Airline Stocking Stuffers: Alaska Air and JetBlue

Tis the season for over-crowded airports struggling to accommodate throngs of holiday travelers and inevitable flight delays due to winter weather.  One stuck in the airport might make productive use of the time by considering his or her unfortunate position as testament to the barriers to entry that major airlines increasingly enjoy.

Ever increasing regulation and the consolidation of the airline industry over the last few decades has given the surviving major companies oligopoly control of an essential service.  These companies become increasingly akin to public utilities and major railroad carriers every day.

This is why an investor such as Warren Buffett, long a critic of the industry, now owns significant stakes in Delta, American, United and Southwest Airlines.

Two other smaller airlines have received positive press coverage recently.  Alaska Airlines is the subject of a positive write-up in the current edition of Barron’s Magazine.  (Alaska Air Stock: Ready for Takeoff). Will Healy at the website likes JetBlue.  (JetBlue Airways Corporation Will Soar to a Higher Altitude, December 1, 2017).

Alaska Air is based in Seattle and has traditionally been viewed as a strong regional serving the Pacific Northwest.   Alaska Air’s share price is lagging its peer group largely due to concerns over the management of its 2016 acquisition of Virgin America for $2.6 billion.

Part of the logic of the Virgin America takeover was to broaden Alaska Air’s regional footprint down into California, while also giving it a more viable East Coast presence.  The problem with the acquisition is that the numbers have not panned out yet.  Analysts are concerned that the acquisition might have been too costly and that current management is not up to leading Alaska Air in the transition from dominant regional to successful niche player in larger more competitive markets.

Notwithstanding that the numbers have not quite panned out yet, some of the significant problems that Alaska Air is facing were inevitable, such as competition.  Alaska Air was facing increasing competition in Seattle from Delta and other airlines.  Buying Virgin America helps Alaska Air defend its Seattle market because it now can offer more seamless options to California and the East Coast.  Following the merger with Virgin America, Alaska Air moved to lower Virgin America’s price points.  However, this triggered an ongoing fare war with other airlines in lucrative California market.  In addition, analysts are concerned that fuel prices are projected to go up in the near future.

However, fare wars and increased fuel costs hurt Alaska Air’s competitors as well.  Investors that are bullish on Alaska Air believe that it is historically a well-run airline and should be able to hold its own in head to head competition, even in new markets.

Meanwhile, JetBlue gave up about 25% of its market value earlier in the fall because of worries about the effects of flight cancellations caused by Hurricanes Harvey and Irma.

Bullish investors, however, are confident that it can continue its year- over- year steady growth in destinations, miles flown, revenue increases and earnings per share. They feel that JBLU’s stock, priced near the industry average P/E, does not reflect its growth prospects.

JetBlue certainly has ample room to grow.  It still has no presence in many cities in the United States and no presence in Canada at all.  It does offer some service to Latin America, but its market share there could expand for years to come.

About Chris Donnelly

Christopher J. Donnelly, is an experienced attorney, bond analyst and fixed income strategist, with years of experience in structured finance, distressed bonds and bond related litigation in a variety of industries and the emerging markets. He is a graduate of Rutgers University (BA), The University of Pennsylvania (JD) and New York University, (LLM in Taxation). Chris is a Managing Director of Straacom, LLC and can be contacted at Straacom provides strategic research, analysis and communications for publication and on assignment for private clients.

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