April 4, 2016, (c) Leeham Co.: Alaska Air Group and Virgin America confirmed weekend reports that they reached a deal to merge.
The replay of the Alaska webcast/conference call, with slide show, is here.
Rationale includes what LNC outlined in our March 29 post: growth, access to more gates and slots. Alaska officials said Virgin’s presences in California, combined with Alaska, will give Alaska to #1 market share position on the US West Coast, passing Southwest Airlines’ 21% by one percent.
Here are some highlights from the conference call:
- Alaska mainline exclusively flies the Boeing 737 and all its future orders are 737s. Virgin American, on the other hand, is exclusively Airbus A320 Family.
- “We are big believers in single fleet, so much so we bought another single fleet,” says Alaska, an official joked when asked about the divergent fleets.
- A decision whether to retain Airbus fleet is probably a couple of years away. A320neo order with 2020-2022 deliveries, has “favorable” cancellation clause should Alaska chose to do that. The Seattle Times reports there is only a $26m cancellation fee.
- The combined companies give Alaska access to gates at San Francisco and Los Angeles it can’t otherwise get. It also gets slots on the East Coast it can’t get.
- The two companies will maintain their brands for at least a couple of years, while Alaska decides what to eventually do.
- It will be a couple of years before Alaska decides whether to phase out the A320s operated by Virgin.
- Virgin only owns seven or eight of the A319/A320 fleet. Leases begin rolling off from 2020, making it easy then for Alaska to dispose of these aircraft.
- Alaska will take on $2bn in debt to pay for the deal, a cash purchase to Virgin shareholders at $57/share. Alaska will slow the current share buyback program through 2017. Wall Street didn’t like this news. Initially Alaska stock was off more than $4/share (>5%) in post-announcement trading.
The merger has to clear regulatory hurdles.
The Seattle Times has a long story here.
Maybe the new livery could take a page out of the United/Continental merger where they added the Continental tail to the United fuselage ( United never had a decent tail logo, it looked like something out of a plumbing catalogue)
But for this instance take Alaska’s face on the tail ( a strong point)and change it to Richard Bransons mug.?
I didn’t follow… why not a three way merger….
You mean Jet Blue: Virgin: Alaska?
But that would mean two airbus airlines with one boeing, and Boeing would miss out. Not going to happen . A big five with airbus centric fleet.?
NIMBY is what Boeing would say.
I think that is still illegal in quite a few states. 😉
“Alaska will take on $2bn in debt to pay for the deal, a cash purchase to Virgin shareholders at $57/share. Alaska will slow the current share buyback program through 2017. Wall Street didn’t like this news.”
Wall Street has no long term vision. None. What happens to the stock today is not really very important. How the company performs over time matters — certainly in terms of employees, customers, focus cities, airframers, etc. But Wall Street doesn’t care a toss for those stakeholders.
Alaska clearly overpaid for an airline that only owns 7 of its aircraft.
But they needed these slots so they paid what the needed to.
It was a sellers market/deal that one and so the Virgin shareholders will have a 100% ROI between 2015 and 2016.
Its not the aircraft, its the network.
There is also gold in the A320NEO and A321NEO they had lined up to purchase in the near future.
How is there gold in some future purchase options. You cant sell options to someone else, and if you cancel them there is an up front payment ( $ which has been mentioned somewhere). The manufacturers are very careful about stopping trading in future deliveries, so that they are the only ones who can do so.
Lets see, Ryan Air buys em and flips em at 5 years when warranty is gone (or used to)
I suspect there are a dozen ways to manage the situation the rest of us have not clue.
Amazing, Ak just gave Wall street the finger!
Sad how some companies value their long term future. Maybe worse, its Un-American (but maybe not Unalaskan (bad pun, there is an Unalaska!)
Wall St is entirely correct. An airline merger is a valley of tears, and as the dividend/buyback flow is interrupted for a few years at least, the share price must decline.
If you see it differently go ahead and buy, if enough agree with you the price will rise, or maybe the reverse will happen and the fall will be greater.
I would rather buy a company with a long term future than one that has sold its seed corn and will starve to death next year.
Then you will never buy airline shares, they are very risky. Look at Southwest, it just grew naturally for a long time avoiding mergers- there was one exception- so your analogy about seed corn is very strange.
As this merger is like buying a neighbours farm, which is leased as he doesnt own the land, and you have to change the way the place is farmed as it only makes sense to run them as one farm.
The only real asset is the company name which you wont keep- likely a hefty licence fee to use -, only a few planes are owned outright.
You look at it one way, others different.
Its routes and gates they are buying, not aircraft.
Aircraft are leased so that is just fine, AK is not going to shift to an Airbus fleet.
If AK is going to survive they need to expand and this is a way to do it.
They are well run and I defer to their management as to how it fits in.
Works for me
All Wallstreet wants is the money and they are happy to leave a hollow husk. They have their place, but it should not ever be the top consideration.
Do you get a dollar every time you write “seed corn”? 🙂
yeah , its a quaint idea from before the 1940s. No one keeps seed corn anymore, they just buy it from specialist seed suppliers.
“In 1926, farm journal editor and future U.S. Vice President Henry A. Wallace, along with a group of Des Moines, Iowa businessmen, founded the “Hi-Bred Corn Company”. At the time, most corn farmers saved part of the seed from the harvest and used this to plant a crop the following year”
Leeham: Thank you for the details.
I looked up Vrigna and they have 30 A320Neo on order and 10 A321NEO.
The 737-900/9 MAX being a tad better than the A320, I could see them shifting to more A321s and dropping A320NEO as the 737900/9 is the top of what they can move to and the A321 would likely fit in nicely with what they need.
If they do will that finally get Boeings attention? We need a poll on that. what will finally get their attention or admit they have an issue?
As they say in Al Anon, you first have to admit you have a problem before you can fix it!
“A BRIDGE TOO FAR” I know, WWII history perhaps, but the global financial condition could render this a very bad decision [except for VIRGIN shareholders]. Just saying…..
For VIRGIN shareholders it is a FANTASTIC deal. I do not get why Branson can not see for himself that the stock would be years away from reaching 57 bucks a share and that is by no means a certainty even if the company did everything wright and all the stars aligned perfectly.
Right, #@*# spellchecker!
Ahh the bane of our existence, bad spell checkers?
Well its a context thing, but they are not good at that!
Frankly in a day of texting, baldy written articles, OMG, LOL etc and so many others, a bit of bad spelling is getting a pass.
We know what you meant and that’s what counts!
It’s personal more than business with Branson which is one reason I like the guy.
Does Alaska go all 737 like Southwest for fleet commonality savings? Or, like American and Delta and fly both the A320 and 737? Looks like United is going all 737 for fleet commonality, and the CSeries is having trouble breaking in anywhere for that reason.
United is in the process of taking used A319s, so they are not going all 737, unless they changed their minds on the used ‘bus fleet in the past 3 or 4 days.
Where’s an airline like Alaska, Westjet, or Icelandair go beyond the 739? An A321 for another row or two, a 1980s era 767, or is there a void for something new?
Westjet choose–4 reconditioned former Qantas 767-300ERs. Boeing would, in my opinion, be wise to “last call” the 74 line (close it at in a year or so), and ramp up the 76 line with just new Genxs and pylons only–a “MOM lite”!
That might undermine the profitability of the 787 line. God knows they need that to make as much money as possible.
The interesting part is the A310 did exactly this sort of thing back in the mid 80s. They sold 255 most over the first 10 years.
I dont think the numbers are there now for a short derivative, as 250 wouldnt be enough. A new engine isnt a panacea as it has to be a match to the desired range ( less than GENx)
And Airbus has limited the selling price by having the A330 neo. The 767 is just too old and built in the labour intensive Boeing way.
Airlines can be like teenage girls, they only want what everyone else wants.
WestJet is flying longer and heavier routes, not even sure its schedule.
Ak has determined that single aisles rather than twins works for them and their route structure.
As they have been successful, I am not going to argue with them.
If it changes I see no management hang ups that they would not shift.