It’s official; Alaska Airlines can buy Virgin America

Alaska announced Dec. 6 via a press release that the U.S. Justice Department has approved the $4 billion merger after a lengthy review of the deal for antitrust issues.

Executives of Alaska Air Group Inc., the airline’s Seattle-based parent company, have said since the purchase was announced in early April that they expected it to be approved without issue, although it took longer than planned.

“We couldn’t be more excited about receiving DOJ clearance for our merger with Virgin America. With this combination now cleared for take-off, 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,” Air Group Chairman and CEO Brad Tilden said in a formal statement.

Alaska Air Group stock finished trading Dec. 6 at $84.80, up 2.02 percent for the day.

Virgin America stock was largely unchanged by the approval announcement; it was up 0.62 percent to $56.80 per share at the close of trading Dec. 6.

The deal was spurred, from Alaska’s side, by a motivation to create the “premier West Coast airline” by growing the its foothold beyond the Pacific Northwest and into California by capturing San Francisco-based Virgin America’s network, airline officials have said.

Additionally, it should increase Alaska’s East Coast reach through Virgin’s cross-country routes originating from its California hubs.

Specifically, it is a $2.6 billion cash purchase with Air Group assuming Virgin’s roughly $1.4 billion of debt. It will result in an airline with a fleet of more than 280 aircraft and making roughly 1,200 flights daily between the U.S., Mexico and Latin America.

Alaska Air Group’s operating revenue — dominated by Alaska Airlines — was $4.4 billion through the third quarter and led to an even $700 million in net income in the first nine months of 2016.

Tilden said during the company’s third quarter conference call with investors that he expects 2016 to be Air Group’s seventh consecutive year of record profits.

Alaska Air Group also held more than $3.2 billion in cash and marketable securities through third quarter.

Virgin America ended the quarter with $1.2 billion in operating revenue and $107 million in net income year-to-date.

The Dec. 6 release also said the Justice Department did not stipulate Alaska Airlines divest any of its existing assets to get approval and the airline hopes to close the deal “in the very near future.”

Air Group expects to have a single operating certificate from the FAA by the early 2018, according to the company.

(Editor's note: This story has been updated to accurately reflect the status of a lawsuit brought against Alaska Air Group Inc. A settlement was announced shortly after publication.)

The airline company issued a statement Dec. 7 announcing that it had reached a settlement in a lawsuit filed a group of attorneys in federal Northern California District Court attempting to halt the merger on the grounds that it would violate federal antitrust laws. The terms of the settlement were kept confidential.

The initial complaint, filed in September, called Virgin “a significant rival of Alaska,” as well as “the most innovative, passenger friendly, premium low-cost and unique airline in the industry” and claimed “the lessening of competition and tendency to create a monopoly in the airline industry is unmatched and unparalleled.”

Alaska Air Group has said purchasing Virgin America would give the company just 6 percent of the overall domestic market, compared to the nearly 70 percent combined domestic market share held by the four largest airlines — American, Southwest, Delta and United — according to the U.S. Department of Transportation.

It would also bump Alaska up one spot to the fifth-largest domestic airline in terms of market share, leapfrogging JetBlue, the carrier Alaska Air Group reportedly beat out in bidding to acquire Virgin America.

“We remain confident in the merits of this transaction,” Tilden said further. “The expanded West Coast presence and larger customer base create an enhanced platform for growth, which is good for investors, employees and especially customers — who benefit from more choices, increased competition and low fares.”

It remains to be seen how Virgin America will fit under the Alaska Air Group umbrella, that includes regional carrier Horizon Air, but Virgin founder Richard Branson has said he would use the Virgin America name to start another airline if his former startup is enveloped and Air Group decides to discard the Virgin name.

Branson, who founded the Airline in 2007, opposed the merger in an open letter he wrote shortly after it was announced. However, there was little he could do to stop the deal, as he is a minority-share investor in the airline through his Virgin Group companies, according to Virgin America.

To win the government's approval, Alaska will stop selling seats on American Airlines flights - a so-called code sharing agreement - on 45 routes. Alaska said the concession will cost it between $15 million and $20 million a year in revenue, assuming it gets many of those customers back on Alaska planes.

Alaska gets $320 million, or 6 percent of its revenue, from code-sharing. Of that, $190 million comes from American, $65 million from Delta Air Lines, Inc., and another $6 million from other carriers.

Alaska also agrees to notify the government before it tries to sell or trade assets that Virgin America received from American Airlines and US Airways when those two carriers merged in 2013. The assets include takeoff and landing slots at New York's LaGuardia Airport and Reagan Washington National Airport and gates at Dallas Love Field.

The Associated Press contributed to this story.

Elwood Brehmer can be reached at [email protected].

 

Updated: 
01/03/2017 - 8:25am

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