Why Alaska Air is willing to pay top dollar for Virgin America

Alaska Airlines has agreed to buy Virgin America for more than $2.6 billion. What makes it worth that much? 

(AP Photo/Ted S. Warren)
Brad Tilden, Alaska Airlines president and CEO, talks to reporters, Monday, April 4, 2016, at the airlines' corporate headquarters in Seattle. Alaska Airlines' parent company announced Monday that it will pay $2.6 billion to buy the Richard Branson-inspired, California-based Virgin America.

In a move announced Monday morning, Alaska Air Group - the parent company of Alaska Airlines - has agreed to buy Virgin America for more than $2.6 billion. As part of the deal, Alaska agreed to pay $57 in cash for each share of Virgin stock, a considerable premium over Virgin’s Friday closing price of $38.90 per share.

Including debt and operating leases the deal could be worth as much as $4 billion, reports The New York Times.

Critics of the merger see it as the next round of competition elimination in an already competitively limited industry. United States regulators are expected to closely scrutinize the deal following the failed US Justice Department lawsuit in 2013 to block the merger between American Airlines and US Airways. The fear is that further consolidation – fewer airlines – will inevitably lead to price increases for consumers.

In a 2015 article for The New York Times, Andrew Ross Sorkin described the US airline industry as an “uncompetitive oligopoly,” claiming that “mergers over the past several years have left the nation with only four major airlines ... which deliberately don’t compete on some routes.”

Following a decade of large-scale airline mergers, this latest move would effectively make Alaska Air the fifth largest airline in the United States.

But for shareholders of Alaska Air or Virgin America, the merger means expanded routes along the US West Coast and the ability to compete with the other major US airlines – Delta, United, Southwest, and American – which currently fly approximately 80 percent of all domestic passengers, reports Time.com

While concern is that Alaska Air will be forced to raise rates in order to recoup the premium paid for Virgin America’s shares, others see benefits to consumers in the combining of two airlines who previously had relatively limited travel routes.

Alaska Air, which is based in Seattle, has a strong base throughout the Pacific Northwest, while the California-based Virgin America has primary hubs in San Francisco and Los Angeles with routes to major cities across the country – New York, Chicago, Dallas, etc.

According to individuals familiar with the deal, as reported in The Wall Street Journal, Alaska Air and Virgin America have only six routes that currently overlap, meaning fliers for both airlines should dramatically increase their access to and from their frequent destinations.

Another potential benefit for frequent travelers of either airline will be witnessed in the combination of mileage programs – domestic and international. Alaska Air currently partners with American Airlines and Delta domestically as well as Air France, British Airways, and Aeromexico abroad among many others. While Virgin America brings its Virgin partners, Virgin Atlantic and Virgin Australia, as well as Singapore Airlines, Air New Zealand, and Air China among its international partners.

Ann Zaninovich, the Alaska Airlines spokesperson tells Forbes that they are still in the process of determining how they will combine the programs - which is scheduled for the beginning of 2017. Mileage members for either company could see a dramatic increase in partners following this potential merger.

Both companies’ boards of directors have approved the deal, but the merger isn’t scheduled to be completed until early 2017. 

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