ANALYSIS: Analysts hot for Alaska and Hawaiian

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Airline industry analysts are increasingly optimistic about the financial health of Hawaiian Airlines and Alaska Airlines, two relatively-small US players that posted strong second quarter financial results.

In recent weeks, analysts have raised their expectations for the companies and published papers arguing that Alaska's and Hawaiian's fortunes look bright, despite heated competition from the major US legacy carriers.

"With $1.5 billion in unrestricted cash and marketable securities, no net debt and a fully-funded pension plan, we believe [Alaska] continues to have one of the strongest balance sheets in the industry," says a 25 July airline industry update from Los Angeles-based Imperial Capital.

The company estimates that Alaska Air Group's stock, which traded at about $45.00 on the New York Stock Exchange on 14 August, will reach $56 by July 2015.

Alaska Air Group, parent company of Alaska Airlines and regional subsidiary Horizon Air, reported operating income for the second quarter of $263 million, up 51% from the same period last year.

Likewise, the Seattle-based company's net income for the quarter climbed 59% to $165 million.

On 25 July, the same day Alaska released its results, New York-based Wolfe Research released a paper making a "bull case" for the company, which it estimates will have a stock price of $65 per share by the end of the year.

Despite solid financial returns, Alaska executives conceded last week that increasing competition from Delta Air Lines in Seattle will likely have a "negative impact on unit revenues… for the foreseeable future."

But Wolfe thinks Delta has no interest in "destructive behavior" in Seattle and will likely pull back from the city if new routes from Seattle do not generate lasting returns.

Alaska, like Honolulu-based Hawaiian, occupies a middle ground in the US airline industry, with cost structures that are lower than legacy carriers but more than discounters.

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Source: Recent securities filings.
* Spirit figures are from Q1 2014. (Spirit released Q2 results on 29 July.)

But despite pressure from newly merged competitors, Alaska and Hawaiian continue to thrive.

Hawaiian closed the second quarter with $51.6 million in operating income, up 38% year-over-year, and $27.3 million in net income, more than double net income in the second quarter of 2013.

On the same day it released its financial results, Hawaiian announced it had cancelled an order for six Airbus A350-800s and agreed to purchase six A330-800neos, with deliveries from 2019.

The deal will save Hawaiian about $500 million in capital expenditures through 2018, said chief executive Mark Dunkerley.

In addition to strong results, Wolfe Research notes that the performance of Hawaiian's inter-island network could be buoyed by Mesa Air Group's decision earlier this year to shut down its subsidiary go!, which also operated inter-island flights

Also, Hawaiian's westward flights across the Pacific could benefit from recent stabilisation of the Japanese Yen, says Wolfe.

Those reasons led Wolfe on 22 July to upgrade its rating of Hawaiian's shares to "peer perform" from "underperform."