Virgin America’s sale sparked a bidding war between two of the US’s most aggressive and ambitious carriers. JetBlue and Alaska Airlines went head to head to secure the airline, culminating in a sale price that was some 47% greater than the share value pre-sale. But why didn’t JetBlue dig deeper and snap Virgin America from the jaws of Alaska Airlines?
Virgin America for sale
When Virgin America went up for sale, it wasn’t in the best shape of its life. Although it had returned to profitability following its IPO, it was still flying with some of the lowest operating margins in the industry. On the back of a successful year, its biggest shareholders Cyrus Capital and Virgin Group wanted to cash out.
At the time, its shares were trading at just under $30 a piece, and it would likely have sold for around $1.2 to $1.3 billion, had there been just one buyer interested. But its sale proved to be attractive to as many as four different companies, and a bidding war ensued.
Following a few back and forths, Alaska Airlines and JetBlue emerged as the frontrunners in the Virgin sale process. Both airlines could see a value in Virgin America that far outstripped its share valuation, and for different reasons.
For Alaska, it was about stifling competition, and about getting those slots and presence on the West Coast that are so critical to its business model. For JetBlue, it was all about the transcon. Its New York to San Francisco and LA services were the best performers out of its entire network, so to be able to do more of that was immensely attractive to the airline.
In the end, Alaska’s $2.6 billion bid won out. It paid some 47% over the odds for Virgin America, but instantly became the fifth largest airline in the US. Why didn’t JetBlue go higher, and was the loss of Virgin America detrimental to the airline?
In many ways, JetBlue and Virgin America were natural associations. Both had a somewhat unorthodox approach to business, fiercely loyal fans, and a certain attention to detail that passengers loved. Integration with Alaska was going to be somewhat more difficult, with its traditionally more conservative way of doing business.
But JetBlue was not sore about losing out. Executive Vice President for JetBlue, Marty St George, said at the time that the investment, as it stood, no longer made sense for JetBlue. He commented to Skift,
“I think seeing that a company like Virgin America was up for sale that has a strong transcontinental franchise, it was obviously something we would look at.
“You know there is a price at which that made a lot of sense for us. I think the price that ended up being the final price to buy the company was a number that when you compare that to our organic options it didn’t really make a lot of sense for us.”
In a nutshell, the price point went to such a level that it no longer worked for JetBlue. But the airline had another trick up its sleeve with regards to the Virgin America sale. It called it Plan B internally; to the rest of the world, it was ‘JetBlue Virgins’.
— JetBlue (@JetBlue) April 6, 2016
Knowing the Virgin America loyalists would be concerned about the value proposition under its new ownership, JetBlue launched a campaign targeting first time fliers. It also announced a massive Mint expansion in its network, particularly on the transcontinental services.
— JetBlue (@JetBlue) April 12, 2016
St George highlighted to Skift that the battle was on, with some fighting talk,
“We are also out there being very aggressive trying to capture the Virgin America customer. To the extent that there is someone, sort of that disgruntled customer, who’s a little bit nervous about what they love about Virgin going away with Alaska, we’re there for them. And just to be clear: It’s already a much better product than Virgin America. They should have been flying us already but we’ll give them a little extra reason.”
In the long run, Alaska’s purchase of Virgin America did it very nicely, and JetBlue has continued to grow without the large investment. Whether it would have worked out as well if JetBlue had won the bidding, who can tell?