A High Flying Airline
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Airlines are widely considered one of the toughest industries to invest in, and for good reasons: a very aggressive competitive landscape, overcapacity in many sectors and cost pressures from fuel and other factors have brought many well known airlines to an almost disastrous situation. This kind of scenario, however, is where opportunities to buy high quality companies at attractive valuations usually surge due to excessive investor pessimism.
Alaska Air Group (NYSE: ALK) is the holding company for Alaska Airlines and Horizon Air, Seattle-based carriers that collectively serve over 90 destinations in the United States, Canada, and Mexico. Facing a very complex environment, the company's management knows it needs to create a competitive advantage around the business in order to sustain growth and profitability.
The company has built a competitive advantage based on operational performance and customer service as evidenced by being ranked the “Highest in Customer Satisfaction among Traditional Network Carriers” by J.D. Power and Associates for four consecutive years. There are several strategies which Alaska Air employs to differentiate itself from competitors.
The company offers an award-winning frequent flyer program, the Alaska Airlines Mileage Plan. Members can earn and redeem miles on Alaska, Horizon, and a network of 15 airline partners around the globe, including Delta Air Lines and American Airlines in the U.S. This mileage plan has earned recognition as the “Frequent Flyer Program of the Year” five times in the Freddie Awards. In addition, the company's Mileage Plan Visa card has been named “Best Loyalty Credit Card in the Americas” for two years running.
Alaska Air is also recognized as having industry leading on-time performance and other key operational metrics. It is the only airline in the country with a Baggage Service Guarantee and recently launched new mobile applications for Android and iPhone smartphones that provide customers with new functionality aimed at making their travel experience more convenient and hassle-free.
Alaska Air aims to provide a high quality on-board experience to passengers. For example, the company's fleet of 737 aircraft is equipped with on-board Wi-Fi capability. With 98 percent of the fleet equipped, Alaska is an industry leader in this area. The Company also continues to focus on serving high-quality food and beverage products on board, in another effort to differentiate itself from competition.
These strategies have paid good results over the last years; the chart from the company's annual report shows comparative performance between Alaska Air, the S&P 500 index and the Dow Jones US airlines index for the last five years. Airlines in general have done much worse than a market index like the S&P 500, but Alaska Air performed well above both airlines and the markets.
Looking forward, the company looks to be in a good position to keep outperforming its peers in the following years: comparing Alaska Air with other carriers like Lan (NYSE: LFL), Ryanair (NASDAQ: RYAAY), Southwest Airlines (NYSE: LUV) and Copa (NYSE: CPA), Alaska comes out like the cheapest alternative in the sector. Alaska Airlines is the company with the lowest forward P/E and Price to Earnings growth ratio by a wide margin in the table.
Considering its outstanding track record, Alaska Airlines probably deserves to trade at a premium versus competition, but instead it’s much cheaper when looking at forward valuation ratios. This airline seems well positioned to keep flying above the competition in the following years.
acardenal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.