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Why Alaska had to purchase Virgin America »
Commercial Aviation Analysts
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Virgin America and Alaska Airlines seem strange bedfellows.  Why Alaska had to purchase Virgin America is a question many are asking this morning.  Their fleets, product, and service levels are apples and oranges — Airbus versus Boeing and premium versus standard.  The common denominator is that both have a predominant west coast presence.  Apart from the natural reduction in competition that results from any consolidation and typically impacts consumers negatively, let’s examine the strategic option that faced Alaska in their acquisition decision – namely, not winning and letting JetBlue acquire Virgin America.

An Easy Lay-Up for JetBlue

JetBlue is a primarily East Coast carrier that has introduced an attractive premium product (Mint) that neither Alaska nor legacy carriers match for value on its trans-continental routes.  It has significant East Coast feed, but lacks feeder routes on the west coast.  Obtaining a west-coast based network with premium service level would bring added competitiveness into markets that Alaska currently serves or will soon enter.  This would represent a significant competitive threat to Alaska.

It would have been an easy transition for JetBlue.  Both carriers operate Airbus narrow-bodies (albeit with different engines), and JetBlue, having introduced a premium class service, could quite effectively meld the high-quality Virgin America service levels with its offerings.  JetBlue would have opened a second front in San Francisco to match its New York and Boston roots, and likely have developed an attractive following given their comparative service levels and pricing against Alaska.  Alaska uses GoGo for in-flight WiFi while Virgin America uses ViaSat – so this is another item to be settled.

For Alaska, the transition will be more difficult, as an all Boeing shop suddenly also becomes an Airbus operator.  Integrating operations will not be as straightforward as it would have been for JetBlue.

The Bottom Line

The perfect fit would appear to be JetBlue.  But Alaska realized this would strengthen a competitor, and took the necessary action of overpaying to keep JetBlue from growing into this market via acquisition.  While that doesn’t mean JetBlue won’t come into West Coast markets as they expand their operation, it does provide Alaska a bit more time, as JetBlue’s organic growth will likely be slower than an immediate West Coast critical mass from an acquisition.

Alaska’s niche is on the West Coast, and they needed to react to any threat that would jeopardize their future independence.  With another carrier with a superior product splitting their market,  their ability to survive as an independent might have been jeopardized.  Alaska’s strategy will be to fiercely defend their market area to retain independence and avoid being the acquired carrier should further consolidation occur.  While they remain an ideal piece for Delta, which is using Seattle as an international hub, and for American, which needs more presence in the Northwest, they have defended their independence.  With this acquisition,they have just upped their game in competing with United in San Francisco.

Did Alaska overpay for Virgin America?  Yes, they did.  But they needed to in order to keep JetBlue away from their turf.

© 2016, Ernest S. Arvai. All rights reserved.

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