Berkshire taking Southwest private seen as one of many potential airline deals

Upcoming mergers in the airline sector will probably be carried out by smaller regional carriers, including JetBlue (JBLU), Spirit Airlines (SAVE), Alaska Air (ALK), and Hawaiian Airlines (HA), Imperial Capital argued this morning in a research note.

DEALMAKERS

Three regional airlines – Alaska Air, Hawaiian Airlines, and JetBlue – could make deals with each other, according to analyst Michael Derchin wrote to investors. Spirit, Allegiant Travel (ALGT) and privately held Frontier Airlines, identified by Derchin as “ultra-low cost carriers,” may also look to consolidation opportunities, the analyst stated.

RATIONALE

Deals among the smaller carriers would make them more competitive and increase their defensiveness ahead of the next downturn, the analyst stated. Additionally, consolidation would enhance their growth opportunities during the sector’s next expansion cycle, the analyst added.

POTENTIAL DEALS

Alaska Air could merge with JetBlue, Frontier could acquire Spirit, the combination of Frontier and Spirit could merge with Allegiant, and American Airlines Group (AAL) could bid for Hawaiian, which could lead to a bidding war, the analyst wrote.

Another possibility, according to #Derchin, is Berkshire Hathaway (BRK.A, BRK.B) taking Southwest Airlines (LUV) private.

After taking major stakes in the four largest airlines, and with $100B in cash available for additional investments, it is plausible that Warren Buffett’s conglomerate could opt to take one of its holdings private, the analyst contends.

Derchin views Southwest, with its low-cost domestic operation, “unique” culture, and consistent track record as the best fit for being taken private by Berkshire.

LARGE AIRLINES

American (AAL), Delta Air Lines (DAL), United Continental Holdings (UAL), and Southwest Airlines may “largely” remain on the sidelines when it comes to consolidation deals, however, Derchin believes.

Those airlines will probably “focus on enhancing joint ventures” in an effort “to strengthen their international route networks,” the analyst wrote.

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