Higher Fuel Costs For Alaska Air Offset By Top-Line Improvement

Reviewing the third-quarter results of Alaska Air Group, Inc. (NYSE: ALK), Bank of America Merrill Lynch said it is only making modest changes to its model, as higher fuel costs would be offset by higher 2017 capacity than it previously expected and sequential revenue improvement.

Analyst Andrew Didora noted that the airline reported better-than-expected third-quarter earnings per share, with the outperformance mainly due to a lower tax rate. For the fourth quarter, the analyst forecasts revenue per available seat mile to improve sequentially to -1.3 percent from -4.4 percent in the third quarter, thanks to lower capacity.

Bank of America Merrill Lynch termed the 7 percent capacity growth projected by the company for 2017 as disappointing, as it had expected a marked slowdown from the 8.5 percent increase in 2016. On the other hand, the firm noted that Southwest Airlines Co (NYSE: LUV) expects 2 percent capacity growth compared to flat trend seen by American Airlines Group Inc (NASDAQ: AAL).

The firm sees the DoJ clearance for Alaska's VA deal as the last hurdle for the closure of the deal. The firm also does not expect a spike in interest expense levels due to the low average interest rate for the debt it raised for funding the deal.

With fuel moving higher, the firm believes multiples should expand. Accordingly, the firm raised its price target for Alaska to $78 from $72, while reiterating its Neutral rating.

At last check, shares of Alaska Air were down 0.93 percent at $74.59.

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