March 29, 2016, © Leeham Co.: A report that JetBlue and Alaska Airlines submitted bids to buy Virgin America spurs the thought: this isn’t as wacky as it appears on
When news emerged last week that VA was shopping itself after interest was expressed, many thought, quite naturally, why?
Dan Reed neatly summarizes this argument in his column at Forbes.
Virgin America has few tangible assets. It leases all but about seven of its 10 Airbus A319s and 50 A320s. It’s not dominant in any city or route it serves. The leases are probably, on a relative basis, rather costly.
It has few slots at the few slot-controlled airports it serves (Chicago O’Hare, New York La Guardia and JFK airports and Washington Reagan National Airport), and only a few gates at any given airport—hardly enough to really boost presence of either Alaska or JetBlue.
Why should either airline want Virgin America?
Alaska objected to the creation of Virgin America in the first place, taking aggressive and extensive legal action to block what it believed was thinly veiled foreign ownership exceeding the legal limits under US law. Alaska was unsuccessful in its bid to deny VA certification.
Alaska feared VA would offer low fare service on some key north-south routes (which it did). But looking at VA’s route map today, there is very little overlap (a plus in any US Justice Department review of an Alaska-VA combination, by the way.)
However, Alaska is in a hefty fight in Seattle, its biggest hub, with Delta Air Lines, which is building a domestic-international hub in Seattle for its trans-Pacific service. Alaska currently is successfully fending off Delta, which is adding routes on top of Alaska. The plus side of taking over VA: this helps immediately diversify Alaska.
The downside: VA’s principal focus city is San Francisco, the domestic-international hub of United Airlines. Alaska’s exposure to United would increase with a VA combination.
VA does have an asset overlooked by most commentators: a firm order for 30 Airbus A320neos, the re-engined option of the A320s currently in VA’s fleet. Alaska, which flies Boeing 737s exclusively for its mainline operation, might well strike a deal with Airbus to release these valuable delivery positions for Airbus to use in its fierce competition with Boeing. There could be a financial benefit to Alaska.
Or, Alaska could chart a different course than Southwest Airlines when it took over AirTran. After initially saying it would retain Boeing 717s operated by AirTrans, Southwest instead chose to sub-lease them (to Delta Air Lines) and order more 737s instead. Alaska touts its economies of scale with its exclusive 737 fleet, but it’s not beyond the realm of possibilities that Alaska might elect to retain the Airbuses and redeploy them more effectively.
The few slots that VA does have could be retained for current service or those Reagan National slots could be used for some trans-con service Alaska already has, to beef up frequency.
VA has two gates at Dallas Love Field, where a nasty fight has been going on between Delta and Southwest over two gates Southwest controls—sort of—but which Delta uses under a court order. Alaska surely would have no interest in these gates, and disposing of them could have financial benefit to Alaska.
VA uses these two gates to fly to La Guardia Airport. Because of “perimeter” rules, Alaska probably couldn’t use them for its network, so a sale might also reap some reward.
These transactions could lower the cost to Alaska.
The biggest benefit to Alaska: instant growth in markets that are established. Alaska becomes more of a national carrier, than one that is largely a north-south airline and west to Hawaii.
For JetBlue, it’s also a growth story. It has a number of trans-continental routes already and VA would complement a lot of the existing service. JetBlue would use the
La Guardia and National slots for any service east of the Mississippi, all inside the perimeter rules. Its mainline jets are Airbus, so the fleet integration is no problem. JetBlue ordered the A320neo, as did VA, though JB selected the Pratt & Whitney GTF and VA the CFM LEAP.
JetBlue service Dallas through D/FW Airport, as does Alaska. The latter has a close relationship with American Airlines, limiting its interest in Love Field. JetBlue doesn’t have ties with American, which might open staying at Love, but staying at D/FW is also an option—giving JB the opportunity to lease those two VA gates to Southwest or Delta.
Expensive lease rates?
It’s assumed that VA has more expensive leases than other airlines because its buying power doesn’t match others. This is probably true. But with common lessors among the three carriers, there’s nothing to say that Alaska and JetBlue couldn’t renegotiate the lease rates, and they probably would, to more closely match their rates.
Although Virgin America is hardly a bride over whom to fight, this doesn’t mean there aren’t some attribute she might have regardless.