RPT-BREAKINGVIEWS-Airline deal flies smoother with fewer passengers

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jonathan Guilford

NEW YORK, Jan 12 (Reuters Breakingviews) - Deals done at 40,000 feet have a better chance of success with fewer people involved. Airline M&A has been choppy in the United States, but discount carrier Allegiant Travel's ALGT.O plan to buy peer Sun Country Airlines SNCY.O for $1.5 billion, including debt, follows a smoother trajectory, thanks to the target's chunky cargo business.

Mergers have been a struggle industry-wide. Alaska Air’s stock price plummeted 15% after unveiling its $1.9 billion acquisition of Hawaiian Airlines in 2023, while various attempts by Spirit Airlines to find a new owner sent its shares into a tailspin. These precedents help explain the tepid reaction to Allegiant's announcement.

The two companies are no strangers. Sun Country CEO Jude Bricker served as Allegiant’s chief operating officer until 2016. Unlike Spirit or erstwhile suitors JetBlue Airways JBLU.O and Frontier, the newly uniting duo lean on non-daily schedules, slotting in flights when others can't. Resulting profitability is solid: Allegiant’s expected 19% EBITDA margin for 2026 compares to 9% for American Airlines, according to Visible Alpha data. Sun Country's is projected to hit 26%.

Allegiant also promises $140 million of merger-related cost savings and revenue uplift, worth some $1.1 billion today after taxing and capitalizing them. Two-thirds of the value would accrue to the buyer because of the stock component that gives the target's shareholders a one-third stake in the combined company.

There's more to like. Add Sun Country's $135 million of forecast operating profit this year to the anticipated synergies, tax it all at the standard corporate rate, and Allegiant would generate a healthy 15% return on its investment, Breakingviews calculates.

The takeover valuation, at 6 times forecast EBITDA, does look high, around where much bigger competitors such as United Airlines trade. Allegiant’s shares fell nearly 5% on Monday morning, but past the horizon things look brighter.

Sun Country derived 17% of its revenue from cargo in the most recent quarter, more than the 3% at United or Hawaiian. Almost all of it comes from one big customer, Amazon.com AMZN.O, which boosted its long-term contract commitments amid the M&A turbulence, Allegiant executives said.

It's probably more dependable revenue than airfares from travelers grappling with the cost of living. By becoming part of a larger fleet, Sun Country also dilutes the danger of being so dependent on one corporate client. Unpredictable trustbusters and economic headwinds are lingering concerns, but the lighter passenger load and strong implied return at least clear this deal for financial takeoff.

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CONTEXT NEWS

Discount carrier Allegiant Travel said on January 11 that it had reached a deal to buy peer Sun Country Airlines for $1.5 billion, including debt.

Under the terms of the agreement, Sun Country investors will receive $4.10 in cash and 0.1557 shares of Allegiant stock for each Sun Country share, giving them about 33% of the combined company. Allegiant said it expects to generate $140 million of annual cost savings and revenue uplift from the merger within three years of closing.

Allegiant shares fell 4.5% at the beginning of trading on January 12.

Barclays is advising Allegiant and Goldman Sachs is advising Sun Country.

(Editing by Jeffrey Goldfarb; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on GUILFORD/ Jonathan.Guilford@thomsonreuters.com))