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2 Airline Stocks Buckled Up for Passenger Growth in Middle East

As traffic surges in the region, U.S. carriers can use codeshares to stave off competition

Lower fuel prices and an improving global economy have given commercial air travel a shot in the arm recently — and nowhere is that growth more apparent than in the Middle East. That poses both a challenge and an opportunity for U.S. airline stocks, for whom robust codeshare alliances are becoming a way to get a piece of the action while also protecting their own turf.

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The International Air Transport Association revealed last week that global passenger growth jumped by 8% in January — blowing away recent metrics. Although U.S. passenger growth delivered a respectable 3.5% increase in traffic, demand in the Middle East soared 18%.

At November’s Dubai Air Show, Boeing (BA) forecast that Middle East carriers will need more than 2,600 new airplanes over the next 20 years, worth an estimated $550 billion. The Persian Gulf’s Big Three — Qatar Airways, Emirates and Etihad — together placed orders worth $160 billion for 355 wide-body jets at the show.

Middle East carriers have increased capacity in response to demand growth, and they are expanding the amenities in lucrative premium and business-class segments. They’re also expanding aggressively into the Americas — which is a challenge for U.S. airline stocks that have profited greatly from the global premium and business travel markets.

Despite the danger posed by Middle East airlines, U.S. airline stocks still have tactics to protect themselves. Airline alliances, often referred to as codeshare agreements, are potentially a winning strategy for U.S. airlines. Airline alliances and global agreements are usually the easiest way for airline stocks to expand their global reach.

In the cutthroat global aviation market, it stands to reason that there is strength in numbers for airline stocks: Larger partners benefit because they can provide end-to-end ticketing to passengers — even to destinations that it would be unfeasible to serve. Alliances also can provide a win for smaller carriers in the Middle East that might otherwise succumb to industry consolidation. In light of that strategy, here are two U.S. airline stocks to play Middle East passenger growth:

American Airlines (AAL)

The new American Airlines (AAL) is arriving — and its strength is in its alliances. AAL is a founding partner of the OneWorld Alliance which includes global powerhouses like British Airways, Cathay Pacific, Iberia, Japan Air Lines and Qantas. US Airways, formerly a Star Alliance member, will transfer to OneWorld this month as a result of its merger with American.

In addition to the robust business many of those carriers do in the Middle East, Qatar Airways and Royal Jordanian are also OneWorld members. American also has inked a codeshare partnership with Abu Dhabi-based Etihad Airways. As Emirates plans to debut service from Dubai to Chicago’s O’Hare in August, American’s hub at that airport will help partners Qatar and Etihad hold their own. AAL’s two partners will add service at American’s Dallas/Fort Worth hub later this year.

For its part, Emirates has approached American in the past about an alliance — perhaps such talks will move to the front burner once the US Airways integration is further along.

JetBlue (JBLU)

Compared to other airline stocks, low-cost carrier JetBlue (JBLU) seems like a curious choice for investors looking to make a play on Middle East demand growth. Then again, JBLU has made big changes in its business model lately.

JetBlue operates a bilateral code sharing relationship with Dubai-based Emirates Airlines, which is one of the largest airlines in the world. The agreement gives the Middle East airline greater exposure to the U.S. market and boosts JBLU’s exposure to profitable business travelers.

The most notable advantage of this agreement kicked off on Monday when JetBlue launched new service from Detroit to Boston and Emirates launched new service from Boston to the Middle East. Emirates is pulling out all the stops to lure first- and business-class travelers away from legacy competitors: Passengers within 60 miles of Boston’s Logan Airport will be picked up by private car.

Expect this partnership to grow in value to both airlines — particularly since JBLU picked up new gates at Washington D.C.’s Reagan National that were divested after the merger of US Airways and American.

Bottom Line: You can’t rule out Delta Air Lines (DAL), which is a founder of SkyTeam, or United Continental (UAL), a founder of Star Alliance as competitors in this arena. However, United and Delta face a potentially more serious threat from carriers like Emirates as they roll out premium and business-class service from U.S. cities to the Middle East.

“Essentially, these are not airlines; they’re governments,” Delta CEO Richard Anderson told The Wall Street Journal last November. “They have the ability to gain advantages in markets because profitability doesn’t matter.” While the Middle East carriers deny this, U.S. airline stocks are unlikely to win government protection for their business — at least, not anytime soon.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities. 

Article printed from InvestorPlace Media,

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