It is official. Alaska Airlines is buying Virgin America for $57/share in cash, a $4 billion deal (including assumed debt; $2.6bn in actual purchase price) which exceeds most earlier estimates. And I still do not get it. The statement from the combined companies says arguably all the right things about the deal, but leaves tons of questions unanswered.
The combination expands Alaska Airlines’ existing footprint in California, bolsters its platform for growth and strengthens the company as a competitor to the four largest U.S. airlines. Combining Alaska Airlines’ well-established core markets in the Pacific Northwest and the state of Alaska with Virgin America’s strong foundation in California will make Alaska Airlines the go-to airline for the more than 175,000 daily fliers in and out of Golden State airports, including San Francisco and Los Angeles.
Okay, so combined it will be stronger in California and on the north-south west coast corridor. That’s solid, but it is also an incredibly tough market to compete in; dropping one competitor out is unlikely to reduce the competition sufficiently to see yields increase significantly in most of those markets.
For Virgin America customers, service will expand in the thriving technology markets in Silicon Valley and Seattle. The combined airline will also offer more frequent connections to international airline partners departing Seattle, San Francisco and Los Angeles. In addition, this transaction will open up growth opportunities in important East Coast business markets by increasing Alaska Airlines’ access to slot-controlled airports like Ronald Reagan Washington National Airport and the two primary New York City-area airports, John F. Kennedy International Airport and LaGuardia Airport.
Getting access to LaGuardia is great but really only works for shorter flights thanks to the perimeter rule. Presumably those will remain with Dallas Love Field for now but it is hard to see the true value proposition to a west coast airline with those slots.
And then there are all the other questions about how the two companies and how they will integrate. As I predicted yesterday this is a buy out by Alaska Airlines, not a merger of equals. Based on everything we’ve heard so far expect that all of the Alaska Airlines policies and products will remain. Which is especially challenging because basically the entire draw of Virgin is its brand. That all disappears if Alaska consumes the company. Which is not to say that Alaska’s customers are less loyal, but the branding is a very different situation and I wonder about the value proposition of the acquisition – particularly at this premium – once that brand goes away. On the plus side, I suppose the annual licensing fee goes away, too.
Oh, and they expect the complete integration process to cost only about $300-350 million. That’s a tremendously optimistic view based on other, recent mergers.
I’ve heard it suggested that this is a move to secure the future of Alaska Airlines, strengthening it in Seattle and fending off the attack Delta has mounted. More planes helps with that, though getting more from Boeing would’ve been cheaper and easier. It helps build a customer base but the combined company is still just a feeder for other long-haul operators rather than growing a long-haul product itself. That doesn’t really seem to me to be a useful type of growth if fighting off Delta is the goal.
Obviously my view does not play in the financial world. A lot of people seem to think this is a great deal for the companies. But I just don’t get it.
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Could this be offense by defense? If b6 got them, as would be left with only ha as a way to expand domestically… Maybe they thought this was the only way to play with the big boys…
I’m sure that’ part of it, but…
At what cost and to what benefit? This transaction comes at a massive premium paid to VX’s investors and also doesn’t help expand internationally. Growing domestically by 20% is great but does it really put AS in that strong a position to fight? I don’t see it.
That’s a tremendous amount to pay on the surface. But let’s think about today’s fuel costs. Right now represents a huge opportunity for carriers to expand and make a lot of money because fuel is so low. The problem is no one can get their hands on more planes and more importantly the crews in the short term outside of M&A. Let’s assume for a second that Alaska is going to draw down the SFO hub. All of a sudden you have 55 A320s to expand operations from mainly SEA and LAX to profitable low competition markets. I could see IND, CVG, STL, CMH and RDU getting new service with the redeployed equipment.
People need to remember why VX was struggling. It wasn’t their cost structure because it was fairly low. It was because they wanted to fly the glam hip routes that already had 3-4 incumbent carriers competing. You can’t make money like that. They need some routes where competition is low or non-existent like CVG-LAX or IND-LAX. Until F9 announced they were going to start 4x weekly service, Delta had no competition on the CVG-LAX route. The flights are high priced typically and DL fills a 738 twice a day. Same with SFO once per day.
If Alaska looks to absorb the VX equipment and crew into their system and make it bigger than it will be a great acquisition. But if AS says they’re going to try to keep doing what VX was failing at namely maintaining the SFO hub, it won’t be pretty when fuel returns to higher levels. This acquisition is about making money right now and if they can string together a couple years of $1-2B profits they won’t care they overpaid by as much as they have.
Alaska just got more attractive as an acquisition target of AA/DL/WN by locking up the West Coast
With the Big 4 controlling 85%+ of US capacity, it’s very unlikely that any of them will be merging or buying a smaller airline.
What licensing fee?
Also, I can imagine this buy-out pleasing Boeing too much as Alaska was proudly an ‘All Boeing Airline’.
VX pays the Virgin Group 0.7% of their operating revenue as a licensing fee for the Virgin brand.
All Boeing except for the Bombardier turboprops at Horizon and the Embraer and Bombardier RJs Skywest flies for them.
Besides, it’s a safe bet they’ll be transitioning to an all 737 fleet as the VX leases expire.
All the VX A320 are leased and can be disposed off in 2-3 years. I’m sure Boeing has plenty of 737NGs to sell.
Yes, exactly! It’ll be a financial and (secondarily) rebranding question for Alaska to figure out the transition; the operational side is not as hard as people make it out to be.
I think the Virgin America
brand is stronger than Alaska and has more upside and growth potential in the California and east coast markets – they should use that for the combined airline. I’m guessing they won’t though.