Skift Take

Once Alaska Airlines figures out the mood lighting and the aircraft post-Virgin America merger, perhaps JetBlue would be on its acquisition wish list. But that would be several years away.

Alaska Airlines began in 1932 when Mac McGee, a former miner, truck driver, and dishwasher from the Midwest, decided to start a carrier in Anchorage. Since then, the airline has become a favorite for travelers in the Pacific Northwest, nurturing a following without such frills as mood lights or lounge music.

That’s about to change.

Alaska Air Group Inc. closed its $2.6 billion purchase of Virgin America in December. Unlike recent airline mergers born of financial duress, both Alaska and Virgin America had built successful franchises. Yet, they had fallen behind, dwarfed by rivals in an industry now dominated by behemoths. Alaska saw its growth inextricably tied to California, Virgin America’s base. A deal was struck. But merging staid Alaska with Virgin America, a brand that spearheaded the airline trend toward Austin Powers atmospherics, wasn’t going to be easy.

Leading the effort is Ben Minicucci, who became Virgin America’s chief executive in December, adding to his roles as Alaska’s president and chief operating officer. Minicucci began flying weekly to San Francisco for the integration, with much of the job focused on trying “to get the culture right” in combining two very different companies.

To that end, Alaska had all-day “momentum” sessions for about 3,500 Virgin America employees, in groups of 150, to explain the merger and the company’s plans. (The combined airline has more than 19,000 workers.) Seattle-based Alaska also saw the acquisition as an opportunity to freshen up its own, relatively aged brand.

The airline expects to secure a single operating certificate from federal regulators in January 2018 and to convert to a single reservation system by the following fall. With those steps, Alaska will no longer operate Virgin America as a separate airline. In 2019, it plans to ditch the Virgin America brand entirely—a decision that drew public rebukes from Virgin Group founder Richard Branson, who described the move as an effort “to rip the heart out of the airline.”

Alaska is also mulling whether to mix things up when it comes to the jets it flies, retaining some Airbus Group SE A320-family aircraft that Virgin America uses to join Alaska’s uniform fleet of the Boeing 737s.

A Montreal native, Minicucci, 50, is a Royal Canadian Air Force veteran who trained as a mechanical engineer. He began his civilian career at Air Canada before joining Alaska in 2004. He spoke by telephone from Seattle on April 5 to discuss how this unification of two very different brands is going.

Q: What was the starting point for Virgin America employees?

A: They asked a ton of questions about Alaska, about the merger and what was going to happen. We wanted to honor what Virgin America built. They had a great culture. Alaska’s been around in business for 85 years, and we love our culture. But it’s an 85-year-old business. They were modern, they were hip, they were edgy. And we said, you know, we could probably bring some of that into the Alaska culture.

We had all these traditional values from Alaska, we had the new values that were coming from Virgin, and we spent a lot of time saying, what should our purpose and values be for the new company? And it was actually Virgin’s purpose statement: “Creating an airline people love.” We just didn’t simply say, you’re just going to adopt the Alaska way. We honored Virgin America’s history and their values in saying, we’re going to infuse a little bit of red into blue and maybe, make it a little bit purple.

Q: Was there any anger or disappointment?

A: There were two groups. There was a group that was totally happy that Alaska acquired Virgin America, just because we’ve had a history of stability, financial success, and they felt that their career now was in good hands. If you’re a pilot who’s worried about having a 20- or 30-year career—Virgin America had only had two successful financial years in nine.

Some were sad to see the Virgin America brand go. People loved their brand, and it was special to them. What we needed to do in these “momentum” sessions is actually have them express that, to say, “We’re sad to see it go.” Then, throughout the eight hours in the session, bring up [Alaska] saying, “Yeah, we understand and we’re listening.” And then, at the end, inspire and motivate them about a future that could be better than what they had today: one that has more security, more growth, and more excitement.

When they came in, you either had a frowny face, a neutral face, or a smiley face. And then at the end … we had them take the same survey and say how many frowny faces now are there—how many neutral faces and how many smiley faces compared to the start of the day? And inevitably, we’d see a massive increase by the end of the day.

Q: You asked that actual “face” question?

A: Yeah, it was just saying, “Where are you?” We had clickers in the audience. So the clicker would be: one, if you’re a frowny face; two, if you’re a neutral face; and three, if you’re a smiley face. We’d see a 20-point increase in the categories by the end of the day.

Q: Did you discuss why that company decided it had to be sold?

A: What we did was show Virgin America’s historical financials over the past nine years. One of the things we wanted to explain was that Alaska may not be a household name in California, but in the Pacific Northwest, Alaska is a powerful brand. It has a tremendous amount of loyalty, it generates a tremendous amount of goodwill in the communities, and it’s one of the reasons we’ve been so successful, at least in the last 10 years.

Q: You mentioned a little more purple. Will the new airline eventually look more like Virgin?

A: What I will say is the outside will look like Alaska. The inside, what you’ll see is brand elements of Virgin. If you fly Virgin, it’s unmistakable. You walk in, the purple lights, flying first class, the white seats, in-seat video, the whole thing with ordering from your seat. And that’s one of the things we loved about Virgin America; they were different, they were disruptive. So some of those things that made Virgin America unique that guests really loved, those were the things we said we need to bring to Alaska. And little things, like music at the gates or the ticket counter. That was different. Not a big thing, not an expensive thing, but just: The mood is different, right?

They were just ahead of their time. I had lunch with Fred Reid [Virgin’s founding CEO] and I asked him: “Where did you come up with the purple lights?” I wanted to understand where all of these innovative, disruptive ideas came from. They just wanted to be different. Where Virgin has really pushed Alaska’s thinking is how can we have a real great, innovative product that’s inspired by Virgin, but it’s Alaska.

Q: Because of Virgin America’s focus on corporate traffic, do you need to be in “fortress hubs” like Atlanta, Dallas, JFK, Denver, or O’Hare more than you are now?

A: We’re going to build our West Coast network. We’re going to look at the top destinations where people want to go. What you want to do in our big hubs on the West Coast is provide utility; that’s how we’re wired. And then provide a great product at a low fare. We’re going to take our playback essentially from the Pacific Northwest and bring it into California.

Q: Do you expect a lot more competitive fights with American, Delta, and United?

A: No. I think our experience in Seattle—we understand that anytime you’re in a hub, you’re going to have competition from other carriers. We’re going to be thoughtful and deliberate about how we grow our airline.

Q: Will you paint the existing Virgin planes?

A: We are looking at perhaps in the fall of 2018, painting the Airbus airplanes—depending on the decisions we make here in the next few months.

Q: At what point will you stop paying Virgin for the Virgin America brand?

A: I think we’re going to leave that for our legal folks to work out. Not much to say there.

Q: Fair enough. Do you think there will be a lawsuit over this?

A: We hope not. We’ll just see how it plays out.

Q: On the fleet, what attributes do you like or not like about the Airbus?

A: The 320 is a good airplane. But there’s always the right airplane for the right market, the right route. And what I will tell you is the 320, with the number of seats it has, its range capability—the [Boeing] 737-800 and -900 is a much more capable trans-continental airplane than the 320, based on seat density, based on range and payload. But the 320 is an excellent airplane. From a customer perspective, it’s a little wider; it’s about seven inches wider than a 737. We love single-fleet—it has massive, massive economics to stay single-fleet. But again, we’re going to stay open to the process and see where we land by the end of the year.

Q: Is there anything the 320 can do that the Boeing can’t?

A: No, not really. They’re both very capable airplanes. I would just say the [Boeing] 37-800 and -900 just has more range and more payload than the [Airbus] 320. Now, the 321neo is different. We’re actually getting our first one here in two weeks. I’m actually going up to Hamburg to pick it up. The 321neo is going to be interesting, to see the capability of that airplane. It has addressed the range issues of its predecessor. The seat density is terrific. It’s got more range, more capability, so we’re very, very anxious to take a good look at the 321neo.

Q: How do you plan to use that?

A: Of course, we’re going to use it trans-con.

Q: Not Hawaii?

A: It’s not ETOPS-certified [extended overwater operation for two-engine aircraft] yet. We’re hoping we can get it ETOPS-certified by the end of the year. And once we get it ETOPS certified, it would be a great airplane for Hawaii, actually.

Q: If you like the Airbus 321neo, does that color the decision on the 320s?

A: No, I think there’s a process that we’re going to follow through. We’ll have a very analytical, economic process that will evaluate both fleets on many, many different criteria. And I think once we’ve done the analysis, I think the answer will emerge. There are so many factors, it’s hard to say whether you like it or not. You have to be careful of being subjective.

Q: Bloomberg Intelligence speculated earlier this month that once your merger is complete, an Alaska-JetBlue deal would make sense for both airlines. What’s your view of that?

A: Right now, we’re focused on one thing: Getting this integration done. We can’t even think about doing something else right now. Doing an integration is a massive, massive amount of work. And our focus right now is getting this deal done, doing it well, getting the cultures right.

Q: Of the prior industry mergers, which has been the most instructive for you among Delta, United, and American?

A: They were all interesting. They all had things that they did really, really well and some things that didn’t go well. I think I admire all three companies for doing those mergers. And I would say, in some respect, [they] were harder, because we acquired a 9-year-old airline and they were putting together airlines with decades and decades of history, which complicated their mergers. So I have a lot of respect for what they accomplished. We are actually a beneficiary of all the hard work that people put forth in all the other mergers.

©2017 Bloomberg L.P.

This article was written by Justin Bachman from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to [email protected].

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Tags: alaska airlines, mergers and acquisitions, virgin america

Photo credit: Virgin America flyers could listen to their Spotify tunes via the airline's ViaSat In-flight Wi-Fi. Alaska is looking to integrate some of that Virgin America cool into the merged airlines. Virgin America

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