Alaska Air Group, Inc. (ALK): Good Value and Buyout Potential

The next airline M&A target?
Alaska was one of five carriers highlighted last year by American Airlines as a potential merger partner . With American now apparently set to merge with US Airways Group, Inc. (NYSE:LCC) as early as this week, some industry observers think that the recent period of airline consolidation is over. However, Alaska is a small enough carrier that it could probably merge with any of the three major carriers without causing major antitrust problems.

Moreover, the company’s strong position in Seattle makes it a very attractive acquisition target, particularly for Delta. Alaska currently carries approximately 52% of passenger traffic at Sea-Tac Airport . Delta is a distant second, with 11% of the market. Alaska and Delta already have a codeshare partnership, which allows passengers to connect in Seattle between Alaska and Delta flights with a single ticket. Delta is using this partnership to build Seattle into a major international gateway . Delta already flies nonstop from Seattle to Paris, Amsterdam, Tokyo-Narita, Osaka, and Beijing, and the airline plans to begin service to Tokyo-Haneda and Shanghai later this year.

Acquiring Alaska would allow Delta to take even better advantage of Alaska’s Seattle-based route network. Seattle is ideally located for flights to Asia, as it sits in the northwest corner of the continental U.S. Building a hub in Seattle could help Delta increase its market share in Asia, a market that is likely to experience higher growth than North America or Europe.

Conclusion
Alaska’s mix of business and leisure travel, and its strong position on the West Coast, have allowed the company to deliver results that are among the best in the airline industry. Nevertheless, the company trades for a very reasonable valuation of eight times expected 2014 earnings. Lastly, Alaska could be a potential buyout target, as control of the Seattle market would allow Delta (or another major carrier) to build a successful Asian gateway there. For all of these reasons, Alaska Air is a strong investment candidate, at present.

The article Alaska Air: Good Value and Buyout Potential originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg owns shares of Delta Air Lines, and is short Mar 2013 $14 Calls on Delta Air Lines. The Motley Fool owns shares of SPIRIT AIRLINES INC. (NASDAQ:SAVE)

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