Why Did Virgin America Merge With Alaska Airlines?

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From the outside looking in, Virgin America was a great airline. Its focus on passenger experience, going the extra mile and adding features in economy usually reserved for premium fliers won it accolade and a loyal fan base. So why would an airline, whose operating model was so well-loved, up and sell to a rival carrier?

Virgin America
Why did Virgin sell out to Alaska Air? Photo: Getty Images

Under the skin, Virgin America was struggling

When Virgin America launched in 2007, it couldn’t have predicted what was coming. The global financial crisis of 2008 hit air travel hard, and couldn’t have come at a worse time for the fledgling airline. Subsequent years saw the airline posting loss after loss, as the downturn in travel bit into its potential to turn a profit.

It was 2010 before the airline posted a profit, when it made $7.5 million in the third quarter. Things remained shaky, however, and at the end of 2012, the airline announced a full year loss of $145.4 million. In a bid to raise money, the airline entered into an IPO in late 2014.

This saw the airline turn profitable, but also opened it up to being bought. On the outside, the IPO had been a turning point for the airline, but on the inside, it was still fluing with some of the worst operating margins in North America. The IPO had sealed its eventual fate.

Founder of the airline Richard Branson was limited to holding 25% of voting stock, due to his British nationality and ownership rules. The biggest shareholders were private investment funds, and they were ready to cash out. On the back of its most profitable year to date, Cyrus Capital and Branson’s own Virgin Group, with a combined holding of 54%, wanted their investment back.

With shares for sale, a bidding war ensued. Leading the charge were Alaska Air and JetBlue, fiercely competing to secure the holding of the airline. The per-share price soared to $57, way above their trading value, and Alaska finally won out. With the approval of the boards of both airlines, the deal was sealed.

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Virgin America Alaska
Alaska won the bidding war, and the fate of Virgin America was sealed. Photo: Alaska Air

But Branson was not happy with the merger. He attempted to block the takeover, but his voting shares were not enough to swing the deal. In a blog post, he noted,

“I would be lying if I didn’t admit sadness that our wonderful airline is merging with another. 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.”

Essentially, Virgin America never really wanted to sell to Alaska. But with its future in the hands of the private investors, the decision was never the founders to make.

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Virgin America
Branson said there was nothing he could do to stop the takeover. Photo: Getty Images

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Why Alaska wanted Virgin

There wasn’t much that Virgin America had that was worth a lot. Its small fleet of Airbus aircraft was mostly leased, and incompatible with Alaska’s all-Boeing fleet. Most of its infrastructure was leased too, such as ground equipment and offices. Its frequent flier scheme wasn’t particularly valuable, and yet Alaska saw a value in the airline. $2.6 billion of value, in fact.

In 2015, the last year before Alaska took over Virgin America, the airline turned a rare profit of $201.6 million. For Alaska to make back its investment with annual profits like that would take almost 13 years. That’s not accounting for the sizeable investment required to assimilate the company, its computer systems, staff and operations.

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Virgin America
The airline’s Airbus fleet was incompatible with Alaska’s all-Boeing operation. Photo: Getty Images

The reason for Alaska’s strong bid for Virgin America was, essentially, about limiting competition. With its home turf in Seattle under threat from Delta’s growing encroachment, market share was becoming ever-more valuable for the airline. And Virgin America was something of a thorn in its side.

In those routes where competition was strong, Virgin America was an aggressive fare discounter. Seats were sold at a barely break-even price, and Alaska was forced to lower its prices too. While it would never be admitted in public, for fear of anti-competitive repercussions, Alaska needed to stop this antagonistic competitor in its tracks.

On the outside, the deal was all about slots and stopping JetBlue, the second highest bidder from taking over the airline. Alaska instantly became the 5th largest airline in the States, and acquired valuable routes to expansion through the gates and landing slots on the East and West Coast. But to do so, it paid a premium. The deal saw it paying $57 per share, 47% higher than the stock was trading at the time.

Nevertheless, the deal was done, and while Alaska might have overpaid for Virgin America, it helped it secure its growth for the future.

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