Spirit Airlines And Alaska Air Could Make A Good Pair Trade, But The Short Side May Surprise You

Alaska Air Group, Inc. ALK's Seattle competition is overrated, while Spirit Airlines Incorporated SAVE's stock may get pressured by a growing rivalry in Dallas, an analyst said Monday.

Stifel's Joseph DeNardi upgraded Alaska Air to Buy with a $85 target, and said that Delta Air Lines Inc's DAL move to muscle in on Alaska's Seattle market will start to slow down this year.

Alaska Air, which fell more than 3 percent in February on worries over Delta, is up 2.4 percent in Monday morning trading.

Related Link: Why This Analyst Is Bullish On Spirit Airlines

A Pair Trade?

Although not specifically referenced by the analyst, there could be a pair trade opportunity here. DeNardi also cut his rating on Spirit to Hold because of expanding capacity at Southwest Airlines Co. LUV in Spirit's Dallas market.

Spirit's outlook reminds DeNardi of the "Alaska-Delta competition 12 months ago," when investors failed to anticipate increasing capacity in Alaska's key market.

Moreover, Spirit's expansion plans in Atlanta and Houston are likely to get answered by both Southwest and Delta.

As for Alaska Airlines, its competitive headwinds from Delta will start to abate in the second quarter, with an improving trend into 2016, the analyst noted.

Alaska's investment-grade balance sheet helps prospects for stock buybacks and its relatively favorable labor contracts should help keep costs low, DeNardi added.