Alaska Air Group said Monday it will buy quirky discount carrier Virgin America in a $4 billion deal that would further consolidate the U.S. airline industry and raise the prospect of higher fares for customers.
“With one less competitor in those routes, we will see less discounting,” said Jim Corridore, equity analyst at S&P Global Market Intelligence.
Alaska Air paid a high premium for Virgin Atlantic and will have to recover those costs, industry experts said. The combination of two discount airlines will create a bigger competitor that may not need to lower prices as much to attract customers, they said.
The high price of the deal “is a plus for the shareholders of Virgin America,” said Paul Hudson, president of the traveler advocacy group FlyersRights. “But that premium has to be made up with cost savings or higher revenue, and higher revenue often means higher prices for customers.”
A series of mega-mergers over the past decade has shrunk the number of major U.S. airlines from nine to four. And the remaining big carriers — Delta, Southwest, American and United — fly about 80 percent of all domestic passengers.
The limited competition has helped airlines post some of their biggest profits in history. Low fuel prices has saved carriers billions and a new fee-based strategy, charging customers to check bags or for seats with more legroom, have all boosted the industry’s bottom line.
“They need to find a way to grow profits, and that is why they are not cutting fares,” said Corridore.
The Justice Department declined to comment on whether it would look at the deal. Last year, it announced it was investigating whether airlines were limiting routes and affordable seats.
Airlines for America, an industry group, did not comment directly on the merger, but in a statement noted that the Justice Department had approved the last four airline mergers.
“These mergers have allowed airlines to focus on renewing fleets, improving the product at all stages of travel, which boosts operational reliability and advancing environmental objectives,” said Melanie Hinton, a spokeswoman for Airlines for America. “The industry is working – perhaps better than it ever has before.”
Should the Justice Department review the deal, it would likely focus on whether the merger will create a better competitor to the big airlines, rather than whether Alaska Air and Virgin America compete in certain markets, industry analysts said. Low-cost airlines have traditionally helped keep industry prices low, said Gene Kimmelman, a former Justice Department antitrust official.
The question will be whether the merger will make Alaska Air a better competitor, or give it the flexibility to raise prices, Kimmelman said. If the deal “actually weakens some of the maverick behavior that has been beneficial to consumers” that could be concerning, he said.
Under the deal, Alaska Air would pay $57 in cash per Virgin share. That is a large premium over the $38.90 a share Virgin closed at Friday. The companies described the entire value of the package at about $4 billion, including debt and aircraft leases. Virgin America’s stock price jumped 40 percent Monday after the deal was announced.
“With our expanded network and strong presence in California, we’ll offer customers more attractive flight options for nonstop travel,” Brad Tilden, chairman and chief executive of Alaska Air Group, said in a statement. “We look forward to bringing together two incredible groups of employees to build on the successes they have achieved as standalone companies to make us an even stronger competitor nationally.”
Alaska Airlines, which was founded in 1932, is merging with an upstart airline known for its lighthearted commercials and reputation for affordable luxury. Virgin America started flying in 2007 with the backing of billionaire Richard Branson, who in a lengthy note, appeared to lament the sale.
“I would be lying if I didn’t admit sadness that our wonderful airline is merging with another,” he said. “Because I’m not American, the US Department of Transportation stipulated I take some of my shares in Virgin America as non-voting shares, reducing my influence over any takeover. So there was sadly nothing I could do to stop it.”
Branson’s Virgin Group Holding owns 13.7 million Virgin America common shares, which are worth about $780 million under the deal.
Alaska Air and Virgin American said they hope to close the transaction no later than Jan. 2. The combined company would be based in Seattle.
“We don’t know what’s going to happen in the future, but from the consumer standpoint, mergers like this rarely work out well,” said Hudson of FlyersRights.