Alaska’s Chief Commercial Officer Goes Across the Aisle to Talk About The Virgin America Merger (Part 1)

It was only a couple weeks ago that Alaska Airlines announced it would be acquiring Virgin America, and like you, I’m full of questions. So I was pretty pleased when Alaska reached out to see if I’d be interested in doing an Across the Aisle interview with Andrew Harrison, Executive Vice President and Chief Commercial Officer. This ended up being fairly long, so I’ve broken it up into two parts.

Today, we’ll start with the genesis of the merger, why Alaska was willing to pay so much for it to happen, and how it is going to think about a combined product going forward. Tomorrow we’ll look at how Alaska views both the Bay Area and the LA Basin as well as its loyalty program and its domestic partners, American and Delta.

Planeline

Brett Snyder, Cranky Flier: Let’s talk about the genesis here. When did you start thinking that a Virgin America merger was something worth pursuing?

Andrew Harrison, Executive Vice President and Chief Commercial Officer, Alaska Airlines: I think I would say we’d really been thinking about a lot of things for a good number of years. When consolidation started happening and we saw what Alaska Airlines Across the Aislewas going on in the marketplace, the big carriers were becoming really big. And as niche carriers, especially in Alaska’s case, we wanted to make sure we secured our future as an independent carrier and continued to grow.

We looked for some time and said we can’t continue to grow in perpetuity from Seattle. We need to continue to grow our footprint. The West Coast has always been a part of our strategic mindset. We fly a lot to California anyway. And so over time we’ve just been looking at organic growth and then really the Virgin America transaction, started to look at the key assets we would need to continue to grow and be competitive. We started to realize that a Virgin America acquisition was probably something that made a whole lot of sense. That’s when we started looking at it last year.

Planeline

Cranky: At this point last year, you had already started building up a lot in California. Mostly secondary airports, San Diego, San Jose. So did you see San Francisco and LA as being particularly large holes that needed to be filled in the network?

Andrew: It always came down to space and facilities, honestly. In San Francisco, we have a couple of gates. We got moved while they were redoing terminals and we didn’t have a really huge presence other than to the Pacific Northwest. And with Los Angeles… So really if we were going to be bigger, we couldn’t just go get the gates and we couldn’t do it quickly. As we looked at those major cities, and as you know, they are, as far as California goes, the two largest airports and were very important to our California strategy.

Cranky: That’s a lot of money to buy some gates. I guess what you’re saying is you couldn’t put the strategy into place on your own because you didn’t have gates. Was there no other way to acquire gates? It was [airline] acquisition or nothing?

Andrew: No, I mean it was also about timing. If you were to build organically from the ground up what we’ve just purchased, that takes a lot of years. That’s a lot of risk. That’s a lot of investment. As you know, Virgin America has basically lost money nearly every year they’ve been operating other than the last year. It’s taken a huge toll on them to invest, to build up, to win customer loyalty, to get space, to get customers, to build up significant markets.

For us, we believe that when you combined our loyalty program, our global partners, our already award-winning service and abilities, we could get to critical mass a lot quicker with an acquisition. As we showed in the investor materials, on a seat basis, we’re the largest on the West Coast. So we needed a platform to grow securely from and be very confident in our ability to continue to grow and produce returns for our shareholders. That’s what we believe Virgin America gave us.

Planeline

Cranky: When you’re looking at this last year, I assume you aren’t expecting you’re going to pay $2.6 billion at that point. Obviously there were multiple interested parties. It got hot and heavy. When you’re looking from your perspective, how do you arrive at that “healthy” figure for an airline that as you said has done nothing but lose money until the last couple years when really, a rising tide lifts all boats?

Andrew: At the end of the day, we’re an 84 year-old company and we want to be here for the next 84 years. When we looked at this acquisition, I don’t really want to get into whether we paid too much or not. I personally believe that the process that we went through and the value of what we believe we can do with this new foundation going forward is massive. Massive. So the cost to acquire the customers, network, assets, and to get there quickly to get some critical mass to build on… I’m very excited about this acquisition and what we can do with it.

Cranky: And that’s my question about this. This is an airline that has lost money. Right now you have to really try hard to lose money, so everyone is making money. But with that and looking at Alaska at the opposite end of the spectrum as one of the most healthy, profitable airlines around, what is it that you think the two of you together can do? What are you going to bring to this process in California that’s all of a sudden going to turn the operation that today is Virgin America into something that’s successful on the level that you’ve been?

Andrew: I think a couple of things Brett. Number one, we bring a very large, even in California, we already have a very large loyalty program. We have a very large membership base; it’s our second largest. And our credit card is very well held by Californians.

Cranky: I have one.

Andrew: Well thank you very much.

As far as loyalty and credit cards and an already established base, we have a very large one. So this now connects routes and customer utility as well as our loyalty into a much bigger proposition for Californians. We also bring to the table a lot of global partners who are very heavily serving San Francisco and Los Angeles. So a combined Virgin America and Alaska Airlines will offer international carriers off key gateways off the West Coast a very powerful feeder network. And for our loyalty members to have access to. So we’re very excited about that.

The East Coast, as you know, we have long struggled to get access even from the Pacific Northwest. Virgin America has a lot of access relative to ourselves on the East Coast. We can use some of that to get more access in the Pacific Northwest if we want. We can have it in California. So it gives us a lot more options and critical mass for customers on the East Coast.

Cranky: That kind of points to a broader strategy of saying “we now have these facilities. We may not do exactly what Virgin America was doing. We may view it as different routes make sense, use slots in different places.” There will be a review from an overall airline perspective. Is that a fair way to look at it?

Andrew: Absolutely. The other thing I would mention too is we have low costs. Our costs are lower than Virgin America’s on a unit cost basis. And we believe that our size and our mass combining that with the assets and the customers that Virgin America has done a fantastic job building up. If you think about it, they started at the beginning of the greatest recession any of us have ever seen next to the Great Depression. They went through $147 a barrel oil. They’ve faced a lot of very difficult headwinds.

And for us as a carrier who wants to be the premier carrier off the West Coast, a combined Alaska and Virgin America we believe provides a very powerful network, loyalty program, low fares, and low costs relative to their choices today off the West Coast. And we actually have a great product. We have a product that’s competitive with the network carriers. There are other low cost carriers that have much less of a product, so we bring all of these to California with a lower cost mindset.

Planeline

Cranky: And that’s part of it. This remains Alaska. I know there’s been talk about “maybe we’ll do something with the Virgin brand. We’ll review what their onboard product is.” But a lot of that goes back to the costs. They’re less dense on their aircraft. They have expensive and heavy in-seat video systems. How important is the cost aspect? Is it something that allows you to consider the heavier inflight entertainment systems or are you saying “no, we really need to stick with what we’ve got”?

Andrew: One thing that’s really exciting for us is that we are really going to take a hard look. If you just get back to the brand concept for a moment. A lot of people like to focus on what’s painted on the airplane. But really what we’re talking about is “what is our customer proposition as a combined entity going to be? What is the hard product we’re going to provide? And how are we going to provide that service to our customers?” We believe Alaska Airlines has very compelling arguments on many of those fronts.

We also believe that Virgin America has some different and compelling arguments as well. We’re going to spend considerable time looking at these things. Virgin America has 165 degree recline and I think 55 inch pitch First Class seats. We have denser. We’re going to be looking at what it is about the customers in California, what it is they truly love about Virgin America and their brand and really understand that. Product vs the people vs the network vs the preference of choice vs other options vs anything else. We’re going to study that greatly.

We also understand that in the market of San Francisco, I think there are like 45 flights to the New York City area, 55 flights from LA, and everyone has lie-flat seats. This is a market we’re going to have to really understand. We want to be competitive on product for the customers that we want to serve. More importantly we still firmly believe in low costs. We believe that customers at the end of the day want a good product at a reasonable price. We’re going to be looking at all of that.

I think the other thing you’ll find is that our loyalty program is popular because we have a lot of upgrades. Customers love that. But the market’s going to – you have to buy those [premium transcon] seats, you can’t just upgrade into them. These are all questions we’re going to have to look at. But at the end of the day we believe that when we’re done we’re gonna take the best of thinking that Virgin America has, the best thinking of Alaska Airlines and build an economic model that produces a fantastic customer product at a lower cost than our competitors. We want to continue to grow.

Cranky: Ok there’s a lot there so let me take a couple pieces here. First, you talk about reviewing the Virgin brand to see what makes sense and what doesn’t, but you’ve just gone through this whole process at Alaska pre-merger. You have the Alaska Beyond stuff, you’ve done a very hard look and come up with this as what makes sense. So is this saying that California is a different market so we need to look at it again or is this saying we’re going to be a different kind of airline now with this?

Andrew: What I will tell you Brett is that you can appreciate when we did the re-branding we spent 3 years on it. We got a mountain of information and we learned a lot about ourself. We learned where our weaknesses were. We learned the things that weren’t making us a national brand. We also know, I’ll just use some simple examples, but you know Virgin America has satellite [wifi]; we have air to ground. They have in-seat entertainment; we do not. They have a special [First Class] product that’s certainly, for someone going long haul, more interesting than ours. It provides a lot more legroom and lot more recline. Their brand is more edgy. Sometimes people think of us as conservative and stiff.

We want to grow ourselves and challenge ourselves to be a better airline. I think what I’m saying is we know where our weaknesses are; we don’t have all the answers, and we know where some of Virgin America’s strengths are and we want to see if we can incorporate some of those to be a stronger and better brand so when you combine the two you get something better.

Cranky: I guess the question is, if you knew where your weaknesses were before, why not address those before the merger when you went through this whole process? Is there something different about the heft that you’re going to have now? Or is it the California market? Is there something about this transaction that enables you to review it differently than you did as a single airline?

Andrew: Like anything, our thinking is going to be challenged. This airline has over 3,000 employees that live and breathe California. My personal view is they’re going to have some great insight into this massive space in a massive economy. They have far more insight into it than we do. There’s a lot for us to learn. I do want to say at the end of the day, we’re very confident in our brand and very confident in our product. There might be areas we look at, we might change, we might tweak and evolve, but we still fundamentally believe in our core business model, the very model that’s generating the 24 percent pretax margin. So we don’t plan on any of that philosophy that’s made us successful changing.

Planeline

I’ll be back tomorrow with the rest of our conversation touching on how Alaska views both the Bay Area and the LA Basin as well as its loyalty program and its domestic partners, American and Delta.

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45 Comments on "Alaska’s Chief Commercial Officer Goes Across the Aisle to Talk About The Virgin America Merger (Part 1)"

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frederik.jacobsen
Member

Interesting interview. Here are a couple of issues I would like to see addressed. What is Alaska going to do with the fleet? Keep Airbus, or move to Boeing? Also, in these merger, Alaska is seeing the advantages of merging and the see a rosy future, as many other carriers did in unsuccessful mergers. So, what is Alaska going to do to prevent this merger from becoming a cash and profitability drain, which in turn can affect their own product/service, liquidity, and profitability? Have a great day, Fred.

Eric Morris
Guest
At the end of the day, I get paid massive amounts of money to overpay for some gates and say “at the end of the day” over-and-over because I am not spending my own personal money on this. Janet Yellen will float my corporation massive amounts of money laundered through some investment bank taking its unearned cut as most of it ends up being filtered back to execs like me. At the end of the day, the system works. Brett, your ability to ask serious questions demonstrates “alternative” media like you is our only hope against blowhards like these that… Read more »
David SF eastbay
Guest

“””They have a special [First Class] product that’s certainly, for someone going long haul, more interesting than ours.”””

We can assume ‘interesting’ means ‘better’, and if they want to compete in the SFO/LAX-NYC market they will need to stay better or give up the market. Both SFO/LAX metros have wealth and a lot of hip and trendy people who want to fly in chic style like Virgin America projects and not (as the car ad says) their grandfathers airline.

Haolenate
Guest
I think Alaska is WELL aware of this, but they also need to keep in mind that they are now competing even moreso against American & Delta, their “partners”. I’m flying Orlando to San Diego in a few days, and while I’ll get upgraded to First Class, part of me wants to stay in the exit row. At least in the exit row, I can use my laptop, hopefully keep an open middle seat, and not feel as cramped. Alaska First, except for the 737-400s, is not something to write home about. Knowing what I do about Alaska, I can… Read more »
Andrew mondt
Member

Great interview! He sure tap danced around your insightful questions. I’ve been through buyouts before. The new owners start out by stating how they want to take the “best” of each brand but in the end gut it which alienates the bought out employees. Even though VX has a good first class compared to AS they are still going to have to update it as it is no longer competitive compared to B6 Mint.

Spindrift79
Guest
The issue with the transcon market is double edged. Virgin had a better product than alaska by far, and they are not going to probably keep that product, probably a little bit but not all. Let me also remind everyone that after B6 everyday with mint, alot of the mint customers came from vx, and then AA/UA/DL all added lie flat bringing vx transcon product at the very last in comparison. I don’t think after the debt hole they just went into buying vx,they will have the energy to invest more to upgrade. As with every never some things get… Read more »
SFO
Guest

The problem is there are no “better” routes. Everywhere AS can fly from SFO is already well covered by other airlines. Where exactly are they going to fly where they will have a dominant position? Hourly shuttle from SFO to Kalispell, Montana? AS is still going to be very weak East of the rockies and the population centers in the West are covered by multiple carriers already. Fares are also quite low. They really don’t have a clue.

Nick Barnard
Member

I wouldn’t be surprised if they didn’t really look at “turning around vx” as much as just using their assets..

Legally this isn’t an asset sale, but in many ways I think that is how AS is going to approach much of it.

Jason
Guest

My first reaction to the merger news was the same thing. Why try to keep doing what a money-losing carrier is doing? This may have been a little about slots and customers but a whole lot about planes and crews. I think they’re better served connecting new market Midwest cities to LAX, SEA and to a lesser extent PDX and SFO than continuing to beat their heads against the wall going up against 4-6 competitors on every single route.

Nick Barnard
Member

Jason, I was saying the opposite. This is more about gates and slots, than planes and crews.

If AS wanted planes they could find them. (Used, slow their retirement rate, go get cozy with Boeing, etc..) employees, may be a little bit tougher, but they’ve got lots of regional airlines to draw from.

Getting the gates, and to a lesser extent the customers, was the reason here.

SFO
Guest
Getting the gates to what end? If they fly new routes they are going to have to spend a ton on marketing in parts of the country where most people have never heard of AS. If they keep transcon markets they will be facing competition with much better products and in the case of B6 at a lower price. Why would anybody choose AS? There is not AS fan base in SFO as AS barely served it. For those not going to PSP/PDX/SEA, AS was never even an option. What makes AS management think that all of a sudden people… Read more »
Michael Foley
Guest

Couldn’t have said it better myself. Either they don’t understand the market outside of the PNW, or actually believe they offer something special and different. AS is going to get slaughtered trying to capture the VX flyer base. That is, if they even try.

SFO
Guest
I still can’t believe AS management is throwing away $4 Billion and has no idea what they are going to do with their new possession or even what they are buying. Now that we have it, we will see what the brand and product is–REALLY? It seems they are really just thinking that they will degrade the Virgin product and all the existing customers will just flock to AS and run to get a B of A credit card. There are many choices flying out of SFO or LAX–both international and domestic carriers. If existing VX routes are cut, people… Read more »
Eric Morris
Guest

I see B6 buying the combined company for $4 billion total in two years!

jmd757
Member

And the 737s going to Delta!

SEAN
Guest

I have the same opinion as you Eric – & I usually don’t on these matters. Both AS & JBLU need each other to compete with the big three & even LUV in several markets.

Oliver
Guest

Well, does anyone really expect that AS management is going to announce their plans at this point in time, on this blog? That’s not meant to put down the blog (which I love), but this is neither time nor the place to expect big revelations. Until the deal closes, VX and AS continue to be competitors and there is only so much they can discuss or announce without getting in legal hot water.

JayB
Guest

Branding is always funny.

Never quite understood how you could sell DCA to LAX on an airline called “Alaska.” But, of course, there’s always BWI to BOS on an airline called “Southwest,” so what do I know

SEAN
Guest

Some brand names carry more heft then others & corporations will evaluate if keeping certain brands makes sense. In the cinema industry for example, AMC kept Loews, Starplex & will keep Carmike once that deal is completed. However the General Cinema name vanished in 2002.

Joe
Guest

That $4B would have been better spent buying the Star Wars franchise. Crazy to think that Alaska paid the same amount for Virgin America as Disney paid for Lucasfilm.

Nick Barnard
Member

I think Alaska knows almost nothing about making movies.. They probably should stick to airlines… which they did.

Joe
Guest

They know “almost nothing” about movies? That is more than I would have thought.

Lighten up, it’s just interesting to compare what $4B can buy you these days. Star Wars, The Dallas Cowboys, the entire 2014 mid-term election and now Virgin America.

Nick Barnard
Member

Hey Joe, I meant it more tongue in cheek/sarcastic. Which didn’t come through.

But yeah. $4 Billion doesn’t buy what it used to. (Like Northwest Airlines.)

Sent from my computer that moonlights as a phone.

Nick Barnard
Member

Wait. There is a problem with this Across the Aisle comment section: No one has complained how the icon glorifies smoking.

I’m feeling cheated CF! Or CF, is this something that has been made an ala carte feature that must be purchased separately?

Dan
Member
I hate flying. You think you’re the cranky flier? After about 2 hours I want to kill myself and the only thing that gets me through is being on Virgin America where I can order a coke or a water whenever I want and I can watch Giants games in the air. Alaska is a good airline, but it’s a dinosaur. Give me something to do for God’s sake. And yes, that CEO is tap dancing around the elephant in the room, which is that they have no intention of keeping in flight entertainment or ordering systems. They know people… Read more »
southbay flier
Guest

I don’t need a video screen on a plane to keep me entertained. I can read a book or a magazine and be content. If I want to do something high tech, I can play games on my phone or tablet.

When flying AS, I can go to the back of the plane and ask a nice flight attendant for another beverage and they will pour it for me. Who needs an ordering system when you can just go back and ask a human. Plus, stretching your legs is good for you.

Steve
Guest

Please.

Right. So staying at the Days Inn is really better than at the Four Seasons? Afterall they both have beds, a bathroom, four walls, and a TV. If I want a massage I don’t have to go to the spa, I can just ask the janitor to rub my shoulders in the hallway.

Frank
Guest

Then buy a first class seat on AS. Whats the big deal?

Xcho Guy
Guest

It’s not worth paying for. That’s the point.

southbay flier
Guest
I still think the biggest benefit of holding airline status are the upgrades. I guess free bags, priority boarding, and priority seating are nice, but I would never want to regularly fly an airline that does not offer free upgrades. I think while the VX seat is nice, it is either too nice or not nice enough. For the NYC routes, everyone else flies with a fully flat seat. For west coast routes, there is no reason to recline so much and IMO, a standard F seat is sufficient. AS already is planning on addressing the tight fit of their… Read more »
Marco
Guest

“but I would never want to regularly fly an airline that does not offer free upgrades.”

Which is why domestic First is awful on AS and other airlines that just give the seat away to their over entitled frequent flyer “elites”.

southbay flier
Guest

Well, the major airlines have finally figured out that F isn’t worth as much as they were charging and are beginning to sell F seats for a much smaller buy up than before. Heck, I’ll buy an upgrade if the price is right (it also means more qual miles). But, I still would not be part of a loyalty program that does not offer upgrades. It’s not just airlines, but hotels, and rental cars as well.

Steve
Guest

Alaska Airlines is a good airline for 1996. They are going to get eaten alive in the transcon market and out of DAL if they think the Eskimo can compete.

southbay flier
Guest

AS is still a good airline. I don’t see what they would get eaten alive in DAL since their only competition on their routes is WN which does not offer an F cabin. As for the transcon market, it will be interesting to see what they do. They could up their product or just simply codeshare with AA who flies these routes with a really nice F and J product.

Andy
Member

American competes with them on every one of the Dallas routes. Remember, DFW is only 15 minutes from Love.

Michael Foley
Guest
“Andrew: I do want to say at the end of the day, we’re very confident in our brand and very confident in our product. There might be areas we look at, we might change, we might tweak and evolve, but we still fundamentally believe in our core business model, the very model that’s generating the 24 percent pretax margin. So we don’t plan on any of that philosophy that’s made us successful changing.” Yeah good luck with that if you truly intend to branch out of the Pacific Northwest. I’m sure New Yorkers and Californians alike will flock to “Alaska”… Read more »
Edgar
Guest

Why not? They all pay hundreds or thousands of dollars for phones and computers named after a fruit.

Keith
Guest

As a passenger Virgin America is just better than AS by every measure. We are not going to be better off regardless of however AS wants to spin this. They will be in for a rude awakening if they think that VX flyers are just going to gravitate to AS.

They have been operating in a bubble in Seatte/Oregon/Alaska and seem to be under the impression their model would play on a national level. It won’t.

Edgar
Guest

Except that VX’s service isn’t sustainable, and was only profitable once thanks to low oil prices. AS has proven to be both profitable and amicable to customers. The flash and swag of the Virgin brand was never going to be anything more than an unprofitable niche and they knew it, otherwise they wouldn’t have sold.

Keith
Guest
It’s not that the service wasn’t sustainable, it was the highly competitive transcon routes they chose to fly from against 4 other major competitors with equal or even better “flash and swag” All of which by the way offering lie flat business, AVOD, and robust networks elsewhere. The AS service is even less competitive on these routes than VX. If you think flyers will magically start paying a premium to fly on the current AS product over what they are paying on VX, you must be part of the AS captive audience in the PNW.
Kishore
Guest

Cranky,

That last comment appears to be spam.

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