Will Rising Costs Dampen Alaska Air's Q3 Earnings?

Alaska Air Group ALK is slated to report third-quarter 2017 results on Oct 25, before the market opens.

Last quarter, the company delivered a positive earnings surprise of 0.4%. Also, the company has an impressive earnings history. It outperformed the Zacks Consensus Estimate in each of the preceding four quarters with an average beat of 4.8%.

However, recent weather-related disruptions have hurt the company severely. Hence, an earnings beat is quite unlikely to happen in Alaska Air's favor this quarter.

Factors at Play

Of late, Alaska Air has been lying low due to escalating costs. The increase in fuel costs is expected to limit the company's bottom-line growth in the third quarter. Fuel cost is projected to be $1.76 per gallon in the third quarter of 2017, reflecting an approximate 12% jump over the year-ago figure.

Evidently, the Zacks Consensus estimate for third-quarter has been revised downward 15.6% over the last 90 days.

Also in May, the pilots of Alaska Air Group's subsidiary, Horizon Air, had approved an amendment to the existing eight-year pay-related contract. This, in turn has spiked the labor costs, shooting up pilots' compensation following the amendment. This is likely to put further pressure on the company's bottom line in the third quarter.

Even though the Virgin America deal — the company acquired Virgin America in December 2016 — looks positive, we note that this transaction like any other merger, has integration risks attached to it. Similar to the previous quarter, merger-related costs are predicted to hurt Alaska Air's bottom line in the third quarter as well.

Due to the above-mentioned headwinds, shares of the company have lost 10.7% of its value in the last three months against the industry's 0.3% gain, over the same period.

However, the company's expansion initiatives are impressive. In August, the company announced a customer-friendly deal with Singapore Airlines. Accordingly, the two will form a codeshare agreement to allow sharing of flights, i.e., a passenger can avail any flight operated by either company covered under the contract, irrespective of the flight number. Also, from Sep 27 onward, members of Alaska Mileage Plan and Singapore Airlines KrisFlyer loyalty programs have begun earning miles on the flight.

Earnings Whispers

Per our proven model, a company needs the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — to increase the odds of an earnings surprise. However, that is not the case as highlighted below.

Zacks ESP: Alaska Air has an Earnings ESP of -3.40% as the Most Accurate estimate is pegged lower at $2.24 than the Zacks Consensus Estimate of $2.32. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter.

Zacks Rank: Alaska Air carries a Zacks Rank #5 (Strong Sell). We caution against all Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Alaska Air Group, Inc. Price and EPS Surprise

 

Alaska Air Group, Inc. Price and EPS Surprise | Alaska Air Group, Inc. Quote

Stock to Consider

Investors interested in the broader Transportation sector may consider SkyWest, Inc. SKYW, Norfolk Southern Corporation NSC and Expeditors International of Washington, Inc. EXPD as these better-ranked stocks comprise the right combination of elements to surpass earnings in their next releases.

SkyWest has an Earnings ESP of +1.03%. This Zacks #3 Ranked company will report third-quarter earnings numbers on Oct 25.

Norfolk Southern has an Earnings ESP of +0.67% and carries a Zacks Rank of 3 as well. The company will report third-quarter 2017 results on Oct 25.

Expeditors is also #3 Ranked with an Earnings ESP of +1.68%. The company will report third-quarter 2017 financial numbers on Nov 7. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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