Airline Stock Roundup: Alaska-Virgin Deal Nears Closure, Labor Deals & More

It seems that a major deal is round the corner in the airline space. Putting an end to months of speculation, Seattle, WA-based Alaska Air Group (NYSE:ALK) moved a step closer toward acquiring California-based Virgin America (NASDAQ:VA) , following the much-awaited clearance from the U.S. Department of Justice (DOJ).

The multi-billion dollar deal is expected to be closed “in the very near future,” now that the major hurdle has been cleared. Successful closure of the deal would result in the creation of the fifth-largest airline in the U.S. (in terms of passenger traffic).

Apart from the aforesaid update, the past week saw significant labor deals being approved at airline heavyweights like Delta Air Lines, Inc. (NYSE:DAL) and United Continental Holdings (NYSE:UAL) . Delta lowered its operating margin outlook for the fourth quarter following the ratification of the pay-related deal by its pilots. This is because costs will rise substantially following the deal.

On the traffic front, Delta Air Lines revealed encouraging numbers for the month of November. The past week also saw Alaska Air Group and Hawaiian Holdings (NASDAQ:HA) unveiling their respective traffic reports for November.

(Read the last Airline Stock Roundup for Nov 30, 2016).

Recap of the Past Week’s Most Important Stories

1. The anti-trust clearance, however, is not free of conditions. Although Alaska Air Group will not have to sell any assets, it will have to reduce the scope of its code-sharing agreement with American Airlines Group (NASDAQ:AAL) .

According to a report on Wall Street Journal, the modification of the agreement implies that Alaska Air Group would have to forego code-sharing revenues in about 45 markets, which amounts to $15–$20 million annually. The routes where the DOJ has prohibited the Alaska Air/American Airlines code sharing pertain to the ones where Virgin America and American Airlines currently compete.

The condition also applies to routes where Alaska Air Group was likely to launch operations (in combination with American Airlines) following the closure of the deal. Alaska Air Group was not too perturbed by the condition and appeared confident of recovering the lost revenues.

On a separate note, Alaska Air Group revealed impressive traffic report for November. Traffic – measured in revenue passenger miles (RPMs) – came in at 2.99 billion, up 7% from 2.80 billion a year ago. Capacity expanded 2.8%. Load factor – the percentage of seats filled by passengers – improved to 85.1% from 81.7% a year-ago as traffic growth exceeded capacity expansion (Read more: Alaska Air Group Gains on Improved November Traffic).

2. Delta announced a 0.3% increase in RPMs, while capacity contracted 0.7% for the month of November. Load factor (percentage of seats filled by passengers) climbed 90 basis points (bps) to 85%. Consolidated passenger unit revenue (PRASM) dipped 1% year over year in the month.Delta further revealed that the recently approved four-year pilots’ contract will increase costs in the fourth quarter of 2016.

Based on the estimated higher costs, Delta expects fourth-quarter operating margin in the band of 9.5–10.5% (earlier outlook had projected the metric in the band of 14– 16%) (Read more: Delta Up on Improved November PRASM Performance). Delta carries a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

3. Technicians at United Airlines, the wholly owned subsidiary of United Continental, ratified a new joint collective bargaining agreement. The accord covers more than 9,000 technicians and related employees of the carrier. The deal encompasses improvements deemed important by the technicians along with increments in wages and job protection (Read more: United Airlines Announces Deal Ratification by Technicians).

4. Shares of Hawaiian Holdings gained on Dec 5, following the impressive November traffic report and improved fourth-quarter guidance. RPMs climbed 9%, while capacity expanded 2.9%. Load factor increased to 85.8% from 81% in Nov 2015 as traffic growth outpaced capacity expansion (Read more: Hawaiian Holdings Up on Improved November Traffic, Q4 View).

5. Barely a few months after commencing scheduled commercial flights to Cuba, American Airlines now intends to operate 10 flights a day to the nation from early next year as opposed to 13 earlier. Lower-than-expected travel demand to Cuba has apparently led to the decision.

Performance

The following table shows the price movement of the major airline players over the past week and during the last 6 months.

The table above shows most of the airline stocks traded in the green over the past week, resulting in the NYSE ARCA Airline Index gaining 3.45% $108.05 over the period. Shares of Spirit Airlines (NASDAQ:SAVE) appreciated the most (6.35%). Over the course of six months, the NYSE ARCA Airline Index gained 24.42%.

What's Next in the Airline Space?

Focus will remain on whether the proposed buyout of Virgin America closes in the coming days. Moreover, multiple November traffic reports are expected over the next few days.

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