Alaska Air's Increasing West Coast Competitive Pressure On Capacity Growth A 'Top Concern'

• Alaska Air Group, Inc. ALK shares have been on a downward trajectory and have lost 14 percent since December 21.
• Credit Suisse’s Julie Yates maintained a Neutral rating for the company, with a price target of $90.
• Capacity growth is likely to keep pressuring PRASM through 2016, Yates stated.

The rating for Alaska Air has been downgraded on January 7 from Outperform to Neutral due to concerns over competitive capacity acceleration in Q1 and Q2 as well as the company’s own capacity growth pressuring PRASM through 2016, analyst Julie Yates said.

She added that while Alaska Air continues to be a “great story” in the long term, with superior cost visibility and capital allocation discipline, there are near-term concerns regarding incremental PRASM pressure on account of faster growth in the company’s own network as well as from a ramp up by lower cost carriers.

The recent pullback in Alaska Air’s shares erases the relative premium at which they traded in 2015, despite PRASM underperformance. Yates pointed out that the stock may not be able to outperform again, despite “what is likely unit revenue underperformance” until at least the second half of 2016, since investors now have a better idea of competitive capacity trends for Q3 and Q4.

The analyst cited the “next wave of competitive capacity growth” in the West Coast and Seattle markets as the “top concern” for investors considering Alaska Air’s stock. Competitive capacity is expected to accelerate from 7% in Q4 to 15 percent in Q1, and is likely to grow in the low double digits in Q2, as compared to the earlier projection of 8 percent.