Alaska Air to Spend $2.6 Billion Cash to Acquire Virgin America

Alaska Air Group and Virgin America plan to merge to create the fifth-largest airline in the United States. The announcement came early Monday morning after a weekend of speculation that the two companies were nearing a deal. Alaska Air Group will pay $57 per share in cash for a total of $2.6 billion. Including $1.4 billion in existing Virgin America debt and capitalized aircraft operating leases, the aggregate transaction value is approximately $4 billion.

The move will expand Alaska Airlines' reach into markets where it currently has limited traction. Virgin America's strong California presence, including Los Angeles and San Francisco, will increase Alaska Airlines' West Coast capacity market share to 22 percent. In addition, the transaction will open growth opportunities in important East Coast business markets by increasing Alaska Airlines' access to slot-controlled airports like Reagan Washington National Airport and New York City's John F. Kennedy International and LaGuardia airports, and it stands to boost Alaska's overall transcontinental capacity market share to 14 percent, up from 5 percent. The combined carrier will offer 1,200 daily departures with hubs in Seattle, San Francisco, Los Angeles, Anchorage and Portland, Ore.

Bidding War Drove Up Cost

Valued at $1.5 billion at the close of Friday's market, Virgin America garnered a premium, with two primary suitors vying for its hand: Alaska Air Group and JetBlue. Cowan & Co. pinned more strategic advantage to a merger with JetBlue, given the Airbus A320 fleet type both it and Virgin America operate and transcontinental route synergies that would have landed 20 percent of transcon capacity. UBS noted, however, that despite fleet commonality, JetBlue "has more financial leverage and more strategic initiatives already underway, making a major acquisition a more difficult proposition for it than for [Alaska Air]." With more cash in hand, the deal went to Alaska Air Group.

According to Loizos Heracleous, professor of strategy at Warwick Business School and an airline industry researcher, the price to win Virgin America was high. "The bidding war for Virgin America has raised the price to levels that will make it challenging for Alaska Air to garner benefits that can justify this price, at least in the short term," he said. "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."

Alaska Air Group chairman and CEO Brad Tilden is bullish on the deal. "Our employees have worked hard to earn the deep loyalty of customers in the Pacific Northwest and Alaska, while the Virgin America team has done the same in California. Together we will continue to deliver what customers tell us they want: low fares, unmatched reliability and outstanding customer service," he said. "With our expanded network and strong presence in California, we'll offer customers more attractive flight options for nonstop travel. We look forward to bringing together two incredible groups of employees to build on the successes they have achieved as standalone companies to make us an even stronger competitor nationally."

Post-merger, the combined organization would be based in Seattle under the leadership of Tilden and his senior leadership team. Until receiving regulatory approval to close, Tilden and Virgin America president and CEO David Cush will co-lead a transition team, which will develop a specific integration plan. Both airlines expect the merger to close by Jan. 1, 2017.