In what can only be considered a most unlikely and incredibly successful exit for Virgin America’s owners, Alaska has agreed to buy the airline for a whopping $2.6 billion in addition to assuming $1.4 billion in debt. I spoke with the folks at Alaska, I’ve done about a half dozen interviews, and I’ve pondered this merger in the middle of the night. In the end, I can see how Alaska finds value here, but $2.6 billion worth of value? That’s a lot.
The overarching theme of this merger is one word… California. This is Alaska’s attempt to take what it has built in Alaska, Washington, and Oregon and export it to California. But instead of growing organically, it felt the need to take out a competitor that was already in the market. Or it at least felt the need to take out that competitor before JetBlue could do it and wreak havoc on Alaska’s plans.
Think about what Alaska has been building in Seattle over the last few years. The airline has added a tremendous number of flights to a whole bunch of new destinations. In Seattle, Alaska provides fantastic utility and, combined with its international and American partnerships, can get people in Seattle wherever they want to go in the world. In the state of Alaska and the rest of the Pacific Northwest, Alaska may not fly nonstop to as many places, but it’s easily the most comprehensive option for travelers. But in California, it’s different.
In California, Alaska has been a niche player. Originally that niche was to bring people up to the Pacific Northwest. Early efforts to grow in California effectively failed when Alaska acquired Long Beach-based Jet America in the 1980s. I don’t believe there’s anything left from that route map.
But when Alaska began growing into Mexico, Californians quickly got used to the idea of flying the Eskimo tail down to sunny beaches. In the last few years, Mexico has fallen out of favor, but Alaska jumped into the Hawai’i market. It has also ramped up its regional flying by connecting dots in smaller cities. Alaska has seen a noticeable build-up in San Diego as well as San Jose, but San Francisco and Los Angeles have been somewhat stagnant.
In Virgin America, it saw an airline with real estate in LA and San Francisco as well as a bunch of capacity. Though we don’t know anything about what the network will ultimately look like, I can only assume that Alaska saw opportunities that Virgin America couldn’t have imagined. Yes, Alaska wants to serve the biggest cities from San Francisco and LA, just as Virgin America does today. But when you layer on top the Embraer 175s that are coming in along with the Q400s, Alaska can have a much greater range of service than Virgin America could have ever imagined. Add in Alaska’s codeshare with American (and Delta for now) along with a generous frequent flier program that improves those relationships, and Alaska becomes a much better candidate to serve Californians than Virgin America ever could have been.
I know this goes against what every airline dork thinks, but in that way, this merger makes more sense than a JetBlue-Virgin America merger. With JetBlue, it was all about putting together two pieces of the puzzle with minimal overlap. It was like America West-US Airways but without the hubs. (JetBlue is still a primarily local traffic airline and doesn’t really like selling connections, so the network effect isn’t really there.)
You bring JetBlue and Virgin America together, and you have a bigger airline, but it doesn’t necessarily improve the standing of that airline dramatically in any one market. It reduces competition on transcons for sure (which is why JetBlue would have seen tremendous value), but it doesn’t enhance the opportunity in one any geography. With Alaska and Virgin America, California sees a marked change.
It’s easy to do the simplistic and rather poor evaluation based on the obvious points. Sure the fleets don’t match, but that’s an easy fix. Alaska can operate two large fleets and do just fine, or it can return the Airbuses over time. That’s not hard to rectify in the long run.
Are the cultures different? Yes, though in a way that makes it easier to define that the Alaska culture survives. The personas are different as well. Alaska is more for tech-savvy grownups while Virgin America is there for the cool kids and hipsters. The latter are all mourning the loss of Virgin America today, but what are they going to do? Fly United instead?
Of course there are some differences, and time will tell how Alaska deals with them. What will happen to infilght entertainment? Will it be in-seat as on Virgin America or just streaming media as provided by Alaska? What happens to First Class? Does Alaska keep its inexpensive and upgrade-friendly cabin or does it go with a smaller, fancier product? And most importantly, what happens to the mood-lighting? (I almost said that with a straight face.) We don’t know, but we’ll find out over time. None of these are deal-breakers.
As a Californian, I like what this merger brings. But as someone who studies the industry, I have a really hard time getting over the expensive price tag. I mean, this is Virgin America, an airline that has lost hundreds of millions of dollars. It only reached profitability because a rising tide lifts all boats. It continues to underperform the industry. Compared to Alaska, Virgin America’s results are downright awful. With that background, I can only congratulate the owners of Virgin America who are walking away with a silly amount of money.
Don’t cry for Richard Branson, who penned a weepy post saying there was “nothing I could do to stop it.” Sure. The man who basically willed this airline into existence could do nothing? This was absolutely the right move. And don’t cry for senior management at the airline. They’ll all be out of a job, but I have no doubt they’ll profit handsomely. If you cry for anyone, it should be middle managers. They’re least likely to have a job and don’t have the safety net that senior management has.
Assuming the feds don’t shoot this down (they really shouldn’t), now it’s on Alaska to be able to execute. You have an airline with a very solid financial footing. Even this huge purchase doesn’t dent that. But there is still plenty to fight about with Delta in Seattle. Alaska can’t take its eyes of that battle.
At the same time, Alaska has to figure out how not only to integrate Virgin America into itself, but the airline has to figure out how to make Virgin America’s network perform much, much better in order to get it up to Alaska-like performance. Today Brad Tilden suggested that the Virgin brand may hang around in some fashion (though not as the name of the airline). I really hope they don’t get bogged down in silly ideas like that. There are bigger issues to tackle in order to make this merger work.
Even then, it’s not clear that we’ll see Alaska be able to justify the $2.6 billion spend. But it’s going to be fun to watch the airline try.
What do you think this means for Virgin’s gates at Love Field? Do you think Alaska will give them up and give them to Southwest, who will be very happy to accept them? Or will they go to another airline like Delta?
I could certainly see the DAL gates being sub-subleased to DL. What really interests me is what AS is going to do with the LGA/DCA slots currently tied to DAL. Since said slots have perimeter restrictions will AS open a scissor hub somewhere like MSP/MKE or CLE? LGA/DCA-XXX-SEA/PDX or SFO/LAX? Or will AS sell those off too? I really can’t see them staying at DAL very long, given the growing relationship with AA. AS could easily move their LGA/DCA flights somewhere else within the perimeter and on to the west coast.
I hope they sublease the Love gates to DL. DAL had to be dragging down VX’s overall utilization.
The question then becomes what happens to the VX slots currently used to fly to DAL from DCA and LGA? The logical choices, SFO and LAX (and SEA and PDX to a lesser extent) are impeded by perimeter rules as the DAL flights were inside the perimeter.
Those slots are too valuable to squander so this will be a very big decision for them as there are no other East coast or central / Midwest destinations that make sense for the combined AS/VX.
The Love Field gates at owned by American and leased to VX. AFAIK, this is part of AA’s settlement with the DOJ to merge with US.
I think Alaska keeps them and uses them. They also get the leg up that they’re partners with AA so they get that advantage selling tickets that VX never had.
They will sublease the gates ASAP. AS isn’t in the position they are by beating their heads against a brick wall. VX is getting eaten alive with 20 slots going up against 180 slots from WN. AS has been based out of DFW for years and years, they are comfortable there. Why would they go lose money at DAL on purpose?
They will get good money to sublease, as long as the lawyers can all be satisfied. WN would pay them a kings ransom for those gates, but doubtful that will pass the legal bar, no way at this point would the City of Dallas allow WN to have all 20 gates. They likely get subleased to DL, and DL drops its legal fight for 1/2 the gate it is “borrowing” from WN now, and everyone is happy. AS gets 50-75 million to sublease 2 gates without having to do anything. As opposed to spending years fighting WN and taking 5 years to make 50-75 million at DAL if ever.
They’ll just grow DFW if opportunity presents itself and not waste their time at DAL
Yea this seems reasonable. I’m sure Southwest will still be pleased if Delta gets the 2 Virgin gates since it will allow WN to fully utilize all 18 of it’s gates.
Jacob – I would assume that Love Field has little to no importance for Alaska. The service loses so much money and has so little strategic value that I would be shocked if it stayed. In fact, it would be detrimental to Alaska since its partner at DFW provides much more value over there.
VX’s DAL operation couldn’t be much worse than Alaska’s proposed 2x daily LAX-HAV on 739s. : )
Alaska’s VP of Capacity Planning (John Kirby) is an ex-Southwest guy. I wonder if that could influence Alaska’s interest in the gates. Maybe keep one gate and operate DAL-SEA/PDX to prevent Southwest from having to themselves?
Makes sense. But then that leaves the question who will they go to? Any ideas? Even if they were given to Delta I’m sure Southwest would be happy to be able to fully use their 18 gates.
CF, I’m confused. DL wants to serve Love Field so badly they’ve dragged the whole thing through court, but for AS there is no strategic importance?
For DL its a spoke, and they’ve got a wee bit of residual frequent flier base from their DFW operation. They mostly want it to be able to funnel passengers into the rest of their network. They’ve settled for Atlanta right now, but would love to put people into JFK, DTW, MSP, and LAX as well.
AA had to give up Love Field as part of their merger with US. Although, I’m having trouble finding out what their service levels to Love Field were immediately before the merger was announced, but I get the gist that the old AA just tried to compete with the Southwest at Love. Scott Kirby is on record saying that they’d have used Love Field. He said, “We were going to do it differently because we were going to serve our hubs. You can make that work by flying from Love Field to Charlotte where you can connect people to the whole Southeast. Love Field to Philadelphia where you can get them to Philadelphia and connect them to Europe. Love Field to Los Angeles, where you can connect to Asia.”
For AS it’d be a spoke, but unlike VX they’ve got frequent fliers from AA who they can attract, who would still be able to earn AA miles.
Also AS could even drop in and do essentially what Kirby wanted AA to do: flights to Philly, LAX, Seattle, PDX, JFK, and perhaps even Charlotte, where’d they have some O/D but be important partners to AA. Not to mention that this is a spot where AS’s partner with everyone strategy might work well. Yes, LAX and JFK are horrible spots to transfer, but some creativity could make this work. (One well timed plane with a small fleet of buses to move passengers in the sterile area might work.)
I don’t see AS keeping the exact service that VX has, but given that Love Field gates are one of those assets once you give up, its a pain or impossible to get back I expect Tilden and his team to try something and see what they can get to work before giving it up.
Nick – Could Alaska try to cobble together some strategy that might work?
It could try. But it’s a distraction in a bastion of low fares that aren’t likely to go up soon. Why bother? It holds no real strategic importance to Alaska as a west coast airline. American might see some value in having Alaska do its bidding, but they don’t have antitrust immunity. Alaska isn’t going to be able to make it work on its own and it has more important issues. DFW is a great place for Alaska to be and to serve its customers.
It should focus on the west coast and not worry about the Love Field games.
Where are the lines on an antitrust violation? Can AS look at AA’s schedule and figure out what bank they want to drop a flight into?
Nick – Alaska can do anything it wants to match up with American’s schedule as long as it doesn’t talk about it with American. It also can’t signal American to make any changes.
This was a purely defensive play by Alaska, not an offensive play. I’m sure Virgin’s mergers and acquisition consultants made Alaska fully believe that, if Alaska did not buy Virgin, JetBlue would. If JetBlue bought Virgin, then Alaska would die a long slow death with fare wars on two fronts. Everyone verse them on transcon market. Then Delta, after seeing them weakened by a transcon market battle, would attack them in the Seattle market. It “only” cost them $2.6 billion to avoid these fare wars.
I feel the same way. This is a play for survival. If they let JetBlue gobble up Virgin America, they would have become even more of a bit player in the California market, while having to deal with a much stronger JetBlue up and down the west coast. My guess is they would have found themselves a merger target not too long after. I think they saw their financial strength and decided to strike before it was too late. Personally, I’m excited to see how it plays out.
One question – since DAL doesn’t fall outside of the perimeter rule, they could keep the slot and ditch DAL, correct?
Alaska’s CEO is quoted as saying that Alaska approached Virgin well before the holidays about whether they were for sale or not. If Jetblue had approached them first and Alaska was asked to bid, then I can see it being a defensive play. But Alaska was the aggressor from the start. Sure, you could make the argument that it’s still somewhat defensive as a proactive defensive move in the event Jetblue was ever interested. But it’s not like Alaska swooped in at the last second and snatched it away from Jetblue in a desperate bid to prevent Jetblue from executing their grand plan. Alaska’s CEO was also quoted as saying that Alaska has been looking seriously at doing something like this for the last few years. Hardly defensive if you ask me.
I wonder how that letter went…
Alaska here, want to merge?
That is how I picture it looking :)
Very hard to see this as a defensive play. JetBlue brings no strength to the north-south West Coast, while Alaska/Virgin does significantly. If there is a defensive element to this acquisition, it’s to counter Delta.
Did you not notice the vicious fare war in Seattle (and Portland) markets in January between Alaska and Delta? My view is that Delta was dreaming of resurrecting Western Airlines (which it bought) which used to dominate the north-south West Coast. Now Delta can ONLY dream!
JeffBTV – Apparently Alaska approached Virgin America last year on its own. So it had interest long before. I think Alaska saw strategic value, though whether the defensive need caused them to pay this much is up for debate.
“And most importantly, what happens to the mood-lighting?”
I’m surprised Alaska hasn’t already incorporated moon lighting on their flights, at least on the ceiling if not the whole cabin. Would have a great Northern Lights effect and match the brand perfectly.
*Mood lighting (sorry for the fat fingers)
I wonder how much it costs to put that system on a plane? AS has probably looked at it and figured it’s not worth the cost.
Nick – As far as I know, Alaska can do mood lighting today. The airplanes with Boeing Sky Interior should have that built-in. Maybe they’d have to buy a purple light bulb…
Alaska’s new planes already have lighting on the ceiling it’s just not black lighting like VX.
Republic must be bitterly disappointed
They can always buy Alaskafifornia.
Nah they’ve got their eyes set on buying Delta.
I’d say Alitalia is on their radar too.
How does AS maintain its industry-leading on time rates when 20% of its operation touches SFO? Lots of out-and-back for SFO?
No one has talked about how this will affect the relationship dynamic with American. They can’t be too happy about this as AS will now compete head-to-head with AA on several flagship routes. Could play out like the AS/DL divorce…
I don’t see AA has being as vindictive as DL has been. AA’s management spent all of their time managing US under the watchful eye of their bigger brother UA. I don’t see them in the must win at all costs stance that DL is in.
I’d think American is happy about this, and it might bring them even closer together. A competitor is removed from those transcon flights and replaced by a partner. They also have a stronger Alaska to work with at LAX and SFO, where the two will now share a terminal. Plus, Alaska will have an even greater presence up and down the west coast, which is still American’s weakness.
Chase – This is fantastic for American in San Francisco. It makes them much more relevant as a competitor to United. (This also potentially makes it so AA can combine its separate operations there.) In LA it’s a bit murkier, but I would imagine American will still find value in this relationship.
As much as I wanted to see JetBlue buy Virgin, they were right to think $2.6 billion too much and a JetBlue acquisition would have probably killed the Long Beach hub and cut out a bunch of transcontinental capacity. As for Alaska, they could certainly turn Virgin’s routes around. While Virgin had an industry leading product in 2007, that product is no longer competitive and Virgin seemed too cheap to upgrade (adding pillows instead). I see Alaska adding flatbeds to some 737-900ER’s for the JFK-LAX/SFO routes, moving a few flights from EWR/JFK to PDX, SEA, and maybe SJC and SAN. As for the 4 DCA and 6 LGA slots, they could trade them for gates/JFK slots and more flights at EWR (apparently slots are going away there). I definitely don’t see the Dallas Love mini-hub sticking around though, there isn’t really room for a 3rd player in Dallas, and if Alaska continues its American partnership, Love lacks connections to AA. I don’t imagine either Alaska or American leasing those gates to Delta though.
It would be awesome if Alaska resurrects the EWR/PDX direct that United/Continental used to have. United kept the EWR-PDX nonstop, but not the PDX-EWR one.
Errr… Heidi, UA only does EWR-PDX non-stop westbound? Or was there a typo there?
Oh, whoops, sorry, I forgot. There is an eastbound nonstop, but it leaves PDX late at night as a red-eye. But, Continental used to have a great nonstop that left PDX somwhere around 7am PT and arrived EWR somewhere around 5pm ET. That flight got dumped by UAL a few months after that merger.
North of Expected
Yikes, I think the bigger story here is that this places Alaska square in the face of Delta in LAX. With Deltas planned move to terminals 2 & 3- guess where all the Virgin gates are ??? The war for the west coast continues.
And as a LA/Orange County resident I profit from cheap fares. Love it, love it, love it.
Superb analytics! Facts, tone, timbre: all instructive. Thanks B! CJTaylor
I’m really curious what happens to the JFK-LAX/SFO routes. The history of sub brands and airlines within airlines in this industry is a long and sorid history with one exception: the JFK-LAX/SFO transcon. There’s UA’s PS, AA’s Flagship, B6’s Mint, and I’m sure I missed one or two.
I’m curious if the “discussions about the Virgin brand” include possibly using “Alaska: Virgin America” or “Virgin America by Alaska Airlines” on the California-JFK transcons. I’d expect this’d also be the last bastion of A320s if/when AS ends up getting rid of them.
Nick – I’m really curious about this too. Virgin America’s transcon service has stayed stagnant while everyone else leaps ahead. It has fallen behind and revenue trends show that. So for Alaska, it needs to invest in something to become more relevant or it needs to decide a different strategy is in order. The codeshare with American does allow Alaska loyalists to fly a superior transcon product and still earn their miles. What if Alaska decided to run its regular service in parallel for those care more about upgrades or coach and less about fancy premium products? I still think it would be a mistake to keep the Virgin brand in any form, but I think this could be the one area where they might be tempted to brand a premium service.
I too scratched my head at the price tag, for what, some leased planes??!! The California strategy sorta makes sense, but the VX route map is primarily highly competitive transcons. Are those profitable enough to pay that kind of dough? Think this is 100% a move to block B6. Long term I don’t think much if any of the VX brand will survive and when that’s gone will their loyal customers go too? Time will tell.
As a side note I’ve always thought Alaska has an identity crisis right around the corner as they try to expand outside of their PNW niche due to the name. People will downplay that as WN does fine with a regional name but IMO Southwest is more ambiguous than “Alaska.” Your non-west coast customer in Dallas who wants to go to NYC probably isn’t going to think “Alaska” first. If this is a move to be more of a national airline it’s going to take a long time to change that perception outside of us airline dorks.
I think the identity crisis might exist, but it’s strongly mitigated by GDSes, and the fact that people tend to buy the cheapest flight.
Sent from my computer that moonlights as a phone.
Perhaps, but flying Alaska is definitely a cut above the larger carriers so once people do fly Alaska, it generally has a loyal customer for a long time.
You know, for 2.6 Billion, just to win California, they should have just built a train between SFO and LAX.
In 2008 Delta paid 2.6B in stock to buy Northwest. Which really puts the 2.B in cash into perspective.
That’s 2.6B in Cash.
…and Southwest bought AirTran for “only” 1.4B
Actually, that’d be 4.0 Billion in value …
Should be interesting to see what happens since so far anything I read made it sound like AS doesn’t know what to do with VX. Seems the plan was to buy it first so no one else can and they figure out what to do later. Is that a smart business plan due the cost?
Do you think the VA brand mystique survives? Will it stay as a separate unit or will it all be merged together eventually?
MarylandDavid – The airlines will be fully merged under the Alaska brand.
I see the play for California being the best (and only) reason for this acquisition (and keeping B6’s hands off of it), but are a lot of things not to like about this.
1) Big overpay. Already explained.
2) Will have a huge fight on their hands with WN and DL in California. Both will fight back hard, we’ve already seen WN move into a 5th LA Basin airport. Not to mention the gates at DAL. AS would commit suicide just like VX did if they try to compete with WN there. Those gates will be subleased if possible.
3) The fleet differences are a big problem. I cannot see any way AS keeps the AB jets permanently, even seeing them keep the fleet beyond the date they go to a single operating certificate is difficult to envision. Beyond the simple fleet maintenance challenges, you’ll need to maintain separate flight simulator facilities, you’ll have to negotiate contracts with the pilots, the FAs, and the maintenance unions at a minimum, makes merging seniority lists a nightmare.
This means that AS will be eating some costs to unload the A3XXs, and trying to buy up used 737s at the same time WN is buying used 737s like mad replace 120-ish 733 and 735s, so their jet acquisition costs will be high.
It might be they didn’t have a choice, but just because you bite the bullet and play a bad hand, doesn’t make it a good hand. This is going to be a painful acquisition, more painful than WNs acquisition of FL, except without a lot of the benefits of that acquisition, like opening international flying, expanding the East Coast presence, gaining a major hub at ATL. This was 4 Billion for a play to grow California and keep it away from B6 and that’s about it.
Operating mixed fleets it not exactly new territory for Alaska. As late at 2008 they were operating classic/combi/NG 737s and MD80s. Is operating both 737s and A320s optimal? No. Is it a big problem? Probably not.
I don’t see Alaska rushing to unload the A320s. This deal was already expensive enough. If they go that route, it is kind of ironic that they have sold some of their 737-700’s to Southwest. Does Boeing has some production slots left to give Alaska some closeout deals on NG 737s ala United and Southwest?
I agree that this move could be primarily defensive. Buying VX may not have been a top choice for AS, but it is far better than having B6 buy them and box them out into the PacNW. Also, there is something to be said for being solid 5th (in size) than a distant 6th (which is now B6).
I realize AS operated a fleet of MD80s from a prior acquisition until 08 timeframe, and I understand that it’s doable to introduce a new fleet of 60 jets, they’ve done it before. But it isn’t easy or cheap. All of their union contracts have been rewritten since 08. They’ve gotten rid of their MD80 flight sims. Its going to be a painful expensive proposition to maintain a fleet of 60 AB jets beyond the single operating certificate.
Yes, it can be done. It’s going to be expensive either way, so the best thing they can do is unload the AB jets ASAP. They will come to the same conclusion WN did with the FL 717s.
I’m not sure that the MD80s were from a prior acquisition. I thought they actually bought them from MD.
southbay is right. Alaska bought its MD-80s direct with first deliveries in 1985. It did get more in the Jet America acquisition in late 1986.
AS is experienced in fighting WN. They’ve fought them pretty well in the Pacific Northwest.
AS’s product is different enough from WN that that will give them some advantage. Plus AS sells on GDSes, WN doesn’t.
Apropos the fleets, Airbus and Boeing, no one has mentioned that in Seattle, AS has a huge marketing campaign surrounding the “All Boeing” fleet. This is Seattle after all, where all those jets are (more or less) built.
I think they will divest those AB airframes quickly. WN did it really fast with those 717s, and I wouldnt expect it to be that fast, but close.
Brett, This West Coast outcome is one Delta can only dream about now. Western Airlines reborn? Now it will never happen.
It will be quite interesting. I’m still curious what will happen with their operations at SJC? If they are going to have a large operation at SFO, will they continue their non-hub flying out of SJC (Hawaii, Mexico, Boise, Reno, and soon San Diego and Orange County)?
I still remember Virgin America’s failed attempt to fly SJC-LAX with all the hoopla and free marketing from the airport. It was funny they called it the nerd bird (everyone knows that’s SJC-AUS). It was a total failure. I’m pretty sure that anything that isn’t making money will be gone quickly. Unlike Virgin, Alaska is a well run company and they won’t keep throwing money on a route that doesn’t work.
southbay flier – I think San Jose is part of the strategy here. Alaska wants more comprehensive service to the entire region, something Virgin America could never have done on its own with the fleet it had.
Excellent article; well reasoned. Change is hard, even under the best of circumstances. I hope those wedded to VX will see that despite the likely loss of things they held dear, that AS is still a great option, and that will likely become clear as time goes by, especially after the JOC comes through and real changes start. Part of me wonders if this is a rebirth of the fierce West Coast battles that involved the likes of Western, AirCal, PSA, Reno Air, and the like. Or, perhaps that battle has always been there, but WN was so powerful intra-CA that it was rather hidden. If B6 had won this one, I don’t think there would have been any way AS could have forced their way in. From a purely personal standpoint, I would love to see AS back at LGB rather than the DL code share through SLC (which, if the acrimony between the two carriers continues, that could drop anyway). That would put AS smack into the fight between the B6 flights LGB-SEA.
Would be fun to see Alaska “Gold” compete in LAX/SFO-JFK against B6 “Mint”. Just daydreaming…
This sounds alot like the AA/QQ acquisition. A lot of cash for regional flying? Then in a year or two cut some of the routes.
I have always thought that AS and B6 would want to partner, given their relatively few overlapping routes and “quirky” cultures. Also combined forces would really give good coverage for both coasts and be somewhat competitive with the big 4. Although the acquisition of VX now places AS a direct competitor to B6. I guess we should all sit back and watch how this plays out.
I think AS is making a mistake here. Aside from routes, an airline is pretty much people and planes. And these are the two places where the mismatch between AS and VX are going to be most felt. A culture clash at two small airlines can set everything back by years. I know, I went through HP-US. Then you have the Airbus vs an all-Boeing fleet. I get that having some options for Airbus orders might give the new AS some leverage with Boeing, but who are we kidding? Those cancellation options will be exercised at Airbus and, eventually, AS will settle back to all-Boeing.
That leaves routes. If AS wanted to get stronger inside California, maybe buying VX is the fastest way to do that. But at $2.6B plus the hidden costs from mismatched cultures and fleets, it doesn’t feel like the least expensive way.
I’m not sure the acquisition was too expensive. Too expensive is subjective, anyway. If the merger strengthens Alaska in California as much as is hoped, the deal could turn out to be a bargain. I have to wonder if the combined carrier will keep its gates at Love Field and slots at LaGuardia and Reagan. It will have an extensive beyond-perimeter slot portfolio at Reagan, flying to Seattle, Portland, San Francisco and Los Angeles, but within-perimeter slots at both LaGuardia and Reagan are of limited use to a West Coast based airline (especially if Alaska finds a way to monetize Virgin’s Love Field gates (or their leases). It’s possible that some slot and gate transactions could offset the acquisition cost to some extent (although the amount probably wouldn’t be a whole lot). I’m guessing (facetiously) that Alaska’s management has far more information than I do; and therefore, is in a much better position to make those decisions. It should be interesting to see how the airlines combine.
This could lay the groundwork for Alaska to join forces with JetBlue in either some form of a partnership or outright merger. I realize of course I’m getting way ahead of myself, but it maybe worth looking ahead as the airline landscape is forever evolving.
So, JetBlu decides it has no future but to offer itself up to the highest bidder.
To me, anyone might be able to buy it for a song, but wouldn’t this be the straw that breaks DOJ’s back, so to speak?
If the 4 majors have 80% of the business now and one of them took over JetBlu, what percentage would cause DOJ to find the situation untenable?
In thiery, only Southwest or Alaska could buy JetBlue since the big three already have a huge presence in NYC. Alaska buying Virgin America gives Alaska an entry to the L. A. & San Fran transcan markets & even allows for growth by adding both Portland & Seattle.
Currently there’s far less service to the PNW from NYC & other large metros east of Salt Lake City with the exceptions of Chicago & maybe Dallas. Even Atlanta surprisingly only has a few round trips per day to Portland – a city that has had crazy growth over the past decade or so.
And Portland, where I live, is experiencing even more crazy growth in the last year.
I’ve heard a rumor that PDX may end up shifting some of their gates around at some point, with AS going to the E gates where United is now, and UAL going to the opposite end of the terminal where Alaska is. Who knows how this would work out, as these two areas are vastly different in size & number of gates. AS has somewhere in the neighborhood of 12-20 gates while UAL has, like, 4.
United has 7 – 5 standard & 2 regional.
PDX is currently lengthening their E concourse to accommodate AS, and swapping United over to the A/B gates (which will become one long concourse of just C gates apparently). The port didn’t like that about 2/3s of airport traffic was going towards the south side of the airport and this is an attempt to re-balance that. I believe Alaska will probably also use some of the D gates which are currently underutilized. I think this will also help with connecting through the growing international market PDX has, although- We know Delta and AS are fighting over turf in Seattle so its a bit problematic to place them right next door to one another.
With a lot of talk about AS competing with WN, AS does have the advantage of United being a big carrier in the west for many decades and a lot of travel agencies and corporate travel departments use Apollo which AS/VX are in but WN is not.
As a SEA-based AS pax, this is many flavors of win. I do hope they ditch the Airbus though.
There’s nothing wrong with Airbus planes.
My favorite line – The latter are all mourning the loss of Virgin America today, but what are they going to do? Fly United instead?
I know – that also struck me funny.
How much of this, if any amount, is about Alaska acquiring otherwise impossible to get gates? Now they’ll have an entire concourse at SFO, for example. Are there other airports where organic growth was impossible without acquiring gates that weren’t for sale?
Just brainstorming out loud, but if I were awaiting regulatory approval for a merger and couldn’t yet get in to the nitty gritty of merging, I might propose an employee exchange. Have each airline “hire” 20 or so people from the other, scattered through every work group, and train and actually go to work for a few months in the job of their exchange counterpart. They’d compare notes with their counterparts, and those reports would be the foundation from which an integration plan could be made.
This is a pretty crazy deal, taking on so much debt on top of the amount of money they are spending.
It’s interesting because I feel like they are the opposite of each others brands; it will be interesting to see how they do this merger.
Plus all the expenses of combining computer systems, changing signage in all the terminals they’re now in, plane paint jobs, employee merging & training, changing the interiors/magazines/safety cards, revamping the ground crew, publicity, the list goes on. So, it’s $4b cash & debt, plus what, another $50-200m for all the “incidentals”? I have no idea how much that would all cost, but it’s no small change, either.
AS return to LGB?? With Southwest starting LGB, and I believe through service to PDX (1 daily) and SEA (1 daily), would they be interested in coming back? Unfortunately, the only airplane they could use is the Q400…25 slots available!!!
I think B6 has shown through as being more savvy than some may think. The put ego aside and realized when to “put the pen down and walk away from a deal they cab do cheaper themselves.
From what bit of ear to the ground, i think jetblue will take about 1/3 of the money they would’ve used to buy va, buy a bunch of additional new airbus, and set up shop somewhere in the west coast. Then shortly after merger with Hawaiian who is trying to crack more into the mainland. B6 gives much needed A320/321 HA wants more of abs HA brings the widebody’s B6 has been mulling over, opening up trans pacific and trans Atlantic and further info latam.
I’m not sure I see HA and B6 getting together.
Hawaiians like their local independent companies, a New York company coming in and taking over wouldn’t bode well.
At best they put both airlines in the same holding company and operate them independently, but I don’t see the point of that.
Not “taking over” but to merge. HA has recently stated that they would like to gain a sizeable footprint in the mainland.
I expected HA to put a bid in but alas, no deal. Airbus fleet…expand their footprint to Midwest and east coast markets while offering a boutique product from SFO & LAX to the east.
I’m sure they ran the numbers and decided p2p mainland flying was a hornets nest.
I’m can’t see this as a play for California flyers long term. So what is AS going to do? Run all of VX’s routes and hope the competition goes away and they miraculously start making a lot of cash? This looks like an opportunity to grow the AS footprint quickly and make as much money as possible now while fuel is cheap. That means being the best airline to get to California and the rest of the west coast. I think their focus will be on growing into new markets in the Midwest and Southeast. They should pick a CA hub, either LAX or SFO making the other a focus city with PDX, and park OO there with regional flights ala SEA for the northwest and Alaska. With the lack of a scope clause in the pilot contract, maybe even take those 40 CS100s off of Republic’s hands for OO. Then use some of those A320s that were bleeding money on routes with a lot of competition and open up CVG, CMH, PIT, etc. The acquisition is about frames and crew and what can be done to expand AS, not what VX was doing because they weren’t doing great anyway.
Just a question: last year CAPA said that Virgin America following their IPO had, after years of unprofitability and speculation that it would go bust at some point, a promising future. But you mentioned that VA had been underperforming for years, and compared to Alaska has not been much of a success story. Could you clarify exactly how poorly VA has been doing, and why the discrepancy with CAPA’s analysis?
Sorry I’m asking this, I’m from the Philippines and I’ve only been to the US once, almost 11 years ago, and though I’ve flown with both Northwest and Delta over the years, I’m not completely familiar with the dynamics of the US airline industry.
In American English going bust means that the business failed. So CAPA and CF said the same thing in different ways.
Anonymous – It is true that Virgin America has finally posted a profit after years and years of hundreds of millions of dollars in losses. But it did that thanks to three things – 1) cessation of growth, 2) low fuel, and 3) strong demand. But Virgin America has once again resumed growing by taking a lot of new delivers in the next few years. So its performance is going to be hurt. Further, it doesn’t seem to have a lot of ideas about where it can grow on its own. While it is profitable now, its margins lags significantly behind the rest of the US industry. That means Virgin America is fine in the short run, but in the long run, it’s hard to see how it succeeds on its own.
On a more humorous note, perhaps someone with better art skills than I can stylize a Richard Branson picture in the form of the Alaska Airlines Eskimo, and put it on tail of an Alaska/Virgin plane in a mashup.
Outstanding! Nothing I like more than to see another great airline grow. To hell with the legacy carriers, who needs them!?
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