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Will High Costs Ail Alaska Air Group's (ALK) Q1 Earnings?

Zacks Equity Research
Updated

Alaska Air Group, Inc. ALK is slated to report first-quarter 2018 results on Apr 23, before the market opens.

Last quarter, the company posted in-line earnings and better-than-expected revenues. The bottom line plunged massively on high costs while the top line showed substantial improvement on higher passenger revenues.

Let’s see how things shape up for this earnings season.

Factors at Play

Persistent high labor and fuel costs are likely to hurt the carrier’s bottom line in the first quarter. Notably, the carrier expects cost per available seat mile (CASM) excluding fuel and special items to rise approximately 5% in the quarter. While economic fuel cost per gallon is anticipated to grow 19.5%.

The Zacks Consensus Estimate for first-quarter CASM excluding fuel is pegged at 9 cents, above 8 cents, reported a year ago. While the consensus mark for economic fuel cost per gallon stands at $1.97, higher than $1.78 in the first quarter of 2017.

The issue of capacity overexpansion has been ailing the company for quite some time now and might hamper its first-quarter results as well. Notably, load factor (% of seats filled by passengers) declined during the January-March period. The metric contracted 50 basis points, 80 basis points and 230 basis points in March, February and January, respectively. Load factor fell in each of these months due to traffic rise outpacing capacity growth.

Expanding capacity implies increase in costs and cheap air tickets. Low air fares reduce unit revenues of carriers, thus affecting the top line. Capacity is anticipated to expand around 8% in the to-be-reported quarter.

The carrier has been struggling on the unit revenue front, which might further affect results in the quarter. The Zacks Consensus Estimate for first-quarter passenger unit revenues-mainline stands at 9 cents, lower than the previous quarter’s 10 cents.

However, the company’s efforts to reward shareholders through dividends and share buybacks are impressive. During the first quarter, it announced a dividend hike of 7% to 32 cents per share, higher than the previous count of 30 cents.

Earnings Whispers

Per the Zacks proven model, a company needs the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase the odds of an earnings surprise. However, that is not the case here as highlighted below.

Zacks ESP: Alaska Air has an Earnings ESP of -15.04% as the Most Accurate estimate is pegged at a loss of 17 cents per share while the Zacks Consensus Estimate stands at a loss of 15 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Alaska Air carries a Zacks Rank #3, which increases the predictive power of ESP. However, a company needs to have a positive ESP to be confident about an earnings surprise. Hence, this combination leaves surprise prediction inconclusive.

We caution against Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Alaska Air Group, Inc. Price and EPS Surprise

 

Alaska Air Group, Inc. Price and EPS Surprise | Alaska Air Group, Inc. Quote

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Stock to Consider

Investors interested in the broader Transportation sector may consider stocks like American Airlines Group Inc. AAL, JetBlue Airways Corporation JBLU and Expeditors International of Washington, Inc. EXPD as these possess the right combination of elements to deliver an earnings beat this time around.

American Airlines has an Earnings ESP of +3.35% and a Zacks Rank of 3. The company is scheduled to announce first-quarter results on Apr 26.

JetBlue Airways is a #3 Ranked player and has an Earnings ESP of +4.28%. The company is slated to release first-quarter financial numbers on Apr 24. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Expeditors is a #3 Ranked player and has an Earnings ESP of +2.09%. The company will report first-quarter earnings figures on May 8.

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