Alaska Airlines is going to fly (ALK)

It's not on the earnings calendar, but Alaska Airlines will be reporting earnings pre-market on Thursday 18 July.

TLDR: I'm expecting a beat and high guidance. Other factors such as Alaska's market position and Delta's poor guidance reducing expectations for the industry make ALK poised for an earnings pop.

Positions: Calls. $40 and $42.5 split between a July 19 and August 16 expiry. The $42.5 Jul19 are absolutely regarded lottery tickets. Keep in mind these are not particularly liquid, and you may have to exercise or sell the contract at a 'discount' if they hit.

Analyst price targets range from $42 to >$70 with a median target ~$54. The stock could be seen as undervalued currently ($38.41) compared to these price targets.

With that out of the way, let's get to breaking down the thesis.

First – beating expectations. Anecdotally, as an occasional business traveler, I've been noticing more travelers and particularly more colleagues traveling. Presumably we aren't the only industry where travel is picking back up.
I'm west coast US based, so obviously will see more Alaska flights. But again, personal anecdotes, all my friends and colleagues fly either Alaska or Delta for their business travel.

Away from anecdotes, Alaska Airlines was heavily impacted by the Max grounding. Around $0.95/share based on Q1 reports. In fact, without the impact from the grounding, this indicates the company would have been back to profitability.
Boeing paid $162M in Q1 for damages, with ALK expecting to receive additional compensation moving forward.
While the press was certainly bad, any additional compensation should be a small buoy for Q2 results now that the immediate financial impact of the grounding has passed.

ALK has a history of surprise beats on expectations. I believe their lower than industry average CASM (cost/mile per seat), resolution to Max grounding, and increased Q2 travel will bring the company back to profitability and beat expectations.

Second, guidance.
The recent earnings report from Delta, DAL, may indicate trouble for the industry. DAL is suffering from a race-to-the-bottom in ticket prices and weak guidance due to it.
Indeed, the DAL report dragged down other airlines stocks, including ALK. It's my belief that ALK will not be as negatively impacted. In fact, this may have lowered expectations for the industry as a whole, increasing the impact of a surprise beat.

Why won't ALK face the same issue? DAL has a high CASM and their profits are driven by up-selling premium fares (PE, BC, FC). Projections for 2024 and reporting so far indicate air travel has recovered to pre-covid levels. People are flying more than ever before. However they are not paying for these premium fares.

In contrast, ALK has a lower CASM and in many segments they operate with little competition. More people flying these segments simply means more people flying ALK.

Another key here – ALK is a smaller player in the industry. They are rapidly expanding operations, and have announced new routes. These are mostly all winter travel routes targeting vacationers to Florida, Costa Rica, and Mexico. As well as Ski vacationers to Tahoe, Vail, and B.C.
(https://thepointsguy.com/news/alaska-airlines-18-new-routes/)
With many ticket sales for winter vacationers to be expected in Q3/Q4, I expect strong guidance from the company.

The wildcard here is the Hawaiian Airlines acquisition. With a response expected by August 5 from the DOJ, this will significantly impact both companies in the coming weeks. Initially investors in ALK reacted negatively to the acquisition, with the assumption being that ALK was paying too high of a premium. However the deal further expands ALK operations and opens more markets.
I see this acquisition as ALK cementing itself as a key, growing player in the industry, nipping at the heels of the big 4 airlines. Just know that it's unclear how the stock might react to the announcement.