Alaska Airlines’ rationale behind acquiring Hawaiian |

Sunday's announcement that Alaska Airlines Group is to acquire Hawaiian Airlines for $1.9 billion including debt and develop Honolulu into a strategic hub caught many by surprise. What will the two airlines, both with a long legacy and rich history, have in mind to establish themselves as the fifth largest carrier in the US? Let’s check out what Alaska and Hawaiian said about the rationale during Sunday’s webcast. Comparing airlines What are we talking about here? Alaska Airlines is about four to five times as big as Hawaiian on all metrics. Revenues for a 12-month period ending September 30, 2023, were $10.4 billion for Alaska and $2.8 billion for Hawaiian. The former carried 43.8 million passengers until August 31, the latter 10.9 million. Daily departures compare 1.100 to 240. Alaska has around 23.900 employees, Hawaiian 7.360. Lastly, the fleet, which we come to talk about later, compares 303 to 62. Hawaiian is rated as a financially solid airline, notwithstanding the difficulties it encountered during the pandemic and recently during the Maui fires that have had a significant effect on tourism. The carrier returned to 2019 revenue levels, although slightly more is coming from domestic travel. Hawaiian says to be on -track for single-digit growth of earnings per share within two years to even high-teen growth after that, with return on invested capital set for mid-teen to high-teen growth numbers if synergies of the acquisition are included. Strategic rationale Hawaiian CEO Peter Ingram said that his airline was approached by Alaska to discuss the acquisition transaction, but his Alaska colleague Ben Minicucci added that the idea has been worked on for some time. By acquiring Hawaiian, “Alaska adds another top-25 market to our network, making Honolulu our second-largest hub. It is a geography we have served for 16 years that perfectly complements our West Coast leisure focus,” said Ben Minicucci during the webcast. “We become the clear leader in the $8 billion Hawaiian market, unlocking hub economics and one of the most globally attractive leisure markets with a proven long-term track record of profitability.” Alaska’s strategy has been one of organic growth, but the acquisition of Hawaiian should accelerate this growth. Benefitting from the strong recovery of the Pacific region, Honolulu will be developed into a strategic hub, where the combination will have a 50+ percent market share that attracts over nine million travelers each year. It is the most popular outbound destination for Japanese tourists. Remember that this is the main reason why All Nippon Airways has built a business case for operating its three Airbus A380s between Tokyo and Honolulu. “With the additional scale and resources this transaction brings, we will be able to accelerate investments in guest experience and technology while preserving the best of the Hawaiian brand,” said Ingram. While there is a 3-percent overlap in the combined network, Alaska and Hawaiian will grow outbound connections from Honolulu to 87, of which 57 are served by Alaska and 30 by Hawaiian. The combination will offer 138 unique routes out of the US West Coast. This becomes 1.200 if the oneworld alliance network is added. Financial benefits and synergies Alaska will pay $1.0 billion in equity value for Hawaiian, representing $18 per share, plus $0.9 billion for its outstanding net debt. The transaction will be financed by cash on hand and new acquisition debt. One-time transaction costs are guided at $400 to $500 million. The net debt/EBITDAR ratio will peak at 3x, but this will go back to 2x within two years of closing. The impact on the balance sheet will be minimal, said Alaska’s Chief Financial Officer Shane Tackett. The plan is to have Alaska and Hawaiian operate under a single Air Operating Certificate (AOC), but with single collective bargaining agreements for each airline. The combination targets annual run-rate synergies of a conservative $235 million, but it is believed this has significantly more upside. Of these, $110 million should come from the network by optimizing the domestic network, growing the number of international connections, and improving intra-island connectivity. Hawaiian's Boeing 717s are only half-way through their life cycle. Alaska Airlines says they could be replaced by the Boeing MAX. (Hawaiian Airlines) The loyalty programs will be combined and should generate $85 million through run-rate synergies and penetration. Cargo, through Hawaiian’s capacity leased to Amazon, Alaska’s full-freighter fleet, and belly cargo, should generate $20 million in synergies, but there is potential for further growth. Another $20 million in run-rate cost savings is expected from integrating collective bargaining agreements. “Strategically, we enhance our network relevance with additional scale. We will further diversify our revenues with incremental international and premium cabin exposure. We become a market share leader in the Hawaiian market, which, in long term, has produced double-digit margins for the industry. We view the Hawaiian attractive long-term and by combining our network with Hawaiian’s, we anticipate that we can drive more revenues to Alaska throughout the geographies we are already strong in,” said Shane Tackett. “The 0.7 times revenue multiple falls well below the industry transaction average of 1.7 times,” said Minicucci. “Simply put, we are acquiring a hub in a premium leisure market that has the potential to approach Seattle in size at a valuation that is amongst the best achieved over the past 20 years of airline M&E.” “This transaction will bring compelling and immediate value to our shareholders,” said Peter Ingram. “Importantly, our fantastic frontline employees will benefit from this combination, thanks to Alaska’s commitment to maintaining and growing our union-represented workforce in Hawaii and for the opportunities that will come from a larger organization.” Fleet differences Alaska Airlines became an almost all-Boeing operator only as recently as in September by phasing out the ten Airbus A321neo’s that it had inherited from the acquisition of Virgin America. These aircraft have been sold to American Airlines. As of December 1, the fleet included 312 aircraft: 79 737-900ERs, 61 737-800s(one -800BCF), 14 737-700s (including 3 converted -700BCFs), 12 737-900s, and 63 MAX 8s and -9s for the mainline fleet, plus 83 Embraer E175s for Horizon's regional routes. Alaska has orders for 89 MAX and nine E175s and purchase rights/options for 118. Hawaiian Airlines operates 62 aircraft, of which 66 percent in owned. The fleet includes 19 older Boeing 717s and 18 new Airbus A321neo’s. The 717s still have half of their cycle time left and could be replaced by MAX aircraft, said Alaska. The airline also has widebodies: 24 A330-200s and one A330P2F operating on behalf of Amazon Prime. From next year, Hawaiian will introduce the first of 12 Boeing 787-9s into the fleet, but they will not immediately replace the A330-200s as lease contracts for the Airbus aircraft will be extended to offer more flexibility. Dreamliner deliveries extend through 2027. The Alaska/Hawaiian combination could operate widebodies on future high-demand long-haul routes that currently are not served. While this mixed fleet will not bring the immediate synergy benefits that come from a single model, Shane Tackett outlined that adding widebodies to Alaska Airlines Group will have another positive effect: “This provides all current Hawaiian and future Alaska pilots more attractive career options over the long term, and we believe it will be a net-positive to pilot attraction and retention for us.” Tackett also said: “We remain strong believers in fleet rationalization and simplification. But we will take the appropriate time to determine what the best long-term fleet set-up for us will be, given the diversity of flying we will be doing from high-frequency, short stage lengths to widebody transoceanic flying.” Lessons learned Both Minicucci and Tackett said that Alaska Airlines will use lessons learned from the Virgin America integration to complete the Hawaiian transaction as smoothly as possible. The airlines will require regulatory approval, which could take 12 to 18 months. Minicucci said that he hasn’t spoken with the US government yet, but he said that of the 1.400 daily flights, the airline combination will only have 12 overlap markets. “From a competitive standpoint, that lands really well. When you join the networks on the West Coast, it gives customers tremendous choice and expands the domestic and international platforms This is a pro-consumer combination that makes us larger to compete against the Big Four that have an 80 percent market share. So we are hopeful it will be seen in a positive light.” Discussions with the unions are also only in the early stages. Ben Minicucci also pointed out that there is no relation between the proposed acquisition and the one of JetBlue and Spirit Airlines, which has met strong opposition from the Department of Justice and resulted in a lawsuit. “We are not focused on that, we are focused on Alaska’s long-term future.” The 8-K filing released on Monday says that the merger may be called off if no agreement has been reached by June 2, 2025, which may be extended until December 2. If a court prohibits or enjoins the transaction, the merger is also off. Either party can terminate the proposed merger, albeit at the cost of $100 million to Hawaiian if Alaska Airlines pulls the plug or $39.6 million if the initiative comes from Hawaiian.

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