By the end of last week, plenty of questions remained
about Alaska Air Group’s acquisition of Virgin America, most notably the future
of the popular Virgin America brand and its mostly leased fleet of highly
customized Airbuses.
But analysts agreed that one thing was clear: Alaska views
the acquisition as a chance to leverage the two airlines’ combined California
routes to become a force in West Coast aviation.
“What this merger is really about is a land grab,” said
analyst Henry Harteveldt of Atmosphere Research Group. “I mean, truly, it is a
land grab in the form of gates at Los Angeles International and San Francisco
International airports.”
On April 4, Alaska Air Group, parent of Alaska Airlines,
announced plans to acquire Virgin America for $2.6 billion. Including Virgin’s
debt and aircraft operating leases, the total value of the transaction is
around $4 billion, according to Alaska.
In addition to Virgin’s loyal customer following and
valuable gate slots at New York and Washington airports, Brad Tilden, CEO
of Alaska Air Group, said that acquiring Virgin would give the merged airline a
“solid foothold” in California, thanks to Virgin’s presence there.
Brad Tilden
“This is going to be a really important opportunity for
us,” Andrew Harrison, chief commercial officer for Alaska Air Group, said
last week on the investor call.
Harrison said Alaska is “most excited” about its
post-merger seat share on the West Coast. At 22%, it will be the largest,
followed by Southwest (21%), United (16%), Delta (12%) and American (12%).
Alaska Air’s fleet consists of 220 Boeing 737s, while
Virgin flies 60 Airbus A319 and A320 aircraft.
Brandon Pedersen, CFO of Alaska Air Group, said on
the investor call that Alaska likes the “flexibility” that Virgin’s Airbus
fleet offers the merged airline.
“You also know that Virgin America leases the vast
majority of its airplanes,” he said. “So we can transition the fleet to a
single fleet, if we should choose to do that, starting in 2020.”
On that point, however, Harteveldt said Alaska executives
should go into the merger “with completely open eyes.” With access to Virgin’s
data, they can decide to keep some, all or none of the Airbuses.
“I think if they are smart they’ll realize that airlines
such as Delta, American, United, Hawaiian and others have a mix of different
types of airplanes, so that you fly the right airplane for the right mission,”
he said.
Robert Mann, an analyst with R.W. Mann & Company,
said Virgin has an “economic fleet size,” but the Airbuses “add complexity and
training costs.” However, because the Airbuses are leased, “they could be
traded out as soon as 2020, or earlier, consensually.”
Both airlines use Sabre technology, so while there are
likely some differences, merging their back-end systems shouldn’t be too
difficult, said Bob Offutt, the senior technology analyst at Phocuswright.
“There is a little wrinkle,” he said: Virgin has deployed
Sabre’s new Customer Data Hub, Customer Experience Manager and Dynamic
Retailer.
“They may be ahead of Alaska in terms of deploying new
technology on Sabre,” Offutt said, adding he believes Alaska will have to
upgrade its technology to catch up.
Onboard technology is a different animal altogether.
Alaska said last week it would explore the technologies that both airlines
offer and decide, in time, what works best.
“It’ll be interesting because their planes are so
different,” said George Hobica, president of Airfarewatchdog.com. “Virgin has in-seat video, and Alaska
doesn’t on most of their planes.”
The two also offer different cabin classes, interior
designs and WiFi technology. Virgin’s in-seat video ranks among the most
sophisticated in the industry, offering passengers the ability to order and pay
for food and drinks from their seats and to engage in text messaging with other
passengers flying in the same class.
Brett Snyder, president of CrankyFlier.com, said, “Alaska has a heritage as a traditional
mainline carrier, but Alaska has also invested a lot in technology, has focused
a lot on the operation. They have a fanatical following in the Pacific
Northwest for sure, and so they are well-loved.”
As for Virgin America, Snyder said, “They’re the cool
kids, right?”
Time will tell if Alaska will adopt any part of Virgin’s
onboard experience.
“Ultimately, I’m not convinced that you need to have all
of the things they have,” Snyder said of Virgin America’s accoutrements. “Does
it really matter if you have mood lighting? And, by the way, Alaska’s new
planes can do mood lighting, too, but does that matter? Does in-seat video
matter? Maybe it does, maybe it doesn’t. ... Ultimately, what really matters is
an airline with a good operation that treats people well, has decent fares and
can get you where you need to go.”
Any merger of this sort begs questions about branding.
While Tilden was clear on the investors call that the Alaska Airlines brand
isn’t going anywhere, he left some wiggle room for some possible use of the
Virgin America brand in the future.
“The Alaska brand stays,” he said. “In terms of the
Virgin brand, what I’ll just say is we want to learn more about it. We believe
it’s driving a big revenue premium for Virgin, and we want to get involved. As
we work through the integration of the two companies, we just want to learn more
about it, so there is a chance that we could use the Virgin America brand in
some form down the road.”
Even so, both Hobica and Harteveldt predicted that the
Virgin America brand would end up in the history books. While Harteveldt said
some possibilities could necessitate operation of two separate brands, he felt
it would be cost-prohibitive and potentially inefficient.
“I think it’s highly, highly unlikely that we’ll see the
Virgin America name continue past the point of the [merged] airline getting the
single operating certificate,” Harteveldt said. “From a business standpoint, it
just doesn’t make sense.”
He also pointed out that Alaska unveiled a new corporate
identity earlier this year at a time when, according to comments executives
made on the investors call, it was already in talks with Virgin. That unveiling
would have been unlikely if there had been a chance of the Alaska brand
disappearing down the line, he said.
Alaska said it hoped to receive regulatory approval by
the third or fourth quarter this year and anticipated a fourth-quarter closing.
Tilden and David Cush, the CEO of Virgin America, will head a transition team
until regulatory approvals are received.
Overall, analysts predicted that the merger would not
face too many regulatory hurdles.
Harteveldt said it might face some additional scrutiny
from a Department of Justice (DOJ) that is “now very, very sensitive to airline
mergers, having allowed the consolidation of the four big super carriers. On
paper, there’s very, very little about the Alaska Airlines-Virgin America
combination that should lead to any kind of objection.”
The DOJ could focus attention on Alaska’s codeshare
partnership with American, he said, perhaps limiting the number of eligible
Alaska flights on some routes, but Alaska and Virgin compete on few routes.
“I don’t think they’d have a case to say they don’t want
Alaska and Virgin to combine,” he said.
Snyder agreed: “They have little overlap with each other,
so it doesn’t really remove much in the way of direct competition. … And there
are plenty of competitors on the routes that they do overlap.”