Several years ago, when my children were just learning about geography, I was spinning around a globe and showing them different parts of the world. They were enamored.
It wasn’t just in the typical way a globe makes everything look so close together. Or finding your actual home on the map. It was the fact that they had yet to hear of many of these places.
My son Hank asked if Bhutan was pronounced: “button.” My daughter Julia was delighted that Madagascar, a popular kids' movie at the time, was a real place you could visit!
I showered them with stories about Austria and Morocco; the former is part of my heritage, and the latter is where I spent my honeymoon. I've visited both, and some of my best memories are rooted in them.
So I came up with a wild idea…
“Kids, when you turn 10, you can pick anywhere in the world you’d like to go, and we’ll go. So start thinking about it now.”
They thought fast.
Julia, who is by far the more impulsive one, immediately shouted, “Paris!” She loves art and pastries and wanted to see the Mona Lisa and the Eiffel Tower. That choice did not surprise me one bit.
“Done deal,” I said.
On the other hand, Hank is far more methodical and took a few weeks to study the globe and research. Bleary-eyed, sipping coffee and making eggs for their breakfast before school one morning, Hank came up to me.
“Let’s go to Alaska,” he said, very matter-of-factly.
The Last Frontier
Alaska, eh?
I didn’t see that coming at all. I had pegged Hank as a Hawaii or South America kind of chap.
But I was impressed by his sense of adventure, and now he turned ten, and we totally went to Alaska!
It was amazing…
We flew into Anchorage, which left much to be desired, but my father, son, and I took the Alaskan railroad all the way to Denali State Park — one of the seven summits and the highest peak in North America.
Here’s a view from the trail:
We also managed to spend a couple of days in Talkeetna, which I highly recommend. It’s a small town of just a few hundred people – all extremely friendly and welcoming. Talkeetna is so small and quirky that it had a cat – Mayor Stubbs – as its mayor for over ten years.
Hank and I took an ATV into the Alaskan wilderness to visit several friendly homesteaders that lived off the grid. They were expert fishermen, hunters, and carpenters who built their own remote homes far from society. Everyone remarked that there was no place they’d rather live and couldn’t imagine returning to their old day jobs as doctors, lawyers, and college professors.
Overall, Talkeetna was a delight and our favorite stop on the trip. Plus, it hosts a number of helicopter and small plane flights to the surrounding glaciers.
Speaking of flights, that’s really what I wanted to talk to you about today: investing in them.
Alaska Air Group, Inc (NYSE: ALK)
While researching flights for the trip, it occurred to me that Alaska Air Group, Inc. could be a very compelling stock.
As we all know, the coronavirus pandemic has continued to beat down airline stocks as flights have been grounded worldwide. Look no further than the hundreds of Southwest cancellations that ruined the Christmas holiday for thousands of people.
Alaska Air Group is well-regarded as a fundamentally stable company with a niche market it works within and plenty of interested travelers waiting in the wings as travel opens up even more over the next year.
It’s already happening: U.S. travel has rebounded almost to pre-pandemic levels. The problem has been staffing issues. Alaska Air, however, hired 8,000 employees last year and plans on hiring another 3,500 this year. They also sport one of the best hiring packages in the industry, with employees earning the largest performance bonus payout in company history last year – adding an average of 10.5% on top of salaries. That’s nearly six weeks' worth of pay.
No wonder they aren’t seeing the staffing issues that have plagued companies like Southwest.
There is no denying that the pandemic wreaked havoc on airline stocks over the last three years. While most major airlines saw a little “recovery” bounce, Southwest, American, and Delta have all dropped 36%, 41%, and 32%, respectively. Alaska Air Group dropped 20% during that period as well.
However, Alaska Air Group is well-regarded as a fundamentally stable company. It has a $6.7 billion market cap — half the size of American Airlines and four times smaller than Southwest. It is meaner and leaner than its larger competitors.
This showed during their Q4 earnings call. Here are a couple of highlights:
- Generated full-year revenue 10% above 2019 levels, doing so on 9% less capacity
- Fourth quarter revenues totaled $2.5 billion. That's up 11.3% versus the fourth quarter of 2019
- An industry-leading 7.6% full-year adjusted pre-tax margin (ALK’s margins have ranked first in the industry for 11 of the last 13 years)
- Finished 2022 with one of the industry's best completion and on-time performance rates
- Earnings guidance of $5.50 to $7.50 per share, which would return the company to 2019 EPS levels
So despite a 9% drop in capacity, the company managed to put together a very solid 2022 and should only pick up momentum from here. In the first quarter alone, flying capacity is expected to rise to 14%, and the full-year capacity is expected to increase from 8% to 10%.
Buy the Ticket, Take the Ride
Alaska has also announced plans to replace all its Airbus A319s and A320s with Boeing 737 MAX 9s. Those planes have almost 20% better seating capacity and 25% less fuel burn. That will help the company keep its best-of-class margins in the future.
The company also reported upticks in their more expensive seats: the first class was up 19%. and the premium class was up 14% versus the fourth quarter of 2019. That means travelers trust the airline with the service and attention that comes with those expensive seating options.
I believe that the airline will be somewhere near pre-pandemic levels by the middle of the year. And I’m not alone: of all of the stocks on the S&P 500 that are rated a “buy” by analysts, Alaska Air Group seems to have quietly become the darling of them all. If you average out all the ratings, Wall Street has a 50% upside for the company, with 93% of analysts calling it a buy.
Like any airline, there can be volatile times, so I’m giving Alaska Air Group a solid long-term buy rating with expectations of short- and long-term gains.
In other words, “Buy the Ticket. Take the Ride.”
Godspeed,
Jimmy Mengel
The Profit Sector
Follow me on Twitter @mengeled.
