Mile-High Merger: Alaska Airlines Buys Virgin America, Expanding Market Reach

Written by Frank Holmes, CEO Of U.S. Global Investors

A little over 10 years ago, there were a dozen major domestic airlines. Following a wave of bankruptcies, the industry consolidated, and today four remain—American, Delta, United and Southwest.

For the past couple of years, these newly-strengthened carriers, along with a full roster of regional and low-cost carriers, have been beating expectations, generating record profits and free cash flow and rewarding shareholders with dividend growth and stock buybacks. Low fuel costs have served as an additional windfall.

That doesn’t mean the industry now lacks the room to change (and improve), however. In February, the short-haul regional carrier Republic Airlines filed for bankruptcy—the first such filing in the industry since American’s in 2011—after losing a number of unionized pilots in a drawn-out salary dispute. (More on that later.)

And just this past weekend, 84-year-old Alaska Airlines announced it would be buying Virgin America, billionaire Richard Branson’s young, hip carrier.

Alaska to Become the Premiere West Coast Carrier?

The $2.6 billion deal, awaiting shareholder approval in June, would create the fifth-largest U.S. airline by traffic and result in a much more competitive player, especially on the West Coast. (Alaska is based in Seattle, Virgin in San Francisco.) According to the Wall Street Journal, Alaska’s annual revenue could grow 27 percent because of the deal.

As I’ve pointed out in the past, the acquiree in deals such as this normally sees a short-term bump in share price, while the buyer’s stock might fall because, among other reasons, it must pay a premium for the acquisition. For the three-month period as of April 6, Virgin was up nearly 66 percent.

Integration can sometimes be tricky for airlines—more so than for other industries—because they involve not just employees and aircrafts but also information technology systems, booking procedures, rewards programs and flight schedules. All of this must be accomplished while the carriers remain fully operational.