Alaska Air Group’s ALK wholly owned subsidiary, Alaska Airlines, is benefiting from an increased air travel demand scenario. The company’s proactive efforts to expand its network are praiseworthy. However, ALK is grappling with high operating expenses and weak liquidity.

Factors Favoring ALK

The uptick in air travel demand is boosting ALK's top line, with consolidated traffic (measured in revenue passenger miles) rising by 8% to 16.97 billion in the third quarter of 2024. To meet this surge in demand, capacity (measured in available seat miles) grew by 6.8% to 19.84 billion. As traffic growth outpaced the expansion in capacity, the consolidated load factor (percentage of seat occupancy) increased by 0.9 percentage points, reaching 85.5%, compared to our estimate of 83.3%.

Alaska Airlines’ efforts to expand its network and connectivity are commendable, with five new nonstop routes between Las Vegas and San Diego, Las Vegas and Santa Rosa/Sonoma County, Los Angeles and Pasco, WA, and Reno, NV. It is also resuming nonstop service between Portland, OR, and Atlanta. To strengthen its presence on the West Coast, ALK is adding two new daily flights from Los Angeles, including the popular Los Angeles-Reno route and a new nonstop from Pasco to LAX, both operated with the Embraer 175 jet.

Moreover, the merger with Hawaiian Airlines, in which Alaska acquired Hawaiian Airlines for $18 per share in cash, valued at approximately $1.9 billion, provides a strong tailwind for ALK. This deal is expected to significantly boost ALK’s prospects.

Owing to such tailwinds, Alaska Airlines shares have risen 44.6% year over year compared with the industry’s growth of 43.9% in the same period.

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ALK: Key Risks to Watch

Alaska Airlines’ financial stability is challenged by soaring operating expenses and weak liquidity, influencing the company’s bottom line. In the third quarter of 2024, total operating expenses rose by 4% year over year. This surge in operating expenses is primarily driven by escalated labor costs.

Weak liquidity does not bode well for the company. ALK exited the September-end quarter with a current ratio (a measure of liquidity) of 0.60. A current ratio of more than 1 is always considerable as a current ratio of less than 1 indicates that the company does not hold sufficient cash to meet its short-term obligations.

ALK’s Zacks Rank

ALK currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Investors interested in the Zacks Transportation sector may consider Westinghouse Air Brake Technologies WAB and SkyWest SKYW.

Westinghouse Air Brake Technologies currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.  WAB has an expected earnings growth rate of 2.01% for the current year.

The company has an impressive earnings surprise history. Its earnings outpaced the Zacks Consensus Estimate in three of the trailing four quarters and missed once, delivering an average beat of 9.46%. Shares of WAB have risen 68.8% in the past year.

SkyWest currently sports a Zacks Rank #1 and has an expected earnings growth rate of 4.07% for the current year.

The company has an encouraging track record with respect to the earnings surprise, having surpassed the Zacks Consensus Estimate in each of the trailing four quarters. The average beat is 79.12%. Shares of SKYW have climbed 135% in the past year.

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