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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