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JetBlue Misses Out on Virgin America Deal: What Next?

The tussle between JetBlue Airways Corporation JBLU and Alaska Air Group ALK over the acquisition of Virgin America VA finally came to an end after Alaska Air Group stole the deal for $4 billion, inclusive of debt and capitalized aircraft operating leases.

The transaction, cleared by the boards of both the companies, is expected to close by the beginning of 2017, subject to regulatory approvals.

Following the news, shares of JetBlue fell 4.31% to $20.41 per share in yesterday’s trading session.

Major Loss

The carriers have been vying over Virgin America in a bid to strengthen their presence in the west coast. Hence, losing out on the deal has dealt a major blow which will not only weaken JetBlue’s presence in the region but will also intensify competition.

Also, of late, JetBlue has been expanding its reach in the Latin America and Caribbean markets and the addition of Virgin America would have helped the company strengthen its services in Cancun, Mexico – a popular tourist spot which is being currently served by Virgin America.

Meanwhile, Virgin America’s modernized fleet comprising 60 Airbus groups with advanced facilities like surround-sound feature, high-speed Wi-Fi connectivity, movie streaming deals with Netflix and touch-screen seatback entertainment makes it an attractive buyout option. Also, the average fleet age is 6.5 years, one of the youngest in the industry.

Merger Options

After the recent deal loss, its time for JetBlue to explore greener pastures. In this context, we view Hawaiian Holdings HA – a company with significant presence in the west coast – as a prospective acquisition target for JetBlue.

Moreover, both Virgin America and Hawaiian Holdings have market capitalization of over $2 billion but EV/EBITDA ratio for Virgin America is 6.29 which is quite higher than Hawaiian Holdings’ 4.9.

Furthermore, Alaska Air Group’s acquisition of Virgin America will not only strengthen the company’s west coast operations through the addition of more routes but will also intensify competition for carriers like Hawaiian Holdings. Thus, a merger is thus the most practical choice for Hawaiian Holdings at the moment.

Meanwhile, low-cost carrier Spirit Airlines has a slightly higher market cap than the other two carriers, making it an appealing choice as well.

Growth Plans

Apart from mergers, JetBlue can focus on route expansion which will likely improve the company’s operations in the areas by driving passenger count and boosting ancillary revenues.

Also, JetBlue’s Mint service is highly popular and has been boosting revenues significantly. Meanwhile, to enhance its network, the carrier plans to flag off an average of 140 daily flights from Fort Lauderdale-Hollywood International Airport (FLL).

We believe that the launch of these services coupled with its latest request for 12 daily flight slots to Havana will drive this Zacks Rank #4 (Sell) company’s revenues going forward.

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JETBLUE AIRWAYS (JBLU): Free Stock Analysis Report
 
HAWAIIAN HLDGS (HA): Free Stock Analysis Report
 
ALASKA AIR GRP (ALK): Free Stock Analysis Report
 
VIRGIN AMERICA (VA): Free Stock Analysis Report
 
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