Why Low-Cost Airlines Are a Contrarian Play in a Post-Pandemic Recovery

The airline industry has long been a rollercoaster of volatility, buffeted by fuel prices, labor disputes, and shifting demand. Yet, as travel demand rebounds post-pandemic, a group of carriers is emerging as contrarian bets: low-cost airlines with razor-sharp operational efficiency, pricing power, and loyalty-driven customer retention. Hawaiian Airlines and Alaska Airlines—now under one corporate roof—exemplify this trend. Despite near-term headwinds, their strategies to dominate niche markets through innovative pricing and cost controls position them for long-term gains.

Operational Efficiency: Fueling Growth with Innovation

The linchpin of these carriers' success is their ability to squeeze costs without sacrificing service quality. Alaska Airlines' use of the Flyways AI Platform is a masterstroke: real-time flight path optimization reduced fuel consumption by 3–5% on long-haul flights, saving 1.2 million gallons in 2024 alone. With fuel accounting for 20–30% of operating costs, such efficiency gains directly pad margins.

Meanwhile, fleet modernization—Alaska's transition to fuel-efficient Boeing 737 MAXs and Hawaiian's 787 Dreamliners—adds to cost discipline. The integration of Hawaiian into Alaska's network has further boosted synergies, from shared cargo operations to co-located hubs in Los Angeles and New York. Combined, these moves have driven Hawaiian's unit revenue up 8.8% year-over-year and its adjusted pretax margin by 14 points since 2024.

Demand Resilience: Pricing Power in a Crowded Market

While many airlines slash fares to win customers, Hawaiian and Alaska are commanding premium revenue through strategic pricing. Hawaiian's $99 companion fare—a fixed-price add-on for travel companions—has become a demand magnet. It locks in repeat customers while shielding the carrier from variable fuel costs. Similarly, Alaska's loyalty program overhaul, which raised cash remuneration by 12%, has boosted high-margin premium bookings by 10%.

These strategies are critical in an era of demand softness, which Alaska attributes to a 6-point revenue drag in Q2 2025. Yet, their focus on customer retention ensures that core revenue streams remain intact. As Alaska CEO Ben Minicucci noted, “We're not just selling seats—we're selling experiences that travelers can't easily replicate elsewhere.”

Margin Expansion: The Long Game Wins

Despite Q2 2025's cost pressures—unit costs rose mid-to-high single digits due to labor contracts and integration expenses—the groundwork for margin expansion is laid. Fuel prices, while volatile, have trended downward since 2024 ($2.61/gallon in Q1 2025 vs. $3.08 in 2024), and refining margins may ease as supply chains stabilize.

Alaska's $2.5 billion cash buffer and share repurchases ($149M year-to-date) underscore financial resilience. The company's “Alaska Accelerate” plan aims for $1B in incremental profit by 2027 through synergies and automation. Hawaiian's improved unit revenue and network synergies are already delivering results: its adjusted pretax margin improved 14 points since 2024.

Risks and the Contrarian Case

Bearish investors point to near-term challenges: fuel volatility, labor costs, and macroeconomic uncertainty. Q2's 6-point revenue drag from soft demand is a reminder that no airline is immune to broader economic trends.

Yet, this is precisely why the stocks are undervalued. Alaska's P/E ratio of ~12X 2025E EPS is a fraction of its pre-pandemic multiple, and Hawaiian trades at a discount to peers like Delta. The market is pricing in short-term pain, not the structural advantages these carriers hold:

1. Niche dominance: Hawaiian's Pacific routes face limited competition, while Alaska's West Coast hub strategy leverages high-yield business travel.
2. Cost controls: Fuel efficiency and labor agreements (e.g., flight attendant contracts) are locked in for years.
3. Loyalty flywheels: Repeat customers and premium pricing insulate margins from demand swings.

Investment Thesis

Buy Alaska (ALK) and Hawaiian (HA) on dips, targeting a 12–18 month horizon. Key catalysts include:
- Fuel price stabilization: Monitor crude oil trends ().
- Synergy realization: Track Hawaiian's unit margin improvements and Alaska's CASM-Ex trends.
- Loyalty program adoption: Rising premium bookings and cash remuneration signal customer stickiness.

Risks: Sustained inflation, further fuel spikes, or a deep recession could delay margin recovery. Diversify with broader aviation ETFs (e.g., JETS) for balance.

Conclusion

Alaska and Hawaiian are not just airlines—they're value engines refining operational excellence and pricing power into shareholder returns. While short-term fuel costs and demand softness cloud the near-term outlook, their structural advantages in niche markets, combined with disciplined cost management, make them compelling contrarian plays. For investors willing to look beyond the noise, these carriers offer a runway to outperform in 2025 and beyond.

Final call: Consider a 5% allocation to ALK and HA, with stops below $40 and $10, respectively. The journey ahead is bumpy, but the destination is worth the turbulence.