In Part 1 of this story, we discussed how JetBlue (NYSE: JBLU) and Alaska Air (NYSE: ALK) both stand out in a cutthroat airline business, and reviewed the possibility that a larger carrier could buy out JetBlue. Now, let's look closer at the prospects that might make Alaska Air a winning airline investment.
As mentioned in the first part of this series, Alaska Air and JetBlue do have some similarities in terms of size, scale, and needs. Both carriers are looking to grow their routes and capacity without sacrificing revenue per seat, while still offering top-tier service. Both have ranked at the head of their categories in terms of customer service, comfort, and even fuel efficiency. But while the JetBlue story appears to center on M&A activity, at least for the time being, Alaska Air is not likely to be a takeover target. Instead, the company is focused on growing organically.
In recent times, Alaska Air has added multiple mid- and transcontinental routes; initiated a plan to switch out bigger jets for more fuel-efficient Bombardier Q400's on shorter-haul flights; and steadily increased its PRASM—passenger revenue per available seat mile.
Based in Seattle, Alaska Air uses West Coast metro areas such as San Diego, Seattle, Portland, and Anchorage to build out its mainline, long-haul routes. As mentioned by fellow Fool Damon Churchwell, the company derived 71% of its revenue from these long-distance flyers.
A growth story
The great thing about Alaska Air is management's effectiveness in generating appealing ROIC and leveraging its position as a West Coast powerhouse. The carrier doesn't generate the attention that JetBlue or Southwest do, but it's highly regarded in its own markets. J.D. Power & Associates has ranked the company first in customer satisfaction among major airlines for six years running.
For August, the company saw traffic and capacity rise appealingly over the year-ago numbers. Passenger miles hit 2.6 billion -- up from 2.45 billion in August 2012 -- while capacity rose 7.3%. This steady growth is expected to continue as the company tacks on more routes and fills more seats.
If you had to pick just one...
JetBlue and Alaska Air are both appealing picks in the industry -- possibly the two most appealing. Either could be a valuable addition to your portfolio, even if airlines are traditionally terrible investments.
JetBlue should appeal to more value-oriented investors. With such a low price-to-book ratio, investors are buying a piece of the company's assets at nearly the lowest cost of any other airline stock. Though a buyout of JetBlue would enable a quick and substantial return on investment, the company isn't relying on that possibility.
JetBlue can and will grow organically, and its valuations should catch up to industry averages. For some time, the company's costs were out of control, and the balance sheet was ugly. It seems like the market's still holding a grudge over that.
Meanwhile, Alaska Air should appeal to growth-hungry investors. The stock is not as cheaply valued, though it's certainly not too expensive at its current level. Management has consistently proven its ability to keep costs low while growing the company -- a rare combination.
For the foreseeable future, the numbers should continue to rise in Alaska Air's favor. The stock holds more downside risk, given its richer valuation, but at the same time, Alaska Air holds one of the healthiest balance sheets in the industry.
Bottom line: I'd buy JetBlue for the bargain and possible acquisition, but I'd choose Alaska Air for its management and growth.
Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.