Alaska Airlines gets US approval to buy Virgin America

By David McLaughlin and Mary Schlangenstein

Bloomberg

Alaska Air Group Inc. won U.S. antitrust approval for its acquisition of Virgin America Inc., a takeover that extends years of consolidation in the industry and expands Alaska Air’s access to the lucrative cross-country market.

Under an agreement with the Justice Department announced on Tuesday, Alaska Air must reduce the scope of a marketing accord that allows it to sell tickets for American Airlines flights on over 250 routes. The change will ensure the merged Alaska Air competes against American rather than partnering with it, regulators said.

The restrictions will reduce by about 50 percent the volume of Alaska Air passengers on American flights, according to the government.

“Today’s settlement ensures that Alaska has the incentive to take the fight to American and use Virgin’s assets to grow its network in ways that benefit competition and consumers,” Renata Hesse, the head of the department’s antitrust division, said in a written statement.

The settlement with the Justice Department, which requires court approval, likely clears the way for the completion of the deal “in the very near future,” Alaska Air said in a written statement. The combined airline will become the fifth largest in the U.S. based on passenger traffic, displacing JetBlue Airways Corp., which lost to Alaska Air in the bidding to link up with Virgin America.

Alaska Air shares rose 1.1 percent to $84.05 at 2:48 p.m. in New York, while Virgin shares rose 0.6 percent to $56.80.

Alaska Air won’t surrender any assets under the settlement with U.S. regulators. While the concessions covering the “codeshare” agreement with American represent a revenue loss of about $60 million a year, the airline believes it will recapture 70 percent of that through its own passengers for a final negative impact of about $15 million to $20 million, Alaska Air said. The codeshare concessions involve 45 markets, the company said.

“We couldn’t be more excited about receiving DOJ clearance,” Alaska Air Chief Executive Officer Brad Tilden said in a written statement. “With this combination now cleared for takeoff, we’re thrilled to bring these two companies together and start delivering our low fares and great service to an even larger group of customers.”

Alaska Air’s $2.6 billion cash agreement to buy Virgin America, announced in April, adds to the string of mergers that have shrunk the number of carriers in the U.S. airline industry since 2005, leaving the top four operators controlling 80 percent of the market.

The deal is the first substantial airline merger since the Justice Department sued to block US Airways Group’s takeover of American Airlines in 2013. That deal ultimately was completed after the carriers agreed to sell airport assets to low-fare competitors.

Alaska Air is paying $57 a share for Virgin America. While the offer was a 47 percent premium to Virgin’s share price at the time, it just barely eclipses the closing price of the shares, $56.45, on Monday. After accounting for debt and the capitalization of aircraft leases, the transaction was valued at $4 billion.

The deal will boost Alaska Air’s revenue 27 percent to more than $7 billion and should produce $225 million of annual savings after incurring integration costs of as much as $350 million, Alaska Air said when the deal was announced. Alaska Air expects Virgin America to begin adding to earnings in the first full year, excluding those costs.

The Virgin America acquisition will expand Alaska Air’s route network out of Washington state, Oregon and Alaska by adding important business centers in Los Angeles and San Francisco as well as adding flights into John F. Kennedy International Airport in New York, Newark Liberty International Airport in New Jersey and Reagan National Airport near Washington, D.C. Alaska Air also picks up new routes out of New York’s LaGuardia Airport.

The deal also gives the combined airlines extra market power to combat larger rivals that have moved to compete more directly with them by adding routes and cutting prices.

Cross-country routes between New York and California are among the most lucrative in the domestic industry. With the merger, Alaska Air hopes to become the carrier of choice within California, where it faces stiff competition from Southwest Airlines Co. and United Continental Holdings Inc.

The company will retain the Alaska Air name, brand and Seattle headquarters. It will explore how the Virgin America brand, which grew out of U.K. billionaire Richard Branson’s business empire and has strong customer loyalty, might be used in the combined airline, Alaska Air has said.

The combined business will have hubs in San Francisco and Los Angeles, where Virgin adds east-west routes to Alaska Air’s north-south strength, as well as in Seattle, Anchorage and Portland, Oregon.

Alaska Air has been on a growth spurt recently on the East Coast, capitalizing on an April decision by the Federal Aviation Administration to open up Newark Liberty to more competition. The carrier has started or is soon to start new routes between Newark and San Diego; Portland, Oregon; and San Jose, California, and it will add a third daily flight there from Seattle in the spring. Alaska Air also plans to add a new route from San Diego to Baltimore in the spring.

The airlines’ merger is still being challenged by consumers in a San Francisco federal court case set to go to trial before U.S. District Judge William Alsup on Dec. 12. In October, Alsup issued an order directing the airlines to give him and those suing at least seven calendar days’ notice of the deal’s closing date, adding that “any consummation will be subject to divestiture.” A final pretrial conference in that civil lawsuit is set for Wednesday.

American Airlines expects to remove its airline code from about 20 of the more than 80 Alaska Air routes in the codeshare relationship. It estimates that Alaska Air will take its code off of 40 of 270 American routes, said Martha Thomas, a spokeswoman for American.

“Even with these changes, we are committed to continuing our longstanding and valued relationship with Alaska,” Thomas said. American declined to comment on the expected financial impact of the codeshare concessions.