipates that a revised labor agreement will eventually be reached, which is expected to increase costs at that time.

Looking ahead, Alaska Air's management has hinted at the possibility of revealing increased synergy targets from the Alaska-Hawaiian merger at the upcoming analyst meeting in December. Barclays has updated its pro-forma model for Alaska-Hawaiian to reflect the third-quarter results and remains positive about the company's prospects for 2025, maintaining the $55 price target.

In other recent news, Alaska Air Group has been the subject of several noteworthy developments. The company's second-quarter earnings report showed a GAAP net income of $220 million and an adjusted net income of $327 million.

The recent merger is expected to dilute Alaska's earnings by 22% in 2025, but Melius Research has expressed optimism that Alaska's management can improve Hawaiian's fundamentals. In line with this, Alaska Air Group launched a $1.5 billion financing initiative backed by its customer loyalty program, with the proceeds intended for redeeming debts from the merger and for general corporate purposes.

Alaska Air Group also issued $1.25 billion in senior secured notes and established a $750 million senior secured term loan facility. These strategic financial maneuvers are part of the company's efforts to manage its debt profile.

In terms of analyst ratings, Susquehanna maintained a Neutral rating on Alaska Air Group shares but increased its price target to $45. TD Cowen, meanwhile, reduced its price target to $50 but maintained a Buy rating. Finally, Barclays initiated coverage on Alaska Air Group, assigning the stock an Overweight rating and setting a price target of $55.

These ratings reflect recent developments in the company's financial position and future outlook.

InvestingPro Insights

Alaska Air Group's recent performance and future outlook align with several key insights from InvestingPro. The company's net income is expected to grow this year, which is consistent with the improved revenue and margin outlook mentioned in the article. This positive trend is further supported by 10 analysts revising their earnings upwards for the upcoming period, as noted in the InvestingPro Tips.

The company's financial health appears robust, with a P/E ratio of 12.6 for the last twelve months as of Q2 2024, indicating a relatively attractive valuation compared to its earnings. This is particularly noteworthy given the strong return over the last three months, with the stock price showing a 31.84% total return in that period.

InvestingPro Tips also highlight that Alaska Air operates with a moderate level of debt, which could be beneficial as the company integrates Hawaiian Airlines and pursues synergies from the merger. For investors seeking more comprehensive analysis, InvestingPro offers 12 additional tips for Alaska Air Group, providing a deeper understanding of the company's financial position and market performance.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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