Alaska Airlines and Virgin America held an investor call this morning to walk through the deal that came together over the weekend.
Regarding the Virgin America brand, Alaska “want[s] to learn more about it.” You ‘d think they’d have some idea the value of the brand and how (if) to deploy it before spending $2.5 billion — $600 million in cash and taking on $2 billion in debt (while picking up half a billion in cash from Virgin America). Currently Virgin America pays 0.7% of revenue off the top to Virgin for the brand.
Alaska claims they initiated the deal, and JetBlue got into the bidding after they started negotiating.
They’re going to slow down share repurchases (but not to zero this year or next year) in order to pay down some of the debt over the next couple of years. I think they weren’t sticking to their talking points though concluding, “We don’t destroy our balance sheet.”
The case that Alaska made for the deal on the investor call is strength in California.
Alaska views upside of the deal being more on the revenue side than the expense side, though they noted over and over that they wouldn’t provide any breakdown of the magnitude of how the revenue synergies break down though they specifically noted a driver on revenue being greater penetration of the Alaska Airlines co-brand credit card in the Bay Area especially. They came back to this point in the Q&A.
They talk about synergies driven by the loyalty program, and member base in California, rather than reducing overlapping routes.
Of course the Virgin America co-brand card contract will take time to wind down, and there’s some tradeoff that reduces synergies when you lose the Virgin America card from Comenity Bank. (The next year could be a good time to pick up that card, since it’s expected to go away.)
They haven’t decided what to do with the Airbus fleet since Alaska mainline is all-Boeing. They’ll operate it in the near-term and decide in the future. Alaska joked, “We’re such a big fan of a single fleet that we bought another single fleet.” That of course underscores the problem or challenge they face.
They grow in Los Angeles but mostly San Francisco. They currently serve only one of the 10 largest markets from San Francisco, but after the merger will serve all 10. Virgin’s and Alaska’s operations at those two airports will be tough to consolidate.
In claiming to really grow, they conflate California with ‘West Coast’ where they’ll have the most seats within the state. They become the second largest carrier in San Francisco and ‘relevant’ in Los Angeles.
They see themselves as a low fare, premium airline — along with JetBlue. In fact, having beaten out JetBlue for Virgin America (a match that I believe would have made more sense), one could imagine Alaska and JetBlue merging to be strong both on the West and East Coasts although the tremendous expense of this deal makes that so much the harder, given the additional debt that would require (having spoken to the ratings agencies, ‘wherever it winds up will be a good result’).
Alaska talked on the call about the importance of getting into constrained airports, that it took 5 years to get a redeye flight into JFK. A deal with JetBlue would change that dynamic.
The deal won’t close until at least the end of 2016, and they do not expect a single operating certificate until the beginning of 2018. So Virgin America is going to remain a separate airline for nearly two years.
Ultimately Alaska gets some value from Virgin America’s San Francisco, Los Angeles, and constrained airport operations in New York and DC. (Dallas Love Field didn’t get focus until the question period and is just something Alaska ‘will be taking a look at’). That’s never been in question. The real challenge here is the price Alaska is paying — $2.6 billion is a 90% premium over Virgin America’s market cap just two weeks ago.
Alaska describes the price as ‘easily digestible’ — which means they’re able to pay — but they do less to demonstrate why that price was worth paying. It was competitive bidding, which drove up the price. They prefer to focus on ‘value’ not ‘price’ which I take to be a deflection from their having overpaid.
While the deal may be easily digestible, the airline operations will present challenges. When US Airways and American held an investor call when their deal finally got government approval American’s CEO Doug Parker specifically talked about the reservation system — something that tripped up other mergers (United, cough, United) and that American ultimately managed exceptionally well. Alaska didn’t focus on operational specifics, and deflected questions that drove down to operational questions like reservation system except when pressed late in the Q&A — although at least both airlines use Sabre.
Alaska sees the American relationship getting stronger. No question that’s the case in San Francisco. Virgin America shares a terminal with American there already. Of course they start competing on the Los Angeles and San Francisco – New York routes. In contrast, Alaska and Delta while partners have been staunch competitors in Seattle. Delta is a joint venture partner of Virgin Australia and 49% owner of Virgin Atlantic. This deal may benefit Delta by leaving them – effectively – as Virgin America, or rather Virgin’s America partner.