It is no secret that Calyon Securities Analyst Ray Neidl does not like what Horizon is doing to Alaska Air Group’s bottom line, having advised not only a restructuring of the regional carrier, but suggested that it might be time for Alaska to spin off the operation. “Horizon Air appears to have greater profit problems than we thought which may be deeper and take longer to fix than expected,” he said in his report on the major carrier. He also noted that CASM reductions are taking longer than expected, adding Alaska’s recent price hikes are questionable in the hotly competitive West Coast markets where fuel prices continue to rise. Related Story
“We believe there is much uncertainty in the company's outlook, especially in its ability to raise prices even in the current strong demand environment,” said Neidl. “The intense competition is reinforcing a weak revenue yield environment in the company's territory. Investors should note that the carrier's route structure means a higher degree of seasonality than other carriers. Our assessment could quickly change depending on a variety of factors including oil prices, the ability to pass ticket price increases, and the timing and degree to which management can address the problems at Horizon Air. The management is starting by reducing capacity next year, which may be a sign that the fix will take longer and be deeper than we originally thought. The company has no plans to spin off the troubled unit since it believes Horizon is an important tool in developing routes.”
As for the rest of the industry, he cited fuel prices as the main risk, not only at airlines but in the economy as a whole. “The silver lining to rising oil prices is that it is forcing even more discipline on the carriers to reduce domestic capacity, at least among the network airlines, giving them greater pricing power.” However, he said the low-cost carriers are throwing a wrench into his outlook because they are adding too much capacity in a high-fuel-cost environment which forces down overall fare structures for everyone. “In addition, we believe Southwest Airlines, generally assumed to be the industry price leader domestically, will at some point, be forced to raise prices despite their remaining relatively strong fuel hedge position.”
For 2008, while threats of a recession exist, he does not see it happening. He predicted airlines would continue to benefit from strong domestic demand and the liberalization of international travel routes. “However, we believe there is going to be a breaking point somewhere where high oil prices will reverse the positive earnings trends of the industry and that is the concern among airline managers as well as investors,” he said. “The guidance given by the carriers so far has been cautious but they remain generally optimistic.”