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Why Wall Street Loves Alaska Airlines

SEATTLE ( TheStreet) -- Wall Street has found a new airline to love.

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"Believe It Or Not, An Airline That Earned Its Cost of Capital; Bravo!," was the title of CRT Capital Group analyst Mike Derchin's report on Alaska (ALK - Get Report), after the carrier reported fourth-quarter results, which showed a return on invested capital of 10.7% and also beat estimates. Moreover, Alaska leads the airline industry with an 11.1% pre-tax margin.

Alaska shares are up about 6% this year after rising 62% in 2010.

But it's not just financial metrics that are benefiting perceptions of Alaska. Mergers have been reducing the number of airlines; once the merger between Southwest (LUV - Get Report) and AirTran (AAI) is completed, Alaska will become the seventh biggest U.S. carrier. That brings enhanced visibility so that, essentially, Alaska is getting more notice exactly at the time when its performance has reached a peak.

"We've been the small guy forever," said CEO Bill Ayer, in an interview. "We've had lots of competition (and) done really well against the competition. The future has never been brighter than at this moment. "
Alaska Airlines CEO Bill Ayer

Added CFO Brandon Pedersen, in an interview: "We're a little bit separated from Wall Street, out here in the Pacific Northwest. But Wall Street is starting to recognize our performance." He said that generating a 10% return on invested capital is a longtime goal that the company finally beat in 2010. Historically, "airline shareholders would have been better off investing in a CD," Pedersen said.

The underlying story is that Alaska unveiled a restructuring plan in 2003 and stuck with it. "We've been working on achieving this return on investment capital goal since 2003," Ayer said. "In the plan, we said there are three stakeholders: employees, customers and investors. We set goals for each of them to ensure balance and alignment between them. Since deregulation, investors have been left out of the equation in this industry."

Now, Alaska contends, all three groups are benefiting. The carrier's customer service is routinely rated highly by J.D. Power, while on Feb. 14 its employees will be awarded bonuses totaling $92 million, approximately a month's pay per person.
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