Alaska Air Group
is buying Hawaiian Airlines parent for $1.9 billion, but the deal is driving the stocks in dramatically different directions.
In morning trading, Alaska Air stock was off 16.6%, to $33.15; Hawaiian Holdings shares was up 178.4%, to $13.53. In premarket trading, Hawaiian surged185% and Alaska Air fell 17%.
The Hawaiian jump can be explained by the 270% premium Alaska is paying, based on Friday’s closing price. However, the shares are still trading below the deal price of $18, perhaps reflecting concerns that the Biden administration will scrutinize the merger on antitrust grounds. The Justice Department is suing to block the proposed merger of
JetBlue Airways
and
Spirit Airlines.
Hawaiian stock hasn’t traded at $18 since May 2022. The shares have taken a battering this year—down 53% since January––on earnings hits from the Maui wildfires and engine problems.
That performance may be why Alaska investors don’t seem convinced by the deal.
For Melius Research analyst Conor Cunningham, the deal is strategically rational, but the timing and the premium “is a bit of a head-scratcher.” He added that the proposal represents a change in tactics for Alaska, which has focused on simplifying its fleet.
“We have written in a prior life about Alaska being a potential strategic buyer of Hawaiian but given the lack of earnings recovery and the structural headwinds now facing Hawaiian, the tie had become less appealing,” Cunningham wrote in a Monday note.
The appeal, perhaps, lies in access to one of the 25 biggest U.S. markets—Hawaii. Honolulu would become Alaska’s second-largest hub if the merger is approved.
The Hawaiian market is worth $8 billion in annual revenue and Alaska CEO Ben Minicucci said the combined company would have more than $4 billion of the total.
For Hawaiian shareholders, it’s a clear win. And the stock still has a way to go to reach the $18 deal price.
However, investors tempted to cash in on Hawaiian’s potential upside, even from Monday’s levels, should be mindful of the Justice Department’s eagerness to tackle what it perceives as a lack of competition in the airline industry.
Justice officials are fighting the proposed $3.8 billion merger of JetBlue Airways and Spirit Airlines and has already succeeded in forcing JetBlue to abandon its alliance with
American Airlines
in the Northeast.
A ruling in the JetBlue-Spirit case could set a precedent for the Alaska-Hawaiian merger. The Alaska-Hawaiian deal would give the new entity more than a 50% market share in the Hawaiian air market.
However, Alaska’s Minicucci said just 12 of the combined 14,000 flights operated by the two airlines overlap. He added that the airline officials haven’t spoken to the government yet regarding the proposed merger.
The almost 180% jump for Hawaiian stock, in comparison to the 270% premium, isn’t probably a bad estimate of the probability that the merger will be approved. A green light forJetBlue and Spirit would swing the odds more for the deal making it over the line.
The tie-up itself “makes good common sense” for both airlines, TD Cowen analyst Helane Becker said in note Monday.
“For Alaska, it enables international growth in the Asia Pacific region, which is one of the faster growing markets in the world,” she said. “For Hawaiian, it enables their passengers to fly to more places on the U.S. mainland on a non-stop or one stop basis vs multiple stops now,” Becker added.
Becker said regulatory approval wasn’t a certainty, particularly given the Justic Department’s battle over the JetBlue-Spirit merger.
Cunningham saidAlaska’s management team has a record of good execution and its members “deserve the benefit of the doubt.” They’re certainly not getting it as investors digested the deal Monday.
Write to Callum Keown at callum.keown@barrons.com
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