MIAMI — Alaska Air Group, parent of Alaska Airlines (AS), has announced today that it has reached a deal to acquire Virgin America (VX) for $57.00 per share in cash, including existing Virgin America’s indebtedness and capitalized aircraft operating leases. The aggregate transaction value is approximately $4.0 billion, according to a statement issued by AS.
When Alaska Air approached Virgin America to merge, JetBlue came in to bid. This created a competitive situation (an auction dynamic) which raised the price. Despite this, Alaska believes that it did not overpay, but instead “got great value for the price.” Nevertheless, airline analyst Brett Snyder from the Cranky Flier blog argues that the merger is costly “That’s a lot of money to spend on an airline that was marginally successful at best.”
The merger would provide Alaska a larger presence in the West Coast, particularly in California, which is to date the nation’s largest market and three times the size of Oregon, Washington and Alaska combined. “With our expanded network and strong presence in California, we’ll offer customers more attractive flight options for nonstop travel,” Brad Tilden, the Alaska Air chairman and chief executive, said in a statement.
Besides the gates at San Francisco and Los Angeles, Alaska Airlines would get two gates at Dallas Love Field, 12 daily slot pairs at New York LaGuardia, and eight daily slot pairs at Washington Reagan. According to a statement, the merger “bolsters its (Alaska Airlines) platform for growth and strengthens the company as a competitor to the four largest U.S. airlines.”
According to aviation analyst Henry Harteveldt, the combined Alaska-Virgin America will offer far more north-south utility to West Coast travelers. “I expect we will see Alaska/Virgin/Horizon expand both intra-state California flying as well as east-west flying. Virgin America will enable Alaska to significantly expand its presence at both LAX and SFO, which are two critical and gate-constrained airports.”
“Well before the contretemps with Delta, Alaska has desired to expand its continental US, LAX and SFO presence, which a VX acquisition would further facilitate and accelerate,” said airline industry analyst Robert W. Mann. “Since Alaska (like rival jetBlue) plays the role of multilateral code-share partner, the VX acquisition may also be viewed favorably by American (if not by Delta), Mann commented.
Winners and losers will depend on how Alaska uses, codes-with or disposes the routes that overlap with American and Delta, which seems to be a winner. “Even if Alaska decides to terminate its codeshare with Delta, AS will now be focused on completing the merger over the next two years.” Harteveldt commented.
The Atlanta-based carrier is expected to continue building out its presence in Los Angeles and Seattle. Another winner seems to be American Airlines, provided that the DOJ does not limit or demands the termination of its existing codeshare with Alaska Airlines. According to Harteveldt, the deal would enable American “to codeshare to a larger number of routes and flights.”
On the other hand, Harteveldt forecasts that Southwest will “feel the most heat” from the merger, as Alaska will be expanding its presence throughout the west. United may also feel some pressure as well, “primarily from corporate accounts and high value travelers who take advantage of Alaska’s frequent flier partnerships with foreign airlines.”
The merger would create the fifth largest airline in the United States in terms of capacity, and it is the latest in the U.S. air transport industry, which has experienced a decade of consolidation and mergers, leaving to date four major carriers (American Airlines, United, Delta and Southwest.)
According to Harteveldt, the deal doesn’t itself force more consolidation. Instead, it is a reaction to other airline mergers that have preceded it, and to the limited gate access seen at a growing number of airports as a result. “More consolidation is inevitable, though, because the airline industry has always been focused on scale” he said.
“United loses. American wins, probably. Delta remains to be seen, but could very well win if Alaska takes its eyes off Seattle during this whole thing” Snyder added.
Seattle-based Alaska Airlines has progressively expanded its network beyond the West Coast, including Hawaii. The airline has a fleet of over 80 Boeing 737 Next Generation aircraft, and together with Horizon, offer flights to over 90 destinations in Canada, Mexico and the United States. Meanwhile, San Francisco-based Virgin America has a fleet of 60 Airbus A320 family aircraft, and serves 23 airports in the United States and Mexico.
“In some aspects, fleet differences, market entry and competitors, this is looking like a thirty years later re-run of 1986 and Alaska out-bidding Delta for acquisition of Jet America and its MD-80 fleet, in a bid to expand north-south along the US west coast. In that case, Alaska used the MD-80s to replace older Boeing 737 Classics” Mann said. However, Alaska Air revealed that there is not a firm commitment to keep Virgin America’s current fleet.
“Although the Airbuses are an economic fleet size, they add complexity and training costs,” comments Mann. As most of the Virgin America fleet is leased, Mann expects that these could be traded out as soon as 2020 or earlier. “Ideally, this would be done prior to achieving FAA Single Operating Certificate approximately 18 months from merger closing.” Mann commented. So far, no Passenger Service System cutover date has been established yet, although both carriers use Sabre, which according to Alaska Airlines “is very good for us.”
From a passenger experience point of view, Alaska Airlines has been very innovative on the ground. Its ongoing “airport of the future” focus has helped the airline improve a key part of the passenger experience. However, Virgin America offers a superior cabin product. “It will be interesting to see whether Alaska decides to keep, I’d like to see Virgin’s overall sense of design and style prevail at the new Alaska” Harteveldt said. However, Snyder was more conservative and commented that it was “too early to tell.”