Recently, airline deals have been causing investors to feel uneasy. Take Alaska Air for example, whose shares plummeted 15% after they announced the purchase of the struggling Hawaiian. Despite the potential benefits of merging, the threat of aggressive trustbusters and unstable balance sheets could lead to a rough journey. Until the turbulence subsides, shareholders have every reason to be wary of the pilot.
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Alaska's $1.9 billion deal, which includes debt, seems logical on paper. The 270% premium is due to the decline in Hawaiian's shares, a result of post-pandemic instability and the Lahaina wildfires in Maui. Earlier this year, there were even doubts about its solvency – its debt was trading as low as 70 cents on the dollar, indicating concerns about its survival. This allows Alaska to acquire the company at a relatively low cost and gain control of profitable routes to a popular holiday destination.
The companies predict a $235 million increase in profitability from the merger - almost equivalent to Hawaiian's market value before the deal was announced. Like other airline deals, most of these come in the form of revenue uplifts, which are harder to achieve. However, if taken at face value, they could be worth nearly $870 million, based on Alaska's pre-deal trading multiple, according to Breakingviews. This comfortably covers the premium. However, as was the case when Frontier and JetBlue Airways first bid for Spirit Airlines in 2022, the buyer's shareholders are resisting. One clear reason is the regulatory risk. Investors often view revenue synergies with skepticism, but if they are real, they are likely to draw the attention of trustbusters, who are against deals that disadvantage consumers. If the merger is blocked, Alaska will owe $100 million, a staggering 10% of the transaction's equity value.
The Department of Transportation has threatened to join the Department of Justice in attempting to block the Spirit merger. Unlike trustbusters, the head of the agency, Pete Buttigieg, doesn't need to go to court to do so. This could leave Alaska facing a long and difficult battle, which could either fail or require the sale of routes that make the deal viable. Although their overlap is limited, they will have approximately a majority market share in Hawaii. Looking at the bigger picture, there are wider concerns. Alaska has been meticulously reducing costs. After deducting cash and securities, it has no debt. It has just received an investment-grade rating from Moody's. This spending spree threatens that effort. Moreover, smaller airlines are struggling: All of their shares, from Alaska to Hawaiian to Frontier and beyond, have underperformed the big four carriers and the broader market this year. This could simply be the long-term impact of changing travel patterns that will normalize as the pandemic continues to recede. However, it suggests that by merging, smaller airlines risk exacerbating their problems. On Dec. 3, Alaska Air announced that it had agreed to buy rival airline Hawaiian for $1.9 billion, including debt. This deal comes as a lawsuit by the Department of Justice seeking to block the merger of Spirit Airlines and JetBlue Airways is set to conclude on Dec. 5.
