Alaska Air announces big move to expand business

It may not be readily apparent, but Alaska and Hawaii have a lot in common.

While you would never confuse their respective climates, both states have the distinction of being admitted to the union in 1959.

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In addition, they both have significant native populations and cultures and rely heavily on tourism. Hawaii and Alaska are geographically isolated from the continental US, and have strategic military significance due to their locations.

Now the Aloha State and the Last Frontier are coming together in the sky, in a manner speaking, with Alaska Air  (ALK) - Get Free Report looking to buy Hawaii Airlines  (HA) - Get Free Report for for $18 per share in cash, or roughly $1.9 billion, which includes $900 million of Hawaiian Airlines net debt.

The proposed deal would unite carriers that largely serve destinations in the Pacific region and operate competing flights to Hawaii and solidify Alaska Airlines’ position as the fifth-largest U.S. carrier.

"This combination is an exciting next step in our collective journey to provide a better travel experience for our guests and expand options for West Coast and Hawai'i travelers,” Ben Minicucci, Alaska Airlines CEO, said in a statement.

Shares go in opposite directions

The airlines will retain their separate brands, but said together they will have broader reach, according to the Wall Street Journal, connecting Hawaii to three times as many destinations in the continental U.S. and giving Alaska Air a new hub in Honolulu for flights to Asia.

Both companies' board have approved the transaction, which is expected to close in the first quarter of 2024, subject to regulatory approval, which could a problem in light of some recent court cases.

Shares of the two companies were heading in opposite directions on Dec. 4.

Alaska Air was tumbling 14% to $34.13 at last check, while Hawaii Air was heading for the stratosphere, surging 183% to $13.76.

Raymond James double downgraded Alaska Air to market perform from strong buy without a price target following the announcement.

With the acquisition unlikely to close for 12-18 months, Alaska's earnings recovery outlook is intact, with the only likely change a delay in resuming a dividend, the firm said in a research note.

Raymond James said that it believes the acquisition makes sense longer term and that 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, the firm said.

Meanwhile, Deutsche Bank analyst Michael Linenberg downgraded Alaska Air to hold from buy with a price target of $44, down from $55, while flipping Hawaiian Airlines to buy from hold.

Justice Department challenges airline mergers

The analyst said the synergy estimate is conservative and implied transaction metric is attractive. 

Linenberg said he views the transaction positively and believes it will drive meaningful long-term value creation. However, airline mergers face high execution risk, the bank said.

Indeed they do. Earlier this year, a federal judge in Boston ruled that American Airlines  (AAL) - Get Free Report and JetBlue  (JBLU) - Get Free Report to had abandon their partnership in the northeast United States.

The U.S. Justice Department had argued that the deal would eventually cost consumers hundreds of millions of dollars a year.

In 2016, JetBlue lost a bid to buy Virgin America after Alaska Airlines swooped in with an offer of $57 per share or $2.6 billion

The DoJ is also looking to block JetBlue's $3.6 billion bid to buy the low-cost carrier Spirit  (SAVE) - Get Free Report on grounds that it would create an anticompetitive environment and leave consumers with few options.

A federal judge in Boston is set to hear closing arguments in the case. A courtroom presentation alleged that at one point JetBlue CEO Robin Hayes said that "Spirit is the next natural step in our longer-term goal to pursue" Alaska Airlines.

JetBlue CEO Robin Hayes denied the allegation and testified that JetBlue never initiated such discussions.

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