Shares of Alaska Air Group (NYSE: ALK) nosedived about 9% in pre-market trading Monday following the acquisition of Hawaiian Holdings (NASDAQ: HA).
Alaska Air Group (NYSE: ALK) announced on Sunday its acquisition of Hawaiian Holdings (NASDAQ: HA) for $1.9 billion, including debt. This move represents a strategic investment in a troubled airline with profitable routes amid ongoing resistance from U.S. antitrust regulators against consolidation in the aviation sector.
Alaska Air has committed to pay $18 per share in cash, nearly four times Hawaiian’s closing price on Friday. This hefty premium underscored the considerable downturn in the value of Hawaiian’s shares. The Maui wildfires, elevated fuel expenses, and jet engine recall problems with certain Airbus SE planes in Hawaiian’s fleet have collectively led to heavy losses and a 65% decline in the share price over the past year.
The deal is anticipated to draw intense antitrust scrutiny, particularly in the wake of the U.S. regulators contesting JetBlue Airways Corp’s (NASDAQ: JBLU) proposed $3.8 billion acquisition of Spirit Airlines (NYSE: SAVE) in court.
Antitrust enforcers have been wary of mergers among smaller airlines, even as the sector remains predominantly controlled by four major players: United Airlines (NASDAQ: UAL), American Airlines (NASDAQ: AAL), Delta Air Lines (NYSE: DAL), and Southwest Airlines (NYSE: LUV). Their efforts proved fruitful in July when they convinced JetBlue to terminate a three-year-old alliance with American Airlines.
The acquisition would grant Alaska Air control over 50% of the market for Hawaii flights to one of the world’s most popular tourist destinations.
CEO Ben Minicucci expressed confidence in regulatory approval by the end of 2024, highlighting that the two airlines share only 12 overlapping flights out of the 1,400 collectively operated.
Alaska Air Group (NYSE: ALK) also justified its 270% premium offer as a bargain, pointing out that the deal values Hawaiian at 0.7 times its annual revenue, well below the industry average of 1.7 times. The company expects a minimum of $235 million in annual savings.
Hawaiian Holdings (NASDAQ: HA) posted a net loss of $159.3 million for the first nine months of 2023, showing improvement from the $189.9 million loss recorded in the corresponding period last year. Factors including lowered air traffic due to the Maui wildfires and a 4% spike in jet fuel costs contributed to these losses. In addition, issues with engines manufactured by RTX Corp’s Pratt & Whitney resulted in the grounding of a portion of its Airbus A321neo fleet.
In an investor presentation, Alaska Air acknowledged Hawaiian’s historical profitability, citing operating margins in the mid-teen percentages between 2010 and 2019 before the recent setbacks.
Alaska Airlines forecasts the deal will result in high single-digit earnings growth within the first two years, with no significant impact on long-term balance sheet metrics.
Since the end of September this year, Alaska Air has exclusively operated Boeing Co’s 737 planes after retiring the Airbus aircraft acquired through its 2016 purchase of Virgin America.
Alaska Airlines CEO stated that, at present, the combined company will operate a mixed fleet, leaving open the possibility of future rationalization. The company will be headquartered in Seattle under his leadership, and Honolulu will become a key hub for Alaska Airlines.
The International Association of Machinists and Aerospace Workers (IAM), representing 600,000 manufacturing and aerospace employees, has vowed to take all necessary steps to protect the rights of its members at both carriers amidst this significant industry development.