Alaska Airlines to Investors: Revenue Is Soaring | The Motley Fool

So far, 2022 has been a rough year for U.S. airlines. Staffing shortages across the industry have led to numerous operational meltdowns. Training constraints, particularly for pilots, have made it hard to address these shortages. As a result, airlines have been forced to slash their flight schedules.

Meanwhile, oil prices are soaring because of rebounding travel demand, geopolitical factors, and years of low investment in the energy sector. The price of jet fuel hit a record high earlier this spring.

U.S. Gulf Coast Kerosene-Type Jet Fuel Spot Price, data by YCharts.

However, Alaska Air (ALK 3.14%) is navigating these challenges in impressive fashion. On Thursday, the Alaska Airlines parent raised its second-quarter forecast, as buoyant demand is helping the company more than offset higher fuel prices with fare increases.

Solid initial guidance

Back in April, Alaska Airlines projected that Q2 revenue would increase by 5% to 8% compared with the second quarter of 2019 despite operating 6% to 9% less capacity. At the midpoint, this guidance implied a 15% increase in unit revenue relative to 2019.

Alaska needed every bit of that projected revenue growth. As of late April, it estimated that adjusted nonfuel unit costs would jump 16% to 19% over the same period and fuel costs would average between $3.25 and $3.30 per gallon, up from $2.27 per gallon in Q2 2019.

Even with costs skyrocketing, Alaska Airlines entered Q2 on track to achieve a double-digit adjusted pre-tax margin for the quarter. Still, its pre-tax margin seemed likely to wind up near 10%, compared to the 15.8% figure it achieved for the same period three years ago.

Alaska Airlines planes parked in an airport gate area.

Image source: Alaska Airlines.

Revenue rockets higher with fuel prices

Fuel prices surged even higher in May. As a result, Alaska raised its fuel price estimate in its recent guidance update. It now expects to pay $3.65 to $3.68 per gallon on average this quarter, even after factoring in the benefit of its fuel hedges.

Fortunately, Alaska Airlines’ revenue forecast has improved faster than fuel prices have risen. The carrier now expects to generate 12% to 14% more revenue than it did in Q2 2019 on 7% to 9% less capacity. The updated forecast implies a roughly 23% unit revenue increase at the midpoint of the ranges.

Based on this guidance, Alaska Air appears likely to record an adjusted pre-tax margin of roughly 13% for the second quarter. That would be a huge accomplishment considering the magnitude of the recent oil price spike.

A great opportunity for long-term investors

Following the bullish investor update, Alaska Air shares rose 3% on Friday. Still, this left the low-fare airline stock trading below $50, down 28% over the past year. That translates to less than eight times the company’s 2019 adjusted earnings per share (EPS) of $6.42.

Clearly, investors are worried that turbulent economic conditions will keep Alaska Air’s profits under pressure for the foreseeable future. However, air travel demand is likely to remain buoyant well beyond 2022, as people catch up on travel. Additionally, Alaska is well positioned for high fuel prices, as it plans to upgrade more than a quarter of its mainline fleet to the ultra-efficient Boeing 737 MAX between 2022 and 2023.

In addition to offsetting fuel price increases, this rapid fleet transition will help Alaska Airlines reverse the recent jump in its nonfuel unit costs.

While there are no guarantees in investing (or life), Alaska Airlines has a good chance to grow EPS well beyond pre-pandemic levels over the next two years or so. That makes the recent dip in Alaska Air stock a fabulous buying opportunity for long-term investors.

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