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Alaska Air Group Grapples With Cost Woes: Time to Dump?

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We have issued an updated research report on Alaska Air Group, Inc. ALK. The stock has been downgraded to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold). Going by the Zacks proven model, the Sell-rated stocks (#4 or 5) are likely to underperform the broader market over the next one to three months.

Reasons Behind the Downgrade

High costs have been putting pressure on the company’s bottom line for quite some time, and the fourth quarter of 2017 was no exception. Moreover, rising costs are likely to hamper first-quarter 2018 results too. Notably, the carrier expects cost per available seat mile (CASM) excluding fuel and special items in the ongoing period to rise approximately 6% year over year.  

Additionally, economic fuel cost per gallon is anticipated to grow 18% in the first quarter. Apart from these, high labor and fuel costs plus expenses pertaining to the Virgin America acquisition might hit the bottom line going forward.

The company has also been struggling on the unit revenue front. Last quarter, passenger revenue per available seat mile (PRASM: a key measure of unit revenues) decreased 5.1% year over year. A continuous below-par performance of this key metric will probably affect the stock significantly.

The negativity revolving around the stock can be gauged from the Zacks Consensus Estimate for current-quarter earnings being pegged at a loss of 13 cents per share. The consensus mark has been lowered from the previous earnings estimate of 47 cents in the last 60 days.

The company’s unimpressive Momentum Score of F further highlights its short-term unattractiveness.

Due to these headwinds, shares of the company have declined 12.8% in the last three months, underperforming the industry’s gain of 2.3%.


Stocks to Consider

Some better-ranked stocks in the airline space are International Consolidated Airlines Group SA ICAGY, AZUL SA AZUL and American Airlines Group Inc. AAL. While International Consolidated Airlines sports a Zacks Rank #1 (Strong Buy), AZUL and American Airlines carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of International Consolidated Airlines, AZUL and American Airlines have rallied more than 11%, 13% and 18%, respectively, in the last six months.

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