Support Skift’s Independent JournalismMake a Contribution Now
Calling the bidding process hard-fought and tough, Alaska Air Group CEO Brad Tilden said “the thought has been in our head” for a couple of years to acquire Virgin America and that Alaska Air first approached Virgin America about the deal in October or November.
The “other party” — JetBlue — got involved in the bidding for Virgin America after Alaska Air initiated the process, Tilden told analysts in a conference call today about Alaska Air’s $2.6 billion cash acquisition, or $4 billion in enterprise value, of Virgin America.
Asked whether the acquisition was defensive in nature, Tilden rejected that notion, saying “we just wanted more canvas to work with.”
He explained that today Alaska Air is likely to be passengers’ preferred airline if they live in Washington, Oregon or Alaska but Alaska currently only has about a 7 percent share in California.
The deal gives the combined airlines “really good economics” to “grow our West Coast presence,” Tilden said. “The opportunity is big.”
For example, Tilden said while Alaska Air currently doesn’t fly east from California, post-deal it will fly to 10 of the top 10 U.S. airports from San Francisco.
Officials said the deal would make the new Alaska Airlines the fifth largest U.S. carrier and number one in seat share on the West Coast.
On some of the key merger issues, Tilden said “we want to learn more” about the Virgin brand. “There is a chance we can use the Virgin America brand in some form down the road.”
Alaska Air operates a fleet of 147 Boeing 737 aircraft while Virgin America boasts a fleet of 60 Airbus A319 and A320 aircraft.
Ben Minicucci, Alaska’s COO, said during the call that while the airline would “love” to offer a single fleet type in the future, Virgin America’s leasing of Airbus aircraft gives the combined airlines a lot of flexibility and Alaska will “learn more” about the Airbus fleet before making any decisions.
Alaska Air expects to wrangle $225 million in annual synergies through the merger by 2019, and the marriage will immediately be accretive to earnings following the deal’s closure, which is expected by January 1, 2017.
The revenue and cost synergies will be a 80 percent versus 20 percent split, respectively, said CFO Brandon Pedersen. On the revenue side, the synergies will come from network benefits, mix and matching the fleet, and from Alaska’s Bank of America loyalty program card partner, he said.
The cost synergies — including some layoffs, presumably — will be based on combining airport facilities, corporate offices and technology systems, Pedersen said. Officials didn’t provide any details on a possible reservation system migration.
Virgin America’s Elevate loyalty program members will be transitioned to Alaska’s Mileage Plan program. Officials said Mileage Plan members will benefit from a much larger West Coast network.
Tilden said the goal is to make inroads into the “bleisure segment of the market,” which he described as business travel and high-end leisure.
Tilden referred to it as “a very promising and underserved segment of the market.”
The merged airline will notch some $7 billion in annual revenue, based on 2015 numbers, fly to 114 cities and employ some 18,000 people.
Unlike airline mergers in the past that were driven by bankruptcies, Tilden argued that the Alaska Air-Virgin America merger comes from “a position of strength. We are getting increasingly confident about the industry itself.”