Shares of Alaska Air Group took a nosedive after the surprise announcement of its $1.9 billion acquisition of Hawaiian Holdings. While some Wall Street analysts are staying optimistic, others are taking a more cautious approach.
Analysts from Deutsche Bank and Raymond James, who were previously bullish on the stock, downgraded their ratings after the deal was revealed. However, J.P. Morgan and Seaport Research maintained their buy ratings.
Investors showed a clear consensus, as Alaska stock plummeted over 14% on Monday in response to the carrier’s proposed tie-up with Hawaiian Airlines’ parent company, which comes at a significant 270% premium. The stock did show slight improvement before trading began on Tuesday.
Hawaiian stock experienced a surge of 193% on Monday, but has been under pressure throughout 2023 due to engine problems and the impact of the Maui wildfires on earnings. The fierce competition from Southwest Airlines in the Hawaiian market has also played a role.
Despite these setbacks, Wall Street generally agrees that the deal is strategically sound, at least in the long term. Even analysts who downgraded the stock acknowledged this sentiment.
Raymond James analyst Savanthi Syth stated, “We believe this acquisition makes sense longer term and Alaska has the balance sheet and earnings strength to see it through. However, given the current macro uncertainty, the complexity of executing the merger should weigh on sentiment and likely limits the near-to-medium term upside case.” As a result, she downgraded the stock from Strong Buy to Market Perform.
Deutsche Bank analyst Michael Linenberg shared a similar view when downgrading the stock to Hold from Buy. While he believes in the long-term value creation for shareholders through the merger, he expects the stock to underperform in the near term due to “deal-related risks and issues” overshadowing its strong fundamental investment story. He has adjusted his target price on Alaska to $44 from $55.
The Alaska-Hawaiian Merger: A Strategic Move with Potential Regulatory Risks
One key benefit of the proposed Alaska-Hawaiian merger is that Alaska would gain access to the highly lucrative Hawaiian market, one of the 25 largest U.S. markets. The Hawaiian market brings in approximately $8 billion in annual revenue, and Alaska CEO Ben Minicucci believes that the combined company would have a share of more than $4 billion of that revenue.
According to J.P. Morgan analyst Jamie Baker, this merger appears to be the solution to Alaska’s uncertain growth trajectory. Baker supports the deal and maintains an Overweight rating for the company.
In addition to the obvious advantages, there is another aspect of the deal that may not be fully appreciated: Hawaiian Airlines’ agreement with Amazon to operate cargo flights for the tech giant. Seaport Research’s Daniel McKenzie believes that this collaboration would transform Alaska into a major player in international widebody flying and significantly boost its cargo business. McKenzie rates the stock as a Buy, with a price target of $48.
The strategic merger would result in a stronger and more diversified network for Alaska, positioning the company to compete more effectively against industry leaders. However, there is a significant regulatory risk associated with this deal. Under President Biden, the Justice Department has shown a willingness to challenge airline mergers and alliances. The DOJ has already taken JetBlue Airways and Spirit Airlines to court over their proposed merger and forced JetBlue to end its alliance with American Airlines in the Northeast.
Despite having only 12 overlapping flights out of the 14,000 flights they collectively operate, the DOJ could still find reasons to sue and block the Alaska-Hawaiian merger. Interestingly, such an outcome could provide a near-term boost to Alaska’s stock, even if Wall Street views the merger as a long-term winner.