Alaska Air Virgin America

April 4, 2016 by  

Alaska Air Virgin America, 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.

Companies at a glance
2015 data, except where noted

Alaska Air Group

Employees: 15,100 full- and part-time

Passengers carried: 32 million

Net income: $848 million

Market capitalization (April 1, 2016): $10.2 billion

Virgin America:

Employees: 3,000

Passengers carried: 7 million

Net income: $341 million

Market capitalization (April 1): $1.5 billion

Source: Company reports

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

Alaska Air history
1930s: The merger of McGee Airways and Star Air Service in 1934 creates Alaska’s largest carrier, with 22 planes. The company is sold in 1937 to a group led by a former pilot and renamed Star Air Lines.

1940s: After buying three more small carriers, the company is renamed Alaska Airlines in 1944. It becomes the largest charter operation in the world, and carries food during the Berlin airlift.

1951: Receives Civil Aeronautics Board approval to fly from Alaska to Seattle and Portland.

1960s: Builds its fleet around the Boeing 727.

1979: U.S. civil aviation is deregulated, supported by Alaska Air. The 10-aircraft company, which serves only 10 Alaska cities and Seattle, sees opportunity to expand.

1980s: Alaska Air expands service to Alaska to Northern and Southern California, as well as Spokane, Boise, Phoenix and Tucson. Flights to Mexico are added in 1988. In 1986, the company buys Horizon Air and Jet America Airlines.

2000: All 88 passengers and crew are killed when Alaska Flight 261, an MD-83 traveling from Puerto Vallarta to San Francisco, crashes into the Pacific. The National Transportation Safety Board later concluded that Alaska’s failure to properly lubricate and check for wear the jackscrew that operates the plane’s horizontal stabilizer directly led to the plane’s crash.

2005: Alaska outsources the jobs of 472 unionized baggage handlers after failing to reach a new contract with the International Association of Machinists. The airline says it will save $13 million a year; in 2004, in a similar cost-cutting move, it laid off 900 Alaska managers, mechanics and aircraft cleaners.

2013: Alaska Air vigorously opposes Sea-Tac’s $15 minimum- wage law, which passes nonetheless.

2014: Delta Air Lines begins Seattle-Hong Kong flights as part of its Sea-Tac hub expansion, raising pressure on Alaska.

2016: After a record year, carrying almost 32 million passengers and earning net income of $848 million, Alaska Air Group says its almost 14,000 employees will receive annual performance bonuses totaling $98 million. Alaska seeks approval to begin flights from Los Angeles to Cuba.

Source: Alaska Air Group, Seattle Times archives

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.

Alaska Air Virgin America

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