Is Alaska Air Group, Inc. (ALK) Among the Worst Airline Stocks to Buy? - InvestingChannel

Is Alaska Air Group, Inc. (ALK) Among the Worst Airline Stocks to Buy?

We recently compiled a list of the 10 Worst Airline Stocks To Buy According to Short Sellers. In this article, we are going to take a look at where Alaska Air Group, Inc. (NYSE:ALK) stands against the other airline stocks.

The airline industry is one of the most crucial industries to the global markets and supply chains. It did suffer quite significantly over the last 4 to 5 years mainly due to the pandemic. However, in 2024, the airline industry is projected to achieve operating profits of more than $49 billion, which is supported by strong demand and pricing power, according to a PwC report from January.

Passenger numbers are rebounding to almost pre-COVID levels, although full recovery of lost growth may take longer. However, there are still a few challenges that the industry needs to overcome, including supply chain and production quality issues, which are expected to continue impacting aircraft deliveries throughout the year.

Trends in Advancement of the Airline Industry

According to PwC, generative AI is set to change the industry by improving efficiency and customer service. Additionally, 2024 is an important year for increasing the use of Sustainable Aviation Fuel (SAF), with goals to reach 5-10% SAF by 2030. However, large investments are necessary to create the needed infrastructure.

We also discussed the role of AI in the industry in our article 11 Worst Aviation Stocks to Buy According to Analysts. Here is an excerpt from the article:

“Like most industries of today, airlines are also implementing AI to improve the efficiency of their operations. According to an August report by CNBC, these companies are using AI for tasks like ground control, customer service, and optimizing flight routes.

American Airlines introduced its AI-powered “smart gating” system at its Dallas-Fort Worth control center. The tool automatically assigns gates to incoming flights, which cut runway taxi time by around 20%, or two minutes per flight, across five airports. The system also helps passengers, baggage, and crews make quicker connections, which improves overall efficiency.

Alaska is using AI to streamline flight paths and optimize aircraft turnaround times at gates. Its tool is described as “Waze for the skies,” and it uses AI to plan faster routes, which saves fuel and reduces delays. Additionally, the system monitors ground operations as it tracks when fuel, catering, and baggage trucks arrive and depart, which allows agents to address delays immediately.

United has implemented generative AI for customer service, especially during flight disruptions. The AI generates detailed, empathetic messages explaining delays, which has increased customer satisfaction by 4% since its rollout on 6,000 flights.”

North America Leading the Way

According to a KPMG report posted in January, the North American airline market has been the primary driver of global traffic growth and profitability, accounting for 56% of the IATA’s industry profit forecast for 2024. The region quickly recovered from the pandemic and achieved profitability in 2022, with transatlantic travel rebounding in the summer of 2023.

While low-cost carriers (LCCs) initially benefited from early domestic recovery, premium international travel demand has surged which favors the bigger airlines. The major carriers have seen strong demand for their premium services, which are driven by both leisure and business travelers. On the other hand, LCCs like Spirit and JetBlue have faced challenges, including softer demand, higher fuel and labor costs, and capacity constraints due to engine issues.

In June, IATA increased its profit forecast for global airlines in 2024 and now expects a net profit of $30.5 billion, which is higher than both the $27.4 billion expected in 2023 and the earlier 2024 forecast of $25.7 billion.

Some major expectations for 2024 include record revenue of $996 billion and 4.96 billion passengers, but ongoing supply chain issues are limiting aircraft deliveries. Cargo revenues are also declining from their pandemic highs but remain above 2019 levels.

IATA also highlighted the need for supply chain improvements and favorable public policy to support industry profitability and investments in sustainability.

Our Methodology

To select the 10 worst airline stocks according to short sellers, we used a Finviz stock screener to identify over 20 airline stocks. Next, we narrowed our list to 10 stocks with the highest short interest but were also the most popular among elite hedge funds, as of Q2 2024. Finally, these stocks were ranked in ascending order of their short interest.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A commercial passenger jet in the sky, performing its daily flight duties.

Alaska Air Group, Inc. (NYSE:ALK)

Short Interest as % of Shares Outstanding: 7.14%

Number of Hedge Fund Holders: 30

Alaska Air Group, Inc. (NYSE:ALK) is a Washington-based company that operates a diverse network of airlines through its subsidiaries. It runs through three main segments, Mainline, Regional, and Horizon.

The company provides air transportation services primarily using Boeing jets and serves passengers and cargo across the U.S. and extending to various destinations in Canada, Mexico, Costa Rica, Belize, Guatemala, and the Bahamas.

The company has faced significant challenges recently, especially following the incident involving Flight 1282 in January. A mechanical failure caused by a missing bolt on a door plug resulted in a serious issue for one of its new Boeing 737 MAX 9 aircraft, which led to operational disruptions and increased costs.

CEO Ben Minicucci has acknowledged improvements at Boeing but commented that the anticipated delivery of the 737 MAX 10 jets has been pushed back to mid-2026. The delay adds to the uncertainty regarding fleet expansion and modernization, which are critical for maintaining competitive advantage. It ranks 6th on our list of the worst airline stocks according to short sellers.

Labor relations have also presented hurdles for Alaska Air (NYSE:ALK). In February, flight attendants at the airline voted to authorize a strike mandate for the first time in thirty years.

According to the Association of Flight Attendants, the strike was a reflection of widespread demands from labor unions for increased wages, which coincided with ongoing contract negotiations for many U.S. cabin crew.

In August, a proposed three-year labor agreement, which included a 32% average pay increase and new provisions for boarding pay, was rejected by the flight attendants. The developments highlight the ongoing push for better compensation and working conditions across the airline industry, adding pressure to the company’s operational stability and financial performance.

On a more positive note, Alaska Air (NYSE:ALK) has made significant strides in expanding its market presence through strategic acquisitions. Recently, the company finalized a $1.9 billion purchase of Hawaiian Airlines after securing necessary approvals from the U.S. Department of Transportation.

The acquisition is expected to improve competition and benefit consumers by broadening access to both airlines’ networks. CEO Minicucci emphasized the potential for at least $235 million in annual synergies by the third year following the merger, which could strengthen the company’s financial outlook and operational efficiency. Additionally, the agreement includes commitments to maintain essential routes and uphold consumer protections, which will further enhance its appeal to travelers.

Overall ALK ranks 6th on our list of the worst airline stocks to buy according to short sellers. While we acknowledge the potential of ALK as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is promising and trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

 

Read Next: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

 

Disclosure: None. This article is originally published at Insider Monkey.

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