Bad News: Alaska Airlines Expected To Buy Virgin America

A bit over a week ago 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.

We learned that both Alaska and JetBlue were competing to buy Virgin America. JetBlue seemed like a logical fit, given that they’re similar boutique carriers with strengths on opposite coasts. They have similar fleets, similar onboard products, etc. I can’t rationalize a merger between Alaska and Virgin America as much, though. They have completely different fleets, completely different corporate cultures, completely different approaches towards their onboard products, completely different frequent flyer programs, and brand equity which isn’t really combinable.

Well, unfortunately it looks like that’s the merger which is happening.

Alaska Airlines is expected to buy Virgin America in a ~$2 billion deal as soon as the next few days.

Alaska-Seattle

Per The New York Times:

Alaska Airlines is near a deal to buy Virgin America for about $2 billion, a person briefed on the matter said on Saturday, describing a move that would unite two popular smaller airlines in the latest round of consolidation in the industry.

An announcement could come as soon as Monday, said the person, who spoke anonymously and was not authorized to speak about the matter, and who cautioned that details were still being negotiated and the talks could fall apart.

Alaska squared off against JetBlue, with final bids being entered in recent days.

Like I said, I really can’t rationalize this deal, and specifically how Alaska values a takeover of Virgin America more than JetBlue does. Alaska has always been successful because of what a lean, disciplined operation they run. I think with this merger we’re finally reaching the point where airlines are merging “just because,” given that virtually all US carriers are turning profits. But presumably that’s only cyclical, and the economy and/or oil prices will change things up again at some point.

Virgin-America

Last time I wrote about the potential of an Alaska and Virgin America merger, a lot of people thought I was crazy for suggesting it doesn’t make sense. So I figured I’d address a few of the points people disagreed with me on (the quotes in bold are some of the points people made):

  • “This will allow Alaska to pick up more slots on the west coast.” West coast airports aren’t slot restricted. Yes, Alaska would pick up some slots at Washington DCA, etc., but that’s hardly a reason an airline based on the west coast which operates primarily regionally would want to spend $2 billion on a new airline.
  • “But both airlines have great corporate cultures and onboard products.” Sure, but in very different ways, and it only takes one flight on each airline to realize that. Virgin America is a young, fun, and hip airlines, which is very different than what Alaska is going for. As Alaska fanboy Travel Codex commented on the last post: “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.”
  • “Alaska is just trying to reduce competition.” A fairly small airline based in Seattle is willing to buy an airline they only selectively compete with for $2 billion in order to shut down competition? All while their hub is being invaded by one of the world’s largest airlines, Delta?
  • “This allows Alaska to compete in the transcon market.” That’s definitely a valid point, though Alaska doesn’t need a merger to make that happen. They operate all kinds of 1-2x daily transcons, though haven’t expanded all that much beyond Seattle. That seems to be a conscious decision, and not due to lack of opportunity. Sure, this would allow them to enter the New York to LA/SF market, but how do they plan on tackling that? Are they going to keep around the Virgin America brand and get rid of the Alaska brand in order to do that? Are they going to finally upgrade the Virgin America first class seats so that they’re competitive in the market? My point is simply that it seems like a conscious decision up until now that Alaska hasn’t competed more on transcons out of other markets, and it’s because that’s not the core of their business. Alaska doesn’t try to be all things to all people, and that’s precisely why they’ve been so successful.

Bottom line

It looks like Alaska will be taking over Virgin America, and that it could happen as early as this coming week. But I have to wonder what they’re thinking with this merger. Just about the only thing these two airlines have in common is that they’re smaller carriers. Other than that they’re so different, and not in the sense that they’d complement one another.

Alaska and Virgin America are two brands which a lot of consumers love, but for very different reasons. Unless they plan on running two separate operations, there’s no way they can combine the two brands without losing what makes them special.

I just don’t get it…

Comments

  1. I’ve noticed that Virgin America is an AMEX MR transfer partner and Alaska isn’t. Is there a play here?

  2. Diversification is necessary to operate sustainably in the competitive market. This deal will provide Alaska entry into a market segment with relatively little investment and brand expansion. However, there will be need for restructuring the organization to align the two brands and develop a plan for pipeline growth. What is surprising is the low appraisal of VA by Alaska.

  3. There are probably other issues at play. For example, Alaska has long been a potential target for acquisition, and this merger will make it bigger and probably add significant debt, making it a far less appealing target for the big three.

  4. What do you think will happened to virgin America point? Currently it’s points are worth at least twice as much as Alaska miles.

  5. Once again you are thinking about this from a fanboy not a business perspective. Alaska could care less about what makes them special or that Virgin has hip mood lighting. They are looking at resources (planes, gates) and economies of scale (better negotiating power with larger fuel purchases and being able to lay off a good part of the redundant executive/back office staff).

  6. Let’s see how the markets react to this on Monday. I’m a bit disappointed about this merger. As you said, a B6/Virgin America merger makes more sense….more commonality as mentioned. AS has always struck me as a very conservative brand and there’s nothing wrong with that. They couldn’t be more different.

  7. This is more about Alaska keeping another competitor (JetBlue) off the West Coast at any sort of scale at least for the next few years. This alone is worth hundreds of millions of dollars to Alaska as they attract a very similar passenger to that of JetBlue. It is also possible that in the future this will make them a very attractive target for further consolidation, probably with JetBlue.

  8. You have it wrong. Anbang is going to acquire Virgin, then trade it to Marriott for Starwood.

  9. Ben,

    I predict in the not so distant future we will be able to purchase Alaska Airlines Miles for less the 1.6 cent per mile to post revenues prior to earnings after this big purchase. Although you will most likely see a Cathay devaluation prior to the sale…

  10. Outstanding news
    Suppose all in the eyes of the beholder
    I’ll likely fly Alaska more and they have a respectable program

  11. The ability to have east coast airports and a ‘hub’ in JFK allows Alaska to become a national airline. Without this they are just a very large regional. This deal makes perfect sense and will allow Alaska to become a much larger player.

  12. Isn’t this just a diversification play for when they eventually officially divorce with Delta? Now they get SFO as a hub where they can still partner with American as needed, they get two more routes to Hawaii, and they get more ability to feed their wide array of international partners.

  13. I think the value is in the brand. That safety video has had 11 million views on YouTube. Alaska would be silly to take over the brand.

  14. Who cares about the fleet merger. Sell off the damn leased airbus’ and fill the gaps with incoming 737Max’s etc.

    Eliminate as much capacity as you can, control it, and this is one way to do it on the cheap.

  15. People are missing the point, although you alluded to it briefly in your point. AS is being encroached upon in its own home turf (SEA). They KNOW they need a way to diversify and they’ve found it. Now, their overpaying by ALOT, and I don’t agree with it, but it will give them the head start they need to get their brand and routes into markets they’ll need to survive.

  16. Agree with Lucky. None of it makes sense to me. Stan, you make counterarguments but what do they have to do with buying VX? If Alaska wants to expand, they can buy planes; if they want to add routes and get better fuel prices they can do that; why instead pay a premium (well above market value) for VX for those things? Especially when that price includes things they don’t want, and requires purchasing the wrong type of plane, etc.

  17. I’m a former Virgin America In Flight Team Leader (that is, purser). What VX and AS share is west coast roots, a very strong customer service culture for long-haul flying, and a competitive spirit to fight off legacy aggression. Both airlines have a spirit of needing to prove their product, whereas the legacies are complacent in their approach since they are so dominant. It may not be the same equipment, but there’s a lot of deep connections that make this a good fit. The VX flight attendants recently voted to unionize; AS just ratified a new contract that the FAs are (more or less) happy with, compared to WN, for instance. B6, as it happens, is trying to unionize, and their management is using the same lawyers to fight the unionization that VX had contracted. Not that VX FAs are assured their jobs in an AS buyout, but I think B6 secretly didn’t want to inherit a majority pro-union FA group.

    That’s just from the inside of the plane itself. I can’t speak to the investor and financial perspective.

  18. Who knows, maybe later they will pull JetBlue into the mix. Set up a strong code-share relationship with Virgin Atlantic and Australia – and it starts to put them in the league of the big 3 (AA,DL,UA). Now keep the Alaska FF program and now you got some strong competition.

  19. You make good points as to why the synergies may not occur.

    But how is it bad news? For me, with a ton of AS miles and no AS transcons from LAX, it’s good. It gives me a real option to AA.

  20. I posted this on the first thread, but this seems like it is about creating a premier West Coast airline. Alaska is obviously popular in the Northwest while Virgin America has much stronger brand equity among California based customers than many miles/points oriented travelers seem to understand. When I am in San Francisco, the locals that aren’t point obsessed all recommend Virgin over United and other options. This merger creates an airline with strong hubs up and down the West Coast, which is pretty valuable. If I am flying to or from the West Coast, this combined airline is an obvious choice. The combined company can take planes from duplicate CA to OR/WA routes and divert them to other business destinations in the middle of the country.

  21. You don’t understand the business model of Alaska, and it’s loyal west coast followers.. You rented an apartment in Bellevue for a few months… Alaska has loyal followers and flies more flights up and down the west coast than any other airline. This will allow them to further dominate the west coast with strategic flights elsewhere… Talk to their frequent flyers and it would make sense

  22. How about a dual brand:
    1- Alaska Airlines for to/from/inter Akaska with 737
    2- Virgin Airlines for continental US + Hawaii + International with mix of A320 and 737 ( or eventually all a320)

    Same mileage program, same codeshare/alliance partners, same policies, etc

  23. As a few others have said, this is about keeping JetBlue from getting bigger on the west coast, and would give them a large presence in every west coast city. A strong coast to coast JetBlue would probably hurt Alaska more than any other carrier. It’s an interesting strategy, and it would not surprise me if they choose to keep the Virgin brand or choose a new name entirely. And with a larger size, Alaska should finally join an alliance (probably OW given their relationship with AA, and their need to have strong TPAC codeshare options with so many west coast flights).

  24. Alaska bought an airline back on 1986 Jet America ..true it was a steal n sold t slots at ord,dtw,n stl and made t money back n aquired 6 airplane’s to help them expand..they would not do something that would backfire..they are bulldogs n have a lot of holdings n power..let me tell you they know exactly what they are doing..

  25. From the WSJ article:

    “People familiar with the matter said the addition of Virgin America would vault Alaska to 15% of the seats offered out of San Francisco International Airport, Virgin America’s base, from its current 4%. Alaska’s position at Los Angeles International Airport also would rise substantially, said people familiar with the matter, to 11% of seats from 5%.

    Alaska Airlines and Virgin America have only six routes that overlap, these people said. As measured by capacity, the number of seats times miles flown, that overlap amounts to just 6.6% of Alaska’s capacity.”

    It seems to me that from a business sense, this merger makes a lot of sense.

  26. I’m MPV Gold in San Francisco, get to that level in segments. Maybe with a hub in SF I won’t have to squeeze in a couple flights to Seattle via Portland.
    As an Alaska Air fan, I can’t think of a better merger, both airlines might have different styles, but they are both well respected. I will look forward to it.

  27. The rumor I heard is that AS is looking to put some pressure on Boeing by gaining some fleet diversification.

  28. Agree with many of the comments above as to deal rationale.

    AS would also be picking up significant Net Operating Losses at VX which would unlock tax savings – not sure how much that is worth to them, but I have to imagine it represents a meaningful chunk of the purchase price.

  29. Aside from what seem to be valid points raised here about blocking B6 and expanding west coast capacity – specifically in CA – what about another Delta angle? Delta owns 49% of Virgin Atlantic and might be nosing around in hopes of trying to pick up another Virgin brand on the cheap. In addition to the other benefits, AS buying VA potentially prevents more DL expansion on Alaska’s home turf.

    http://skift.com/2016/03/24/why-delta-is-virgin-americas-most-likely-suitor/

  30. You’re two for two with recent mergers. Time to start paying attention and finding out more than just what it means to a ‘loyalty’ customer. Stick to what you do best: trip reports.

  31. Agree with Nemme.

    @PRB – addition of extra fleet is not as easy as it sounds with having to purchase new tarmac space in new airports, ground staff, maintenance, flight planning staff, etc, etc, etc. The easiest method is to use CAGR to obtain a well performing, reputed, existing company. In this case USD2B is quite a steal if you also include brand image.

    Great move by AS in securing more space on the west coast and extending some lucrative long domestic routes.

  32. Hello. Wake up call. The days of the free ride (pun intended) are over, loyalty is NOT churning CCs and never having BIS miles. Airlines don’t give a flying f if you buy miles. That is not a loyal customer. Mergers can and do and will happen so whine away. You have no influence so pay up or shut up.

  33. One or two others above commented along the same lines about how I feel. This post is written from the perspective of a fan and/or mileage runner, not a Wall Street businessperson. Look at AF/KLM and BA/IB (IAG) and also LH/LX/OS. You can have a diversified portfolio of competitors with different products and services that will increase shareholder value. This is a basic financial principle. Yes the two carriers are very different but there is financial gain to be had with a merger, however it will take shape. I suggest you go back to Finance 101 because you might have missed this critical lecture while you finding loopholes in airline pricing and mileage running during school.

  34. They are just buying market share. Plane and simple. It takes a lot more time and hard competition to try and build it up instead of buying it outright. They won’t get many chances to do that.

  35. I agree – Lucky, you should probably stick to just Trip Reports, and if you want to make comments about the business aspect of things, maybe make sure you know exactly what you’re talking about? I’m really trying to not be mean, but you wrote, “I have to wonder what they’re thinking with this merger,” and well, if you knew more about business (no, not J class, actual business) and not just onboard products and champagne, I think you’d be able to figure out why Alaskan is buying Virgin America.

  36. This is good news as it strengthens Alaska’s west coast territory. Both airlines have a great reputation so I can only see good from this.

  37. I agree that the merger may make sense (and I posted something to that effect in the first thread).

    However, to be fair, I believe Ben’s point is whether a merger with AS makes more sense than a merger with B6, not that a merger with AS doesn’t make sense at all. I don’t know all the economics involved (none of us are), but while I do think a merger between AS/VX makes sense, I would have guessed that it would have made more sense to B6. But maybe AS actually has the cash, and defending home turf is worth a lot to AS.

  38. True, about the airports not being slot-controlled, but there are only so many gates that can be used only so many times in any 24-hour period.

  39. Another point to consider, however small it may seem, is the addition of 600+ pilots for AS. With the new rules passed 2 years ago requiring higher minimum time, airlines are fighting each other for new hires to keep up with retirements. This could allow them to expand even faster than planned.

  40. Defense against JetBlue and Delta. (Everything Alaska does seems to be defense against Delta).

    Merger with JetBlue makes enormous sense; that’s why Alaska had to block it.

  41. As an Alaska Airlines customer in California, it’s great news for me because I’ll be able to get to the east coast using Alaska Air. I already am going to Boston in June on Virgin…I hope I get some mileage credit now with Alaska.

  42. We will sadly see less flights and higher airfares between Hawaii and west coast, especially Bay Area.

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