By Pierre Caye, Blake Dal Santo, Yuxuan Zhou, Alexis Bruneau, Giuliana Vadacchino, Jules Donzelot, Mathis Grandchamp, Alexander Megrelis (McGill University) ; Sam Oberly, Julia Weinrod, Yuyu Huang, Talia Hovsepian, Jenny Sun (Johns Hopkins University)
Photo: Chuttersnap (Unsplash)
Overview of the deal
Acquirer: Alaska Air
Target: Hawaiian Airlines
Implied Equity Value: $0.9 Billion
Total Transaction Size: $1.9 Billion
Closed date: N/A
Target advisor: Barclays (financial), Wilson Sonsini Goodrich & Rosati, Professional Corporation (legal)
Acquirer advisor: BofA Securities and PJT Partners (financial), O'Melveny & Myers LLP (legal)
Alaska Air's proposed merger with Hawaiian Airlines, reflecting a strategic move leveraging various factors. The weakened yen, due to a shift in the dollar-yen exchange rate, has made dollar-denominated vacations like those to Hawaii more costly for Japanese tourists. Hawaiian Airlines, heavily reliant on Japanese tourism, experienced significant stock value decline as a result. Alaska Air's move capitalises on Hawaiian's vulnerability, aiming to benefit from potential synergies and economies of scale. The deal's success hinges on US regulators, but it's viewed by some as a preemptive competition strategy, potentially sweetened by favourable currency dynamics. If the yen strengthens, as anticipated by some analysts, Japanese tourism to Hawaii could rebound, making the merger strategically advantageous. Shareholders approved the merger but the transaction remains subject to regulatory approvals. Both expect to finalise the transaction in 10 to 16 months from March 2024.
“In Alaska Airlines, we are joining an airline that has long served Hawai'i, and has a complementary network and a shared culture of service. With the additional scale and resources that this transaction with Alaska Airlines brings, we will be able to accelerate investments in our guest experience and technology, while maintaining the Hawaiian Airlines brand. We are also pleased to deliver significant, immediate and compelling value to our shareholders through this all-cash transaction. ” - Peter Ingram, Hawaiian Airlines President and CEO.
Company Details (Acquirer - Alaska Airlines)
Alaska Airlines is headquartered in SeaTac, Washington, United States with flights to the continental United States, Hawaii, Canada, Costa Rica, and Mexico. It is the fifth-largest airline in North America with respect to passengers carried.
Founded in 1932, headquartered in Anchorage, Alaska
CEO: Ben Minicucci
Number of employees: 26,043
Market Cap: $4.67bn (as of 29/02/2024)
EV: $6.69bn
LTM Revenue: $10.43bn
LTM EBITDA: $895.0m
Recent Transactions: $2.6bn acquisition of Virgin America (2016)
Company Details (Target - Hawaiian Airlines)
Hawaiian Airlines, headquartered in Honolulu, Hawaii, is the largest operator of flights to and from the island state and ranks as the tenth-largest commercial airline in the U.S. Operating primarily from Daniel K. Inouye International Airport on Oʻahu and a secondary hub at Kahului Airport on Maui, the airline serves various destinations across Asia, the Pacific, and the U.S. mainland. Known for its exceptional safety record, Hawaiian Airlines has never experienced a fatal accident or hull loss and consistently ranks among the top airlines in the U.S. for on-time performance and customer satisfaction.
Founded in January 30, 1929, headquartered in Honolulu, Hawaii
CEO: Peter R. Ingram
Number of employees: 7108
Market Cap: $727.1M (as of 06/03/2023)
EV: $1.86Bn
LTM Revenue: $2.72Bn
LTM EBITDA: $-193.82M
LTM EV/Revenue: 0.68x
LTM EV/EBITDA: 16.51x
Projections and Assumptions
Short-term consequences
The merger is viewed as a strategic opportunity to capitalize on the strengths of both airlines. Hawaiian Airlines, facing heavy losses due to the Maui wildfires, jet engine recall issues, and a slow recovery of travel to and from Asia post-pandemic, stands to gain from Alaska Airlines' stronger financial standing. Moreover, the unified entity is poised to control over 50% of the market share for flights to Hawaii, thereby securing a dominant position in one of the world's most lucrative tourist markets. From an operational standpoint, the merger aims to diversify its offerings by introducing more destinations, including nonstop flights, providing a wider array of cabin options catering to diverse customer needs, and enhancing the loyalty program for the merged airline. This expansion of product offerings positions the combined company competitively against others serving similar routes. Furthermore, by merging into a single operational platform, there's potential to streamline efficiency and cut costs, leveraging the synergistic benefits of the union.
Long-term Upsides
Alaska Air’s acquisition of Hawaiian Airlines has a range of advantageous implications in the long run, including diversification of revenue streams, cost savings through synergy, and strategic positioning in a market with high potential for growth.
First, the acquisition of Hawaiian Airlines would allow Alaska Air to tap into the Hawaii market departing from Japan, a market worth 83M in 2023. On top of that, the 83M figure is expected to grow, given the asymmetric nature of the bet against the yen since the Central Bank of Japan has historically started intervening to support the currency when the exchange rate depreciated further from ¥150/$, limiting the downside. Therefore, if the yen strengthens in the future, Hawaiian holidays will become more affordable for Japanese tourists, potentially leading to a resurgence in tourism to Hawaii. This would translate into a new source of revenue for Alaska Air.
Merging Hawaiian Holdings with Alaska Air will likely result in synergies and cost savings through operational efficiencies, route optimization, and shared resources. This could improve profitability for both companies in the long term.
Acquiring Hawaiian Holdings could also strategically position Alaska Air as a dominant player in the Hawaii market, allowing it to capture market share and compete more effectively with other airlines operating in the region.
Risks and Uncertainties
The merger does not come without risk. Many investors are wondering, given the efforts to block the JetBlue-Spirit merger recently, whether the Alaska-Hawaiian deal might face similar pushback. The key argument in JetBlue-Spirit was that consumers might face higher prices. While some argue this may occur in flights between Hawaii and the US, the airlines state that less than 3% overlap in routes meaning any decrease in competition would be limited.
Additionally, Hawaiian has been a source of pride in a state where many travel and hospitality companies and properties are owned by outsiders. The merger also raises questions over whether Hawaiian Airlines will maintain its commitment to employing Hawaiians now that it will be part of a combined company headquartered in the continental US. Furthermore, it has been a strong source of union-represented jobs in Hawaii including pilot, flight attendant, and maintenance roles. So far, Alaska has promised to maintain contracts with union employees but has not made the same commitment to non-union-protected jobs.
On top of being a large employer in the state, Hawaiian has also been an integral part of travel across islands, to the continental US, and abroad. Hawaiian offers more flights between US and Hawaii than any other airline, and some Hawaiians have wondered whether this service as well as its Neighbor Island routes between Hawaiian islands may be decreased post-merger. However, Alaska has promised to maintain Hawaiian’s service in Hawaii, and similarly currently provides essential air service to 16 Alaskan communities not accessible via roads.