Commercial

Alaska to Purchase Virgin America for $2.6 Billion

By Woodrow Bellamy III  | April 4, 2016
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[Avionics Today 04-04-2106] Alaska Air Group has announced a plan to acquire Virgin America for $2.6 billion, merging the California-based airline with its existing company Alaska Airlines. Under the proposed acquisition, which is still subject to regulatory approval, the newly combined Alaska Airlines would become the fifth-largest U.S. carrier behind American, Delta, United and Southwest.
 
 
Photo: Alaska Airlines.
 
During a conference call announcing the news, Alaska Airlines CEO Brad Tilden said the acquisition provides a big opportunity for Alaska to expand its presence in California and effectively become the biggest domestic airline for West Coast air travel. The Virgin America acquisition was a purchase that Alaska Air Group had been considering for several years, and finally decided to follow through with the deal at a time where they feel the industry finally has set itself up for long-term profitability, Tilden said.

 
"Today, just four airlines have 84 percent of the revenues. This is a good thing for investors, but to an airline like Alaska, it says that scale is relevant. So, we think it's a good thing for us to have a little bit larger scale to work from," said Tilden. "While California is actually our second-biggest state in terms of flying, we don't fly east from there, really. And that affects how much customers living in California can concentrate their travel with us. California is three times the size the markets of Alaska, Oregon and Washington combined. This acquisition gives us a solid foothold in California." 
 
According to Tilden, the acquisition will add Virgin America's fleet of 60 Airbus A320s to its existing mainline fleet of 147 Boeing 737s. Based on the 2015 performance of both airlines separately presented by Tilden, the new Alaska is expected to generate $7 billion in annual revenue, with 39 million annual customers flying to 114 cities in four different countries on 1,200 daily flights.
 
The acquisition will also force Alaska to reconsider its policy of using only one type of aircraft, which is currently the Boeing 737. All but five of Virgin America's A320s are leased, with those aircraft entering the final years of the leasing terms between 2020 and 2022.
 
"We are acquiring a great fleet of young fuel-efficient airplanes, we have that on the Alaska side; Virgin America has done a great job building their fleet. We are big believers in single fleet, so much so, that we bought another single fleet. We are not worried about it, we are going to get to know the Airbus airplane and go from there," Brandon Pedersen, chief financial officer at Alaska Airlines, told reporters and analysts during the April 4 conference call. 
 
Prior to the acquisition announcement, Virgin had already committed to leasing 10 new Airbus A321neo aircraft in 2017, along with orders for three additional A320s and 30 A320neos. 
 
"There's also an order for 30 A320s on the books, 10 in 2020, 2021 and 2022, and that order has a pretty favorable cancellation provision. I'm not suggesting at all that we are going to do is that, but it is something we could do if in fact we decide to move in a different direction," said Pedersen.
 
Outside of the differences in the two fleets and the expanded destinations the airline is adding to its network, experts monitoring the acquisition believe that timing played a major factor. Since its inception in 2007, Virgin America's first year of profitability came in 2013 and the airline experienced record profits last year. 
 
"It is a matter of grabbing opportunity when it arises, for both airlines. From the perspective of Virgin America’s investors, this would be the right time to sell. The company has started being profitable in 2013, with record profits in 2015. Given the unpredictability of industry conditions, and the acquisition premiums that can be achieved when the industry is on an upturn, this would be a good time for investors to capitalize on their investment," Loizos Heracleous, a professor of strategy at the Warwick Business School told Avionics Magazine in an emailed statement.
 
"If oil prices remain low, the upward trends in the aviation industry performance continue, and Alaska successfully gains synergies from the acquisition, then this will have been a good strategic move. However, the aviation industry performance is cyclical, oil prices are unpredictable, and synergies are notoriously hard to achieve — so this is one to watch with interest," Heracleous added.
 

Alaska Airlines’ executive team is currently preparing for a Department of Justice (DOJ) review of the proposed acquisition, and expects the DOJ to approve it by Jan. 1, 2017. 

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