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
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.”

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