Alaska Air clinches Virgin America deal for $2.6B

Alaska Air Group, parent company of Seattle-based Alaska Airlines, agreed Sunday to purchase San Francisco-based carrier Virgin America for approximately $2.6 billion.

If the deal survives regulatory scrutiny, it will make Alaska Airlines a much bigger player, adding Virgin America’s 60 Airbus A320 jets to Alaska’s mainline fleet of 147 Boeing 737s.

Alaska would leapfrog JetBlue, which it beat in the bidding for Virgin America, to become the fifth-largest U.S. airline, after American, Delta, United and Southwest.

And San Francisco would become a second major California hub for Alaska, whichflies many routes from Los Angeles.

The Alaska Airlines brand will be retained. In a presentation about the merger plan, Alaska said, “We will explore options for the Virgin America brand in future.”

Alaska will pay $57 per share in cash and will assume existing Virgin America debts and aircraft operating leases of $1.4 billion, for an aggregate transaction value of approximately $4.0 billion.

In a statement, Alaska CEO Brad Tilden said the deal brings together “two incredible groups of employees to build on the successes they have achieved as stand-alone companies to make us an even stronger competitor nationally.”

The bidding war with JetBlue forced Alaska to pay a premium well beyond Virgin America’s current market capitalization of $1.7 billion, already inflated from $1.5 billion since news of a potential sale emerged.

The Alaska senior management team, led by Tilden, will lead the merged airline. Virgin America chief executive David Cush along with his executive team will leave the company, according to a person with knowledge of the details.

In the months ahead, government regulators will have to decide whether to oppose the acquisition on antitrust grounds.

If it isn’t blocked, Alaska will likely have to stop touting itself in Seattle as “proudly all-Boeing.”

Antitrust scrutiny

U.S. airline consolidation has already reduced the legacy carriers to just three giants, so antitrust officials at the Justice Department are likely to take a close look at how this merger could affect the West Coast flying public.

From its main hub in San Francisco and a secondary hub in Los Angeles, Virgin America flies up and down the West Coast, to Hawaii, and to vacation resorts in Mexico, as well as flying transcontinental to Chicago, Boston, New York, Washington, D.C., and Florida.

Since 2014, it has also had flights out of Love Field in Dallas.

It certainly has routes that overlap with Alaska’s.

Residents of Seattle or Portland can choose between the two when traveling to San Francisco or L.A., as can passengers traveling from the Bay Area to Hawaii.

Cutting that head-to-head competition will be good for Alaska, but not so much for travelers.

Yet acquiring Virgin America also offers Alaska lots of additional routes out of San Francisco, vastly strengthening its status as a West Coast power.

Widening its network in the Golden State will also help Alaska in its intense competitive battle with Delta by offering more connections to California from Seattle.

One slide in an Alaska presentation about the merger states that the merger will create “a bigger stronger national competitor to the big four airlines.”

As for adding the Airbus jets, Alaska could choose to abandon its policy of flying only one aircraft type, though that has been a fundamental strategy of low-cost carriers.

Introducing another aircraft type adds a great deal of expense in terms of training pilots and maintenance crews on two different machines. In 2008, Alaska finally retired the last of its MD-80s to focus solely on the Boeing 737.

But Alaska could choose to operate the two aircraft types separately with minimal integration of the flight crews and could conceivably even retain the Virgin America brand.

Since all but five of the A320s are leased, not owned, by Virgin America, Alaska could theoretically let those aircraft go as they come off lease between 2019 and 2025.

Yet this doesn’t seem to be the plan, with Alaska taking on the additional commitments Virgin America has made to Airbus.

Virgin America has already agreed to lease 10 new Airbus A321neo aircraft in 2017 and 2018, and also has firm orders for three more A320s and 30 A320neos. However, the airline has the right to cancel those 30 orders with just a $26 million cancellation fee.

“Virgin America’s fleet provides us ample flexibility” is the heading of one slide in the Alaska presentation.

Fun in flying

Virgin America launched in August 2007, declaring itself “on a mission to make flying fun again.”

British entrepreneur Richard Branson’s trademark branding promotes the airline as offering low-fare but high-quality service with a dash of glamour.

When the airline debuted, the San Francisco Chronicle reported that boarding a Virgin America jet “is not unlike rolling into a late-night club, cocktail in hand.”

The carrier’s fleet of new planes features mood lighting, leather seats with Wi-Fi, power outlets and seat-back video touch screens.

Virgin America CEO Cush said in a statement: “Our mission has always been to create an airline that people love … Joining forces with Alaska Airlines will ensure that our mission lives on.”

Last year, the airline had a profit of $341 million, up from just $60 million in 2014 thanks to the plunge in the price of jet fuel.

With foreign ownership of U.S. airlines limited to 25 percent, Branson owns 24.9 percent of the airline through his Virgin Group. New York hedge fund Cyrus Capital Partners owns 28 percent.

The airline went public in November 2014.

Joined with Alaska, the combined airline will have approximately 18,300 employees. Its fleet will consist of 280 aircraft, including regional planes, with an average age of 8.5 years.

The merged airlines will have some 1,200 daily departures, with hubs in Seattle, San Francisco, Los Angeles, Anchorage, Alaska and Portland.

Alaska outlined a merger schedule that anticipates Virgin America shareholder approval in June, with regulatory approval coming in late fall and the deal closing by year end.

The two airlines will continue to operate as separate entities for about a year after that until they get a combined operating certificate from the Federal Aviation Administration.

After that, a person with knowledge of the plan said, the intention is to integrate the airlines as completely as possible.