The coronavirus has hit the airline industry particularly hard. As long as COVID-19 rages, it is unlikely that there will be a meaningful resumption of normal services. In the meantime, airlines have taken drastic measures such as refinancing, taking on piles of extra debt, severe cost-cutting initiatives and furloughing employees, in order to remain afloat.
But apart from extreme courses of action, the industry will need to be creative to keep the wolf from the door. A new partnership between American Airlines (AAL) and JetBlue (JBLU) could be the first of many collaborations over the coming months.
Although, new might not be the right word here. It’s more a rekindling of an old flame. A decade ago, the two forged a partnership that petered out after four years, so it remains to be seen whether the outcome will be more positive this time around.
The deal, announced on July 16, will provide AAL with entry to 130 JetBlue routes, and in return, JetBlue will be able to use 60 American Airlines routes out of New York and Boston.
The deal makes perfect sense to Deutsche Bank analyst Michael Linenberg, who argues it is a win-win for both airlines.
Linenberg said, “We view the move by American and JetBlue to form a partnership as a very positive development for both companies on many levels; we anticipate it will be earnings accretive for both companies in year one… We think there is the potential for this partnership to expand into something much bigger than what is highlighted in the initial press release.”
So, how will each airline benefit?
For JetBlue, which Linenberg thinks has long been an “airline in search of a network,” it will provide access to routes between the largest cities and large second-tier cities in the US, as well as an entry into new markets where it presently has little-to-no presence.
As for American, an airline that has lost its dominant position in the New York and Boston markets, it will be a chance to reestablish a commanding presence.
“By working together,” Linenberg summed up, “American and JetBlue will create the largest airline network and frequent flyer base in Boston and be of similar size (possibly larger) to Delta and United in New York (rather than where they are today, a distant third and fourth based on revenue, respectively).”
To this end, Linenberg reiterated a Buy recommendation on AAL along with an $18 price target. Expect upside of 57%, should the target be met over the next 12 months. (To watch Linenberg’s track record, click here)
Linenberg’s colleagues aren’t quite as upbeat. Based on 3 Buys and Holds, each, and an additional 7 Sells, the airline has a Moderate Sell consensus rating. However, the share price has declined to such an extent that there’s possible upside of 17%, should the $13.44 average price target be met in the following months. (See American Airlines stock-price forecast on TipRanks)
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