Alaska Air Group Stock Plummets After Surprise Hawaiian Holdings Deal

Alaska Air Group sent shockwaves through the market with its unexpected $1.9 billion acquisition of Hawaiian Holdings. Investors reacted swiftly, causing the stock to plummet. Although some analysts are taking evasive action, others maintain a positive outlook.

Deutsche Bank and Raymond James analysts, who were previously bullish on Alaska Air Group, downgraded their ratings following the announcement of the deal. However, J.P. Morgan and Seaport Research remained optimistic, maintaining their Buy ratings.

The investor consensus has been clear – Alaska Air Group’s stock experienced a staggering 14% drop on Monday as shareholders adjusted to the proposed merger with Hawaiian Airlines’ parent company, which comes with a hefty 270% premium. The stock showed slight recovery as Tuesday’s trading session began.

Hawaiian Holdings’ stock, on the other hand, skyrocketed by 193% on Monday. This is a welcome change for the company, which has faced numerous challenges in 2023 due to engine issues and earnings losses from the Maui wildfires. Additionally, competition from Southwest Airlines in the Hawaiian market has further impacted their performance.

Despite these obstacles, Wall Street seems to agree that the deal has strategic merit – even those downgrading the stock acknowledge this. Savanthi Syth, an analyst from Raymond James, expressed her belief in the long-term viability of the acquisition. She stated that Alaska Air Group has the financial strength to see it through but noted that macro uncertainty and the complexity of executing the merger might restrain short-to-medium-term growth. As a result, she downgraded the stock from Strong Buy to Market Perform.

Deutsche Bank analyst Michael Linenberg shared a similar perspective when he downgraded the stock from Buy to Hold. While he recognizes the value creation potential for shareholders in the long run, he expects near-term underperformance due to deal-related risks and challenges. Linenberg adjusted his target price for Alaska Air Group to $44 from $55.

Alaska’s Potential Expansion into the Hawaiian Market

One of the key advantages of the proposed merger between Alaska and Hawaiian Airlines is the opportunity for Alaska to tap into the lucrative Hawaiian market. As one of the largest markets in the United States, Hawaii boasts an impressive annual revenue of $8 billion. With the combined forces of Alaska and Hawaiian, CEO Ben Minicucci estimates that the new company would have access to over $4 billion of that revenue.

Analysts, including J.P. Morgan’s Jamie Baker, express optimism about the merger’s potential. Baker believes that the deal “solves Alaska’s uncertain growth trajectory” and maintains an Overweight rating on the stock. The merger is seen as a logical move that would benefit both airlines.

In addition to the direct market benefits, another significant factor to consider is Hawaiian’s agreement with Amazon to provide cargo flights for the tech giant. This strategic partnership has caught the attention of Seaport Research’s Daniel McKenzie, who believes that it would propel Alaska’s cargo business and open doors to international widebody flying. McKenzie rates the stock as a Buy with a price target of $48.

By joining forces with Hawaiian, Alaska would create a stronger and more diversified network, enhancing its ability to compete against the industry’s major players. The merger positions Alaska to face the “Big 4” airlines with greater confidence, as explained by McKenzie.

However, it’s important to acknowledge the potential regulatory risks associated with the deal. Under President Biden, the Department of Justice (DOJ) has demonstrated a willingness to scrutinize airline mergers and alliances. The DOJ has even taken legal action against the proposed merger between JetBlue Airways and Spirit Airlines, as well as forcing JetBlue to terminate its alliance with American Airlines in the Northeast.

Although Alaska and Hawaiian have minimal overlap in terms of their flight operations, there is still a possibility that the DOJ could find reasons to sue and block the merger. Ironically, this outcome could result in a short-term boost for Alaska’s stock, regardless of Wall Street’s perception of its long-term profitability.

Overall, the proposed merger between Alaska and Hawaiian Airlines holds great potential for expanding Alaska’s reach into the Hawaiian market. While regulatory risks loom, the strategic advantages and market opportunities make this deal a compelling prospect for Alaska’s future success.