Alaska Air Group Inc.ALK

Alaska's decision to transition into an all-Boeing 737 fleet (from older MD-80s) has already paid dividends, delivering a 12% gain in fuel efficiency during the first half of 2009 compared to the same time in 2008. If oil prices retest their 2008 highs, this improvement should help drastically reduce operating expenses while lessening the cash burn.

Alaska Air Group maintains a stronghold on most of its routes in Alaska, where it primarily competes with the less-efficient legacy carriers. Alaska Air Group is able to achieve modest fare premiums in these markets, as much of the state remains highly dependent on air transportation.

Alaska has approximately 50% of its remaining 2009 and 44% of its 2010 fuel consumption hedged at roughly $76 and $71 per barrel, respectively. Since the firm mostly employs call options, it protects the firm if oil rises while enabling it to benefit if prices plummet. Read more 

Alaska Air Group's fuel costs have increased at a 20% compound annual clip during the past three years to 27% of total operating costs, up from the historic 10%-15% range. If crude oil continues to rise, the firm has very few options to offset this increase other than raising ticket prices, which may be difficult to do.

New entrant Virgin America announced that it has commenced service between Seattle and Los Angeles and Seattle and San Francisco. Increased competition will likely lead to reduced fares, pressuring results.

Alaska Air Group's workforce is more than 80% unionized. Although the firm recently announced new deals with its flight attendants, customer-service agents, and ramp workers at market rates, but future negotiations with the pilots could push labor costs meaningfully higher. Read more