Niche airlines are developing as a very profitable growth sector, according to Ray Neidl, Senior Equity Analyst at Calyon Securities (USA) Inc. He says airlines like Alaska Air Group (ALK), Hawaiian Holdings (HA), JetBlue Airways Corp. (JBLU), Allegiant Travel Company (ALGT), Spirit Airlines (SAVE) and Southwest Airlines Co. (LUV) are all growing fairly rapidly in their particular niches, and are now large enough to be considered carriers.
“You have Alaska Airlines, which is really growing and dominating the western coastal area of the North American continent. You’ve got Allegiant, which has a very unique model, which in combination of a charter schedule service going into very small communities that have lost your scheduled service because of the fallback of the regional airlines. You have got JetBlue, which is restructuring themselves,” Neidl said. “And you’ve got Spirit Airlines, which is growing at around 20% a year with a very unique product, where they charge you for just about everything beyond the ticket, to keep ticket prices low, which appeals to be a very certain segment of the economic market toward the bottom end of the small business — the infrequent traveler seems to like that product.”
Neidl says these air carriers have different niches they attack, and they have been very successful attacking them. He says the margins are better than those normally seen in airlines, and expects significant growth in these airlines.
Neidl also says Hawaiian has room for growth beyond its interisland routes into East Asia, expanding beyond its close-to-monopoly situation in the Hawaiian islands. “The big area for growth for them is to Asian points — Japan, where they just recently started services; in particular, Korea; and eventually, China — and that represents big growth and profitable opportunity for them,” he said.
And lastly, he highlights the discount-fare airline Southwest Airlines. “You’ve got Southwest out there as not the only low-cost, low-fare carrier any longer. They are quite large, but wisely they have curtailed growth as they restructure themselves and try and absorb their recent acquisition of AirTran. So Southwest has to define their model in a new industry environment and to achieve a targeted ROIC before they begin growth again,” Neidl said.
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