Strange Math – What Does AS+VX=

It’s being reported by several sources that as soon as Monday Alaska Airlines will announce a deal to acquire Virgin America. Many of us are scratching our heads and saying why? The two airlines don’t seem like soulmates, and the company cultures are very different. Since many of these questions will be answered, or at least addressed on Monday, let’s speculate why this merger could work.

Why would either airline want this merger? With Virgin America the answer is simple. Money, and who’s offering the most. Once a deal is done and the acquiring airline has control it really doesn’t matter (from the acquiree standpoint) any longer. They’re sold.

But why would Alaska Airlines want to spend the money to acquire Virgin America. What does Virgin America have that Alaska can’t build on their own? When an airline acquires another airline it comes down to some of a few things. Planes, Slots, Scale, Elimination of Competition, Brand Equity, and Technology.

Planes: Virgin America uses Airbus A320/A319. Alaska mostly uses Boeing 737s. It’s hard to see why Alaska would want Airbus A320/A319s. Additional metal don’t seem to be the reason. We’ll call this a negative for the deal.

Slots: The West Coast isn’t slot restricted so this doesn’t seem to be a big gain for Alaska. At the same time, acquiring those slots in a deal your going to do anyway isn’t a negative. We’ll call slot acquisition as a neutral.

Scale: It’s hard to see this as anything but a positive for the deal. Currently Jet Blue is 5th largest airline in the U.S. (by traffic). Alaska is 6th.  Virgin America is 9th. Acquiring Virgin America’s would put Alaska at 5th and Jet Blue at 6th. In addition, overlap between these two airlines is very small. It would also materially improve Alaska’s position in SFO and LAX.

Elimination of Competition: This is a little more difficult to judge. Virgin America doesn’t directly compete with Alaska so you might say a negative, but this really isn’t the case. If Alaska doesn’t acquire Virgin America and JetBlue does, well it’s just a longer road to number 5. Who else could Alaska purchase? There really isn’t anyone (maybe Frontier). Additionally, the West Coast is Alaska’s home turf. You could almost call them a super-regional airline. Letting JetBlue into the playground just introduces another potential headache. In fact, you could argue unless Alaska wants to be acquired (and they don’t) they must protect themselves with this acquisition. This one is in the positive column.

Brand Equity: Alaska has their brand and Virgin America has Richard Branson’s brand. And they are very different. This would be a negative for the deal, in that Alaska will most likely absorb Virgin American and rebrand them over time.

Technology: This one is a neutral. Neither company has expertise the other one can’t obtain. Virgin America has some bell and whistles that Alaska doesn’t, but they’re not of a nature that Alaska couldn’t easily replicate them if they wanted to.

Overlooking the list, we have:

Scale – Big Positive
Elimination of Competition – Positive
Slots – Neutral
Technology – Neutral
Planes – Negative
Brand Equity – Negative

So why is Alaska trying to purchase Virgin America. I would put the top 3 reasons as scale, scale, and scale. The 4th reason might be to keep JetBlue at bay. Alaska wants to be a big boy and not a super-regional any longer. They don’t trust their competition, and they shouldn’t. Once a deal is done the slots become a positive. They’ll also figure out the Airbuses. In fact, if you’re going to be a big boy Airline then maybe you want to widen your fleet a little. Or they’ll let the leases expire over time. In any case it’s immaterial. They want Virgin America in order to leapfrog to number 5 and compete.

In Summary

Planes don’t matter. Virgin America’s cool brand doesn’t matter. Company culture doesn’t matter. Alaska wants to purchase Virgin America in order to jump to the number 5th airline position and eventually compete with the big 4. Now what the feds say about the deal is another discussion altogether.

Susan leaned over my shoulder and read my post. She exclaimed, “Alaska Airlines is trying to buy Virgin America!?” “Yes dear” I answered. “Does that mean we’ll be able to visit that cool lounge in San Francisco” she asked? “I’m not sure Suzy, but I sure hope so.”