Although many airline executives have been openly excited about what they think the next Trump administration has in store for them, the spoils will not be evenly distributed. Deutsche Bank (DB) believes that the concentration of industry profits for the first year of the second Trump regime will be decidedly top-heavy.
“Our investment call for 2025 is similar to our call in 2024 which is to own the industry leaders, i.e, the airlines producing the majority of the industry’s profits, namely the Big 3: American, Delta, and United,” analysts from the bank said in a research note for clients. Specifically, Deutsche expects that triumvirate to soak up 90% of industry profits next year.
After a so-called “capacity” crisis of under-filled flights, many players in the space felt prompted to trim their schedules in order to prop up fares. Plus, the companies that competed for market share with cheap tickets, such as Southwest Airlines (LUV), Frontier Airlines, and Spirit Airlines, are making pivots into offering premium flight experiences so that they can serve a profitable clientele.
Unfortunately, pivoting away from a business model that leads with low fares is easier said than done. Spirit Airlines is making its way through bankruptcy proceedings, and Southwest Airlines had to give up board seats to an activist hedge fund that said its turnaround strategy was not moving fast enough.
“Put simply, we stated that the low fare carrier space was over-supplied and that one of the most likely outcomes of their predicament was capital destruction,” Deutsche Bank recalled about its industry stance last year. “Twelve months later, the financial performance of many of them has substantiated our view.”
Although Spirit declared bankruptcy in large part because its merger with JetBlue Airways (JBLU) failed, another tie-up that did manage to go through is expected to provide a bright spot outside the industry’s biggest players. Alaska Airlines (ALK) managed to successfully combine with Hawaiian Airlines, and that investment could quickly pay dividends.
“Alaska’s timing couldn’t have been more propitious as Hawaiian executes a turnaround which we estimate should result in earnings accretion much sooner than what is typically expected from an airline merger and at a higher level than previously forecast,” Deutsche’s analysts wrote.
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