NEW YORK – Virgin America has loyal passengers who love the airline’s cool vibe even if its size and schedule are too limited to meet all their travel needs.
But it appears to be going away.
Alaska Airlines’ parent company announced Monday that it will pay $2.6 billion to buy the Richard Branson-inspired, California-based carrier. Alaska hopes to become travelers’ preferred airline on the West Coast and a tougher competitor to giants American, Delta and United on transcontinental routes.
The deal would vault Alaska over JetBlue – the losing bidder for Virgin America – to become the nation’s fifth-biggest airline by passenger traffic.
Since it started flying in 2007, Virgin has helped bring down fares on transcontinental routes between California and New York, and it engaged in a price war with Southwest that led to dramatically lower fares in Dallas.
Some analysts believe the merger will mean fewer bargain fares. Mergers and acquisitions have already reduced nine major U.S. airlines to four and made it easier for the survivors to limit flights, an indirect way to avoid cutting prices. Now two smaller carriers are combining, again leaving passengers with fewer choices.
“We think (Virgin) was a price disruptor in the industry, so we think we will see less discounting on these routes,” said Jim Corridore, an analyst with S&P Capital IQ.
But Alaska’s CEO, Brad Tilden, said Alaska and Virgin thrive because they keep their costs – and as a result airfares – lower than bigger airlines.
“We don’t have any intention of straying from that strategy,” Tilden said.
Alaska faces the risk that Virgin’s most passionate passengers won’t like their new airline because it won’t be as hip. The combined company plans a campaign to keep those key customers happy and flying.
“I think our biggest advocates, because they are so invested in the brand, will be disappointed,” Virgin America Inc. CEO David Cush said in an interview. “We are going to make sure that we spend the proper amount of time with them to explain that we think this is a good deal.”
The pitch will go something like this: The route network will be greatly expanded with more flights to more places. A combination of Alaska’s Mileage Plan and Virgin’s Elevate will be a bigger, more valuable loyalty program. And even if its planes don’t have mood lighting and order-at-your-seat screens like Virgin’s, Alaska runs a solid airline.
Alaska ranked second among U.S. carriers in on-time performance last year, trailing only fair-weather Hawaiian Airlines. Virgin was fifth. Alaska had the industry’s lowest complaint rate. Virgin’s rate was in the middle of the pack, three times higher than Alaska. While Alaska charges bag fees, it was the first to add a guarantee – if a checked bag isn’t at the pickup area within 20 minutes, fliers get $25 off a future trip or 2,500 bonus miles.
The proposed merger would give Alaska a bigger presence in Virgin’s key markets of San Francisco and Los Angeles and a foothold at busy airports in New York and Washington, D.C.
Tilden said the goal is to be “the premier airline for people along the West Coast.”
“One of the main things customers want is for you to fly them to places they need to go. This is going to put us in a better position to do that,” Tilden told The Associated Press.
The combined airline would operate about 1,200 daily flights and control 5.5 percent of domestic air travel, compared with 4.2 percent for New York-based JetBlue. It would still lag far behind American, Delta, United and Southwest. Those four control 83 percent of domestic seats, according to an Associated Press analysis of data from Diio, an airline-schedule tracking service.
It will be based in Seattle with Tilden as its CEO. Alaska said the deal would add to its adjusted earnings per share in the first full year.
If past airline deals are any indication, Alaska and Virgin will continue to operate separately for several years while combining workforces, computer systems and – maybe – fleets. Alaska flies Boeing planes, and now must decide whether to keep Virgin’s leased Airbus jets.
Alaska executives also said they might keep the Virgin America brand name alive in some form.
Analysts pressed the executives on whether Alaska had overpaid for a relatively small airline with only about two dozen destinations. The executives replied that it was a one-time opportunity to grow overnight in California, complementing their airline’s strength in Washington, Oregon and Alaska.
Virgin started flying in 2007 with backing from Branson, the colorful British billionaire, as a minority owner – U.S. law limits foreign ownership of airlines. It went public in November 2014 with an initial stock offering that jumped 30 percent on its first day of trading. The airline turned profitable – barely – in 2013 and earned a record $340.5 million last year with help from lower fuel prices.
JetBlue issued a statement saying that it wants to grow on the West Coast and on transcontinental routes, but that the price of an acquisition got too high – it would be better for JetBlue to grow on its own.
The Alaska-Virgin deal is subject to approval by shareholders of both airlines and government antitrust regulators. The airlines hope to close by the end of this year.
Alaska will pay $57 per share in cash. That is a 47 percent premium to Virgin’s closing price on Friday and an 86 percent premium to its price the day before Bloomberg News first reported a potential sale.
Alaska shares fell $3.09, or 3.8 percent, to $78.92, while Virgin shares soared $16.21, or 41.7 percent, to $55.11.
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