Alaska Air: Held Back By Post-Merger Turbulence

Picture Courtesy: International Association of Machinists and Aerospace Workers

Alaska Air Group, Inc. (NYSE:ALK) owns Alaska Airlines and Horizon Air along with McGee Air Services, an aviation services provider. Serving mainly the West Coast of the US, ALK has its largest number of departures from Seattle, Portland and the Bay Area where it competes with United Continental Holdings, Inc. (NASDAQ:UAL)-owned United Airlines and Delta Airlines, Inc. (NYSE:DAL).

In 2016, ALK fully acquired its premium-branded competitor, Virgin America Inc. (NASDAQ:VA) in an all-cash deal worth $2.6 bn, combining its presence in Pacific Northwest with VA’s route network mainly based in California. Despite becoming the fifth largest US carrier post-merger in terms of passenger capacity, ALK’s share price has declined by c.29.6% since the merger announcement in April 2016 cf. c.8.6% gain of NYSE ARCA Airline Index for the corresponding period (^XAL).

With operating margins contracting by nearly two thirds from 2016 to 2018, the management time and effort spent along with expenses incurred on the integration of the two airlines are to blame for the under-performance. Having completed 95% of the integration by Q4 2018, the forecast $330 mn revenue expansion for 2019 from synergistic benefits and revenue initiatives justifies the company’s premium valuation compared to peers.

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Disclosure: I/We have no investments in the stocks mentioned in the above article and don’t intend to open any within the next 72 hours. I wrote this article for myself, and it expresses my opinion. I/We receive no compensation, nor do I/We have any business relationship with any companies whose stocks are mentioned in the article.

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