Digging Into Stifel's 'Frequent Flyer' Monitor

In a report published Monday, Stifel analyst Joseph DeNardi discussed "frequent flyer" airline and air travel related events he is following.

Thoughts From Alaska Air Meetings

DeNardi hosted Alaska Air Group, Inc. ALK's management for a meeting and offered the following takeaway.

According to DeNardi, as the Alaska Air's rate of growth in Seattle begins to improve in the second and third quarter, investment sentiment is beginning to follow suit.

The analyst continued that company's management placed less of an emphasis on "what happens if the Delta Air Lines, Inc. DAL situation gets a lot worse and more on when do capacity trends begin to stabilize" while focusing on factors that it can control rather than what Delta may or may not do.

In addition, Alaska Air's preferred seating initiative is performing well based on initial results. The company began selling exit row seats and first row behind first class seats for $15 to $50 at the time of check-in, which is projected to generate $15 million in revenue in the first year. The analyst noted that the longer-term benefits are "more meaningful" and provide upside to current pricing strategy.

Finally, the company's hedging strategy remains unchanged as management uses call options 20 percent out of the money with a duration of 18 months out. The program costs $12 million to $15 million per year, marking a decrease from the $50 million cost from a few years ago.

North Atlantic Capacity Monitor

DeNardi noted that capacity on the North Atlantic increased approximately 6.2 percent year-over-year in the week ending May 31. This marked a return to the level of growth seen over the past several weeks as capacity trends are "ramping up for the summer" following long single-digit growth rates during the winter months.

Additional Thoughts

DeNardi is "encouraged" by Southwest Airlines Co LUV's CEO Gary Kelly's comments that it is reversing the most recent increase to its capacity guidance from approximately 7 percent to a range of 7-8 percent. The analyst noted that he suspected the company was "surprised" by how strongly investors disapproved of its continued capacity creep, and made the announcement to appease investors.

DeNardi also stated that the timing of Delta reaching an agreement with its pilots on a new contract is a "positive data point" for the industry and Delta specifically given management's confidence that it would reach a deal early as it has done in prior negotiations.

AIR CANADA ACDVF released "encouraging" financial metrics during its Investor Day presentation. The company is now targeting a ROIC of 13 to 16 percent from 2015 to 2018 and EBITDAR margins of 15 percent to 18 percent over the same time period.