Alaska: You’re Crazy For Wanting To Buy Virgin America!

Last week I posted about how Virgin America’s stock shot up following speculation that they were looking to be taken over. The US airline industry is turning record profits right now, so it seems like Virgin America probably thinks they’re doing as well as they can, given that they’re looking to sell.

Virgin-America

While there was a lot of speculation, at the time we didn’t have details of which airlines were possibly interested in taking over Virgin America. Now we have more details. Via Bloomberg, it looks like Alaska and JetBlue are both interested in buying Virgin America:

Virgin America Inc. received takeover offers from JetBlue Airways Corp. and Alaska Air Group Inc. after the carrier backed by billionaire Richard Branson put itself up for sale, according to people familiar with the matter.

Discussions between Virgin America and the two bidders are ongoing, and a deal could be announced as early as next week, the people said, asking not to be identified discussing private information. It is unclear if other suitors will emerge, and Virgin America may yet decide to abandon sale negotiations in favor of remaining independent.

As I explained last time, I could actually see the value of a JetBlue and Virgin America merger. Both airlines have strong brand identities and have a pretty good network on their respective coasts (the East Coast for JetBlue and West Coast for Virgin America). They also have similar fleets (both primarily use Airbus narrowbody aircraft).

JetBlue-A321

Meanwhile I can’t wrap my head around why Alaska would want to buy Virgin America. It’s the second most irrational thing they’ve considered lately, along with twice daily flights between Los Angeles and Havana.

Alaska has been so successful as an airline because of what a lean operation they run. They’ve been doing well even when other airlines were suffering. Why wouldn’t Alaska and Virgin America be a good fit?

  • Alaska primarily flies the Boeing 737, while Virgin America primarily flies the A320
  • The airlines have very different corporate cultures — while they’re both good cultures, Alaska’s is more Pacific Northwest (if you know what I mean), while Virgin America is more hip and showy
  • The route networks of Alaska and Virgin America are largely overlapping, so there’s not much Alaska would be gaining by taking over Virgin America, aside from a stronger presence in Los Angeles and San Francisco

Alaska-Seattle

Regardless, Alaska has been very successful because they’ve run a lean operation and have many markets they dominate. Meanwhile Virgin America largely tries to replicate the route networks of American and United.

Bottom line

I can see the synergies between JetBlue and Virgin America, though I don’t think Alaska and Virgin America would be a good fit. Sure, they’d be eliminating a competitor on some routes, but there aren’t really any routes where Alaska’s primary competitor is Virgin America.

I think this would be a huge mistake for Alaska Airlines, which has always been pretty conservative in their growth strategy.

How do you see this playing out? Am I the only one who thinks Alaska would be crazy to buy Virgin America? 

Comments

  1. I could be an effective stalking horse bid.

    And raises the price for Delta.

    Alternatively, it can reduce capacity in key Alaska markets.

    Who says they have to buy and grow it? Could be valuable to increase yield and solidify the West Coast with less overall capacity.

  2. maybe that’s why your not running an airline. As a businessman and a high mileage flyer on AS I would support this for a host of reasons, it gets you slots, routes, and enables AS to grow as it needs to in order to survive. On the downstroke they don’t fly AB so the JetBlue match comes into play here.

    And don’t forget both AS and JetB has ties to EK, some stronger than others, but there is a “play ” here. I would keep an eye on this one.

  3. Ben,

    What do you think would (will) happen to the Virgin America brand and the custom designed mood-lit Airbuses if (when) jetBlue takes VX over? Would they continue to operate the niche brand or take over the routes under jetBlue branding?

    -Max

  4. @ Greg — Except those mostly aren’t slot restricted markets, so other airlines could move in right away to pick up the capacity. This isn’t the 90s, so nowadays airlines can easily add more capacity into markets thanks to regional jets which are getting quite large, not to mention the number of planes that the major US carriers have on order.

  5. @ Max Prosperi — Hah, I imagine it would be a while before they align their products. Or perhaps they’d keep those minor differences, just as American and US Airways planes won’t feature identical interiors even after the US Airways planes are reconfigured.

  6. @ ghostrider5408 — Which slot restricted airports would Alaska gain access to? DCA? Most west coast airports aren’t slot restricted. And aside from some random routes, they have huge overlaps in their route network. There’s nothing stopping Alaska from operating in many of those markets with their own planes.

  7. I hate to agree with you as I’m more of an Alaska fan but Jet blue is a better fit overall unless you merge all three together. To me Virgin is about as good of a fit as Frontier would be for Alaska.

  8. I like the comment about different cultures. I’m clearly in the Alaska Airlines camp but flew Virgin America once and hated it. The mood lighting, the hipster safety video, and the ugly white seats. It had nothing to do with their schedule, routes, or prices.

  9. I agree–B6 makes more sense as an acquirer.

    But perhaps AS wants to solidify their presence in the Bay Area (given their already strong presence at SJC) and expand on their transcon routes, which are VX’s bread and butter.

  10. I think Virgin could teach Alaska a bit here and there on how to be less stodgy
    Alaska runs a good show they run a superior FF program and treat elites better then Virgin
    I see a great fit for Alaska and Virgin
    Having the extra routes would certainly entice me come on board as a FF
    American has horrible change fees except for top tier and now with their monkey see monkey do revenue based program and tough saver availability
    I’m ready to jump ship.Did I say outrageous anytime awards?
    In addition American no longer listens to their customers and fluffs them off by email when issues arise
    No doubt most likely the Parker affect

  11. AS probably prefers the status quo and is playing defense here more than anything. B6 acquiring VX creates arguably a 5th US major and makes AS the last non-LCC midsize airline. As a mainly 737 outfit, they couldn’t get their hands on enough planes in time to grow fast enough to keep up. Unless they decide to take the plunge on the CS300 or E190 and aggressively go after interior markets to SEA and LAX where the Big 3 charge whatever they want.

  12. Seems utterly out of character for Alaska. I hope it doesn’t happen. Alaska’s great they way it is, this would only screw the pooch.

  13. I predict if AS were to make this happen, they would kill VX the way AA killed Reno Air.
    Sure, they might pick up a few routes that VX is flying where AS has less capacity, but basically they are just eliminating a competitor so they can drive prices up in the markets they serve.

  14. Ben,

    What do you see happening to VX’s Elevate Program if either AS or B6 partially (or fully) acquires VX?

    Do you see any improvements (or not) coming to the Elevate program after the sale?

  15. The Alaska bid is a bit perplexing. When looking at the Alaska route network it appears that they are a very, very large western regional (my words) with some international routes as well. Perhaps the battle in Seattle with Delta has sobered their conservative business views. They may feel they need to have larger scale in order to survive long term against the other four dominate US carriers, and this is a faster way to that goal.

    In any case if Alaska and Virgin America were to combine I think they would either have to run 2 separate operations, which is unlikely, or assimilate the Virgin America group. The latter option would essentially require destroying the Virgin America brand which begs the question, “Why Alaska?”

  16. @ghostrider5408: “As a businessman”, lol. “On the downstroke”, lol. “Play”, lol. Okay, okay, you win. Here’s your douchebag crown. You’ve earned it.

  17. It’s to shut down a competitor and maybe get a few more gates. That’s it. Nothing more to see.

  18. Alaska makes perfect sense as 1. Emirates and Hainan could use Alaska as a backdoor entrance to further gain US market; and 2. the overlapping network means it has less incentive to keep the Virgin brand. For JetBlue it makes more sense to keep the Virgin brand and this alone attracts about 5% of cost payable to Virgin Group. If you look Virgin’s business in the UK where they operate the East Coast Mainline passenger railway, it’s 95% owned by Stagecoach and 5% owned by Virgin, just for the brand alone (Virgin is it involved in any operational or financial aspects of this business entity). This 5% can easily kill off a lot of the synergies between the two.

  19. I would think a lot of the value of VX would be its brand and association with Branson and the rest of the global Virgin product line. I don’t see how either AS or B6 could make use of that. They both already have strong, positive brands. VX has 60 aircraft, so buying the carrier wouldn’t do much to vault AS or B6 into the big leagues. There has to be some big picture strategic consideration here, and it will be interesting to see what it is.

  20. Ben, you might have a good knowledge of the industry as a passenger, but what makes you think you have more info, skills and knowledge of the industry from the business perspective than the management of Alaska (or JetBlue)? Network overlap with AS means lots of synergies both on the revenue and on the costs side. In general it might also mean building up a defensive position in terms of access to slots & gates, and a number of other possibilities on the fleet side, on the ground handling side, on frequent flyer programs, on the balance sheet, etc.

  21. Would Delta be allowed to buy it anyway?

    B6 and VX makes sense. Similar brand, similar equipment, different routes. Whereas AS fails all those tests.

    And similar FF programs. VX has some partners but honestly none of them are worth much. I wouldn’t mind if they dropped that in the merger if they kept B6’s family sharing. I credit my miles from both airlines to SQ anyway.

  22. AS motivation could be:
    1.) Buy a major west coast competitor, thus blocking a major west coast push by B6.
    2.) Gates at SFO and at other airports where space is tight (LAX).
    3.) Being a strong number two in SFO isn’t bad; better than being number 5 at LAX.
    4.) This one may be out there, but access to a global brand of Virgin and getting rid of the “regionality” of Alaska.
    5.) Their partner, AA would rather see a stronger Alaska than B6 out West.

  23. There was a rumor onetime of AS buying Sun Country. As a strong AS supporter, I think that would be a better fit as it would give AS a Midwest hub and expansion into the Caribbean. Their aircraft align and their is very little route overlap. I think that make a better acquisition than VX. If VX would happen, I guess they would spin off the airbuses and kill the VX brand and have a stronger presence in SFO. I think AS is in a better cash position than Jet Blue, but that is only part of it.,

  24. I think it is somewhat obvious – while Alaska and Virgin compete a lot in the West Coast, Virgin’s specialty (at least to me) is its transcon products from California to the East (NYC, BOS, CHI, Florida, etc). Virgin is seen as a cool way to travel from California to the East Coast and back, particularly in coach and premium economy. Alaska relies on American and Delta for East Coast to California flights; buying Virgin would give them control of those routes. It would be complementary.

    On the other hand, Jet Blue already has a lot of coverage between the coasts via its JFK and BOS hubs. Their main goal would be really to eliminate a competitor and reduce transcon capacity.

  25. For more perspective, as a NYC, Boston or DC, based customer, a combined Alaska/Virgin would allow me to fly to the four West Coast metropolises (LA, SF, Portland, Seattle) on the same airline. Right now neither Alaska or Virgin can offer that while some of their competitors can in certian cities.

  26. I think it makes perfect sense, AS has reached its limit on new 737 destinations from SEA, heck they now fly daily SEA-BNA who would have thought that route would ever pencil out. So if they are to expand they need to look elsewhere for that expansion, assuming they still have no intent on operating long-haul. When you look up and down the west coast, PDX and SJC don’t have the resiquite O&D demand for nationwide expansion. SFO and LAX have the demand but lack available gates.

    VX gives AS the ability to rapidly expand their mid- & trans-contental services and be the dominant West Coast airline. They have already effectively driven UA out of the SEA market up and down the coast. With a strong route network based out of 4 of the top 10 west coast airports (SEA, PDX, SFO, LAX) and focus cities in 3 more (OAK, SJC, SAN) They can quickly become the B6 of the west coast.

    Plus they will be extending a giant middle finger to Delta as they will be better able to feed Emirates west coast operations. Think about how aperplectic with rage the big three will be if EK announces 2x daily A380 SFO-DXB and says it’s all because of AS feed. 🙂

  27. I bet Alaska would make more money if they started flying to Hawaii out of Orange Co SNA than buying Virgin. We manage oceanfront Condos on Kauai and know the meeting is Huge in the OC.

  28. @Tom re: I bet Alaska would make more money if they started flying to Hawaii out of Orange Co SNA …

    I would love that. I would also love to see someone come into SNA and give DeltASS some competition on the direct route to SLC. Currently I fly often SNA-SEA-SLC just to avoid DL. I think DL just put in bots instead of flight attendants on most flights.

  29. Bro. It makes sense, consolidate and make it one. Come on dude. Common sense. Cut capacity and make money. Go Nova!

  30. I will disagree on several points. First of all, AS and VX overlap on only 7% (As opposed to B6/VX overlap of over 20%) of their route structure so the West Coast networks would definitely compliment each other. VX flies more O&D, long haul flights out of SFO and LAX with very little feed. This is where AS would benefit their smaller, California-centric operation by providing feed to their long haul services. Second of all, AS would gain more slots at ALL Level 3 slot controlled airports (JFK, LGA and DCA) and EWR(which is slot controlled but not considered “level 3”). Finally, much has been written about similar fleets. Many articles omit the fact that B6 operates a fleet of 60 Embraer 190’s so they are not an all Airbus fleet. VX already has a low cost infrastructure to support the fleet so I don’t see this as an issue. Eventually, they will reduce their fleet types but its not as big a deal as many say. My last bone of contention is LAX-HAV……The LA basin has the fourth largest Cuban expat population in the US behind Miami, Tampa, Orlando, and New York with a populous of about 43,000. Maybe not 2 flights daily, but there’s definitely more than enough business to make one round trip highly profitable. Remember, AA fills LAX MIA with charter traffic.

  31. @simon good comeback 🙂 the word that comes to mind with VA is expensive I have never flown them as I am not a fan of changing planes. I can’t see the benefit of buying Va. A look at Key statistics makes me wonder why AS is doing this but that’s what makes business a horse race. Apologies to Ben but my experience on Delta has been fairly good and my sons live in Tx and Im in WA so my choices are AS,AA DL. When I looked at VA they were at least a $100 more with stops.

  32. I’m a loyal Virgin America customer who strongly believes that Alaska is congenitally unable to add any of the qualities of Virgin, starting with humor. Talk about a culture shock. I wouldn’t be surprised at all if loyal Alaska flyers felt the same way about Virgin.

    I’m so angry with Alaska about taking away my Virgin America (which is clearly about VCs making money and Alaska eliminating a competitor), to the point where I refuse to fly Alaska from this point on, whereas before I would occasionally use them and had a neutral to slightly positive impression of their brand. Jet Blue is nice and all, but it also isn’t Virgin. I’ll use them if I’m forced to, though, when Virgin America is no longer.

    Is there an organization I can join to start lobbying Branson right away to start a new airline? Is there an anti-Alaska Airlines organization I can join to try and hurt them? Maybe such organizations could make Alaska feel some pressure to let Virgin America operate relatively independently.

  33. Has anyone thought to ask Alaska Airlines, why they bought it? maybe all the above, give a choice of airlines, ?stop Delta, who own Virgin Atlantic, UK. The name? It seems Delta have taken on board the Virgin way of charging for upper class, economy comfort, on the day, or days before the flights,

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