The Big Four in the airline industry — long known as Delta (DAL), American Airlines (AAL), United Airlines (UAL) and Southwest Airlines (LUV) — may look a little different at some point this year as executives pull the trigger on mergers to consolidate costs as the slog from the depths of the pandemic stretches on.
“We’re expecting M&A to occur. You could see United Airlines buying JetBlue (JBLU). United is going back to JFK [airport] after an absence of a few years and it [JetBlue] has a big presence there,” long-time airline industry analyst Helane Becker of Cowen told Yahoo Finance Live.
Becker has Market perform ratings on both United and JetBlue.
Added Becker, “You can see Allegiant, Frontier and Spirit merge. Those three airlines have a 3% market share, maybe a little more now since they are so domestic. They would be a really terrific competitor to the Big Four because they are so low cost and their so domestic and leisure focused.” Becker rates Allegiant (ALGT) at Market perform and Spirit (SAVE) at Outperform.
Becker said, however, that depressed stock prices make doing a big airline deal now problematic. In other words, because of the toll the pandemic has had on air travel and airline cash flow, the stock prices are crazy low and unattractive in trying to fund a deal.
Moreover, most airlines lack the cash on the balance sheet to do a splashy deal. Cash is primarily being used to fund the losses being driven by the plunge in demand and high structural costs (see airplane maintenance, unionized employees, etc.). But to Becker’s point, some airline executives with the better balance sheets and stomachs of steel may be the reason they have no choice but to strike now on a target.
By getting larger, any airline would be better able to spread out costs. And, it would also put itself in a position to be a market share consolidator in the post-pandemic recovery.
To be sure, the outlooks for the airlines this year remain horrible even as vaccines start to flow globally.
The International Air Transport Association (IATA) said last November the airline industry will lose $157 billion in 2020 and 2021. Previously, the IATA had forecast $100 billion in losses for the two-year period. But that number — which was eye-popping when released — may be conservative. Since that forecast, fresh pandemic-related lockdowns have swept the globe amid rising infections and deaths.
Concerns over new strains of the coronavirus have amplified the concerns on travel demand.
According to data from the TSA, December passenger demand declined 62.4% year-over-year, cited by Becker.
“We don’t think any of the big U.S. airlines are in danger of bankruptcy at this juncture,” Becker adds.