By Thomas Black / Bloomberg Opinion
Scale matters in the airline industry.
Just look at the divergent stories of JetBlue Airways Corp., which tried twice and failed to gain more scale, and Alaska Air Group Inc., whose management team impressed a room full of analysts with the cost savings and network expansion that will result from its recent acquisition of Hawaiian Holdings Inc.
Alaska Air’s shares have gained 80 percent since the Justice Department cleared the way on Aug. 20 for the $1.9 billion purchase of Hawaiian, a deal that closed a month later. Alaska Air Chief Executive Officer Ben Minicucci said during a gathering of investors and analysts on Tuesday that the acquisition would help increase profit by an extra $1 billion by 2027. He also detailed aggressive expansion plans, including airport lounges and 12 new international flights.
JetBlue, by contrast, is losing money and has nowhere to turn to add scale. At the urging of the Justice Department, a federal judge last year rejected a proposed JetBlue alliance with American Airlines Group Inc. to share routes and revenue in the Northeast. An appeal failed in November. The Justice Department also opposed JetBlue’s proposed acquisition of Spirit Airlines Inc., and a federal judge in January killed that $3.8 billion deal on antitrust grounds. JetBlue gave up on that idea two months later. JetBlue had driven up the price to keep Spirit from merging with Frontier Group Holdings Inc., an agreement reached in 2022 that fell apart when JetBlue stepped in with more money.
For JetBlue, it was a good thing the Spirit deal collapsed. Spirit has since filed for bankruptcy because its low-cost business model fell out of favor with passengers who after pandemic lockdowns are willing to pay more for a better flying experience. The JetBlue-Spirit combination never made much sense. JetBlue wants to increase its business-class offerings and expand international flights while Spirit is at the bottom rung of low-cost carriers that attracts bargain flyers willing to put up with charges for everything from carry-on bags to water. JetBlue and Spirit do have a common fleet type with Airbus SE aircraft, but otherwise it was an apples-to-oranges deal.
What makes much more sense would be for Alaska Air to acquire JetBlue.
Yes, Alaska has a lot on its plate with the Hawaiian integration. The plan, as Alaska Air executives detailed, is well on its way, and a deal with JetBlue would take time to negotiate and then to win approvals. Yes, Alaska Air flies mainly Boeing Co. aircraft, so the fleet would be mixed. With the purchase of Hawaiian, which operates both Airbus and Boeing planes, Alaska Air now has a mixed fleet. Delta Air Lines Inc., United Airlines Holdings Inc. and American Airlines Group Inc. all operate mixed fleets, which can add to maintenance and pilot-training costs.
The antitrust scrutiny that JetBlue suffered will most likely become less of a hurdle after January when President-elect Donald Trump begins his term. Besides, the overlap of Alaska Air and JetBlue, which is based in Long Island City, N.Y., is negligible. Such a deal would bolster competition in the airline industry by forming a fifth nationwide carrier. Even if the Trump administration is more amenable to acquisitions, it should block any of the large legacy carriers from snapping up a weakened JetBlue. Delta and United are doing fine and don’t need a leg up. American should concentrate on getting its financial and operational house in order.
Alaska Air has proved to be adept at acquisitions. In 2016, it purchased Virgin America, the airline started by billionaire Richard Branson, after beating back a rival bid by JetBlue. The $2.6 billion deal gave Alaska more service to East Coast cities, such as New York and Washington. Many of the executives who shepherded the Virgin deal through the regulatory maze are still at the airline, Minicucci said during the meeting on Tuesday. They know how to reach a single operating certificate with the Federal Aviation Administration and have the experience of combining passenger service systems without affecting customers.
“We’re, like on the complicated stuff, super confident,” Minicucci said of the Hawaiian integration. “We pulled our playbook out. We improved upon it and we’re moving with more speed.”
The Hawaiian acquisition will add to earnings in the first year and enable $500 million of so-called synergies, Alaska Air said. By 2027, Alaska expects to reach earnings of $10 a share, up from as much as $4.50 this year, and it will shore up its balance sheet. Alaska’s debt, after financing the Hawaiian purchase, is 2.5 times earnings before interest, taxes, depreciation, amortization and rent costs, and the airline expects to reduce that leverage to 1.5 times.
More important in this post-covid environment, Alaska is capturing a rising share of the valuable premium market. The percentage of its premium seats has jumped to 26 percent from 8 percent in 2010. That percentage will climb to 29 percent by 2027.
Alaska Air is a well-run airline and will quickly integrate Hawaiian’s operations. It will then have the best shot at becoming the next nationwide carrier to compete with the big four. Acquiring JetBlue would supercharge that process.
Thomas Black is a Bloomberg Opinion columnist writing about the industrial and transportation sectors. He was previously a Bloomberg News reporter covering logistics, manufacturing and private aviation.
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