Alaska Air falls as Wall Street questions $1.9b Hawaiian deal

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Alaska Air Group Inc shares sank after it said it would acquire Hawaiian Holdings Inc for $1.9 billion in cash and debt, in the latest attempt to consolidate the US aviation industry despite regulatory headwinds. Alaska shares fell as much as 19% in New York on December 4. Shares of Hawaiian rose as high as $14.20, almost tripling after
the deal’s announcement but still below the $18 price Alaska agreed to pay. This suggested that investors remain concerned that the deal may not clear regulatory hurdles.
The Biden administration has taken an aggressive stance on airline mergers, derailing one partnership between carriers and fighting JetBlue Airways Corp’s $3.8 billion cash takeover of Spirit Airlines Inc in court. The combined entity would capture more than 50% of Hawaii’s airline market, Alaska said in an investor presentation.
The chief executives of both airlines touted what they said were “pro-consumer” and “pro-competitive” outcomes of the proposed deal. Travellers in Honolulu, for example, would be able to reach three times as many destinations via their combined networks, while the tie-up would create a stronger competitor to the four largest domestic carriers that dominate the US market, Alaska Chief Executive Officer Ben Minicucci said in a CNBC interview. “There’s really not a lot of overlap and the route networks are very complementary,” Hawaiian CEO Peter Ingram told CNBC. “When you take a look at it in the correct context, you’ll see that this is a deal that regulators should look at favourably.”
The deal, should it go through, could provide a valuable lifeline to Hawaiian, whose stock had tumbled more than 52% this year. The company has been hurt by the slow return of tourism between Asia and Hawaii following the pandemic, as well as fires which dampened visitor traffic in August. Hawaiian has also felt the impact from a ramp-up in growth in the Hawaii-to-mainland US market by Southwest Airlines Co. Alaska’s proposal values Hawaiian Holdings’ equity at about $1 billion, and includes about $900 million of debt. Alaska Air Group will be the parent holding company, headquartered in Seattle, with Alaska Airlines and Hawaiian Airlines continuing to operate under their separate brands.
Alaska is taking on the acquisition despite the Justice Department filing a record number of challenges last year to corporate combinations and a pending antitrust challenge to a separate airline deal. A federal antitrust lawsuit over JetBlue’s Spirit deal is nearing a close.
“We believe the facts will prevail that this is pro-competitive and pro-consumers,” Alaska Chief Financial Officer Shane Tackett said in an interview. Alaska and Hawaiian Airlines overlap on 12 routes, or 3% of their total seats, he said. “They are very complementary businesses.” Federal regulators earlier this year succeeded in breaking up an alliance in the northeastern US between JetBlue and American Airlines Group Inc, after a federal judge found the partnership gave the carriers too much power in certain markets and harmed consumers by raising fares and limiting choices. “There could be concerns in the Hawaii-Continental US market,” said Savanthi Syth, a Raymond James analyst. In a research note, she said the combination would change the market’s currently moderate concentration to “highly concentrated.”
The deal could “improve fares, though increase complexity by adding long-haul operations from Hawaii to US cities and into Asia,” Bloomberg Intelligence analysts George Ferguson and Francois Duflot wrote in a note. “Overlap appears to be limited, which improves odds of approval.”
In the investor presentation, Alaska Air said that Hawaiian’s owned fleet of 26 aircraft was worth $560 million alone. Alaska will have to pay Hawaiian a termination fee of $100 million if the deal is blocked by a court or other governmental entity.
The $1.9 billion total price is “very manageable” financially, CFO Tackett said. “We feel very good about the price. We are getting a market leadership position in a really attractive premium market in Hawaiian.”