Alaska Air Group closes acquisition of Virgin America

Eleanor Steed
By Eleanor Steed December 14, 2016 16:18

Alaska Air Group closes acquisition of Virgin America

Alaska Air Group has finally closed its acquisition of Virgin America, which was agreed by the two parties in April and approved by Virgin America shareholders in July.

Alaska Airlines and Virgin America intend to spend the next year working to secure Federal Aviation Administration (FAA) certification to allow the two airlines to operate as a single carrier (with regional sister carrier Horizon Air remaining on its own separate operating certificate).

“Alaska Airlines and Virgin America are different airlines, but we believe different works – and we’re confident fliers will agree,” said Brad Tilden, CEO of Alaska Air Group. “Together, we’ll offer more flights, with low fares, more rewards and more for customers to love, as we continue to offer a distinctive travel experience. The two airlines may look different, but our core customer and employee focus is very much the same.”

Today, Alaska Air Group boasts nearly 1,200 daily flights to 118 destinations, the most seats on flights from the West Coast and more than $7 billion annual revenues. Alaska Air Group promises to continue to provide customers “low fares, unmatched reliability and award-winning service… while offering a convenient schedule of flights to even more of the places they want to fly”.

The two airlines have merged their loyalty schemes and from December 19, Mileage Plan members will be able to earn miles on Virgin America flights, and Virgin America Elevate members will be able to earn points on Alaska Airlines flights. Also from Monday, customers will be able to purchase Virgin America tickets at alaskaair.com. Tickets will continue to be available for sale at virginamerica.com for the immediate future.

“Beginning Monday, Virgin America Elevate members and Alaska Airlines Mileage Plan members will enjoy reciprocal rewards earning across each other’s networks,” said Tilden. “We plan to make this the most customer-friendly merger ever, and we will have much more to announce over the coming weeks.”

The airline group stated that it had yet to make any long-term decisions regarding the Virgin America brand. For the near-term future, Alaska plans to continue to operate the Virgin America fleet with its current name and product “for a period of time while it conducts extensive customer research to understand what fliers value the most. Virgin America will continue to fly under its brand with no immediate changes to the onboard product or experience.”

“We appreciate that there is great interest in the future of the Virgin America brand among customers and employees alike,” said Tilden. “This is a big decision and one that deserves months of thoughtful and thorough analysis. We plan to make a decision about the Virgin America brand early next year.”

The combined company will be led by Alaska Air Group CEO Tilden. Ben Minicucci will serve as chief executive officer of Virgin America in addition to his role as chief operating officer and president of Alaska Airlines. Peter Hunt, previously Virgin America senior vice president and chief financial officer, will serve as president of the Virgin America subsidiary, reporting to Minicucci. Hunt will be based in the company’s Burlingame, California regional headquarters. Both Minicucci and Hunt’s positions are effective today, and remain in effect until the airlines obtain a single operating certificate from the FAA, expected in early 2018.

Alaska Air Group has updated its fourth quarter 2016 guidance, which shows actual unit revenue for November exceeding expectations thanks to load factor and yield improvement. Jet fuel costs are increased compared to previous guidance to $1.70/gallon, up from $1.65/gallon, but November unit revenue is up 3.6% and PRASM up by 1.9%. As a result, Cowen & Co has increased its target price for the common shares of Alaska Air Group to $92 from $87, which is based on 5.8x 2017E EV/EBITDAR or 13.7x EPS

CORRECTION
In yesterday’s news we inaccurately reported that ACG would be retaining the E note on the portfolio of 18 aircraft in its Merlin ABS transaction. This is incorrect; the E note has already been sold for some time although this has not been publicly announced. The ABS deal prices on Friday, with an expected close of December 23. More on this deal will be covered in Issue 35 of Airline Economics, which will be published on January 16, 2017.

Eleanor Steed
By Eleanor Steed December 14, 2016 16:18