Virgin America acquired in $2.6 billion deal

Seattle-based Alaska Air Group, the parent company of Alaska Airlines, announced today that it will acquire Virgin America for $2.6 billion.

Virgin America is the brainchild of British entrepreneur Richard Branson, but USA law prohibits an American airline from being owned and controlled by foreign citizens, which forced Branson to become a minority owner along with non-voting shares.

With Virgin debt added in, the total value of the takeover, already agreed by the boards of both companies, will run to about $4 billion.

With a wistful tone, Sir Richard said that he started Virgin America in 2007 out of “frustration” because flying in the USA was an “awful experience”. It became a publicly traded company in November of 2014 with a $23 per share public offering. Virgin, which turned profitable barely in 2013, earned a record $340.5 million previous year.

For the fourth year in a row, Virgin America is tops in airline quality among the biggest US airlines.

Virgin America accounts for about 1.5 per cent of United States domestic flight capacity, while Alaska Air and its Horizon Air subsidiary account for 5 per cent, Deutsche Bank analyst Michael Linenberg wrote in a recent research note.

The deal would create the fifth-largest US airline in the latest in a series of mergers in the past decade that have shrunk the industry to a handful of companies.

The announcement caps a contest reportedly between Jet Blue Airways and Alaska Air for Virgin America, as smaller United States carriers seek to beef up now that the four largest control about 80 percent of the market.

“With an expanded West Coast presence, a larger customer base, and an enhanced platform for growth, Alaska Airlines will be positioned to provide more choices for customers, increase competition and deliver attractive returns to investors”, the Seattle-based Alaska Air Group stated in the release.

Loizos Heracleous, a professor of strategy who researches the airline industry for the Warwick Business School at the University of Warwick in Coventry, U.K., said both Alaska and Virgin are known as airlines with strong customer-service reputations, and the acquisition will be one that the airline industry will watch with interest due to how it boosts Alaska’s national presence. The two airlines have very few routes that overlap.

Bank of America Merrill Lynch (BAC.N), UBS Investment Bank (UBSG.S) and Cowen & Co (COWN.O) were financial advisers to Alaska Air, while Evercore Group LLC advised Virgin America.

“Seven out of our top 10 corporate customers are tech companies (with employees) that travel up and down the West Coast and across the country”, Cush told the publication, noting the merger would benefit those businesses.

The deal is expected to close next January. Legal advisers were O’Melveny & Myers LLP to Alaska Air and Latham & Watkins LLP to Virgin America.

Envoy also had the highest rate of involuntary denied boardings, with JetBlue ranking first in that category.

With this relationship, access is given to American Airlines into Alaska Airlines networks and vice versa.