Alaska And Virgin: Integration Always A Challenge In Airline Mergers
Alaska Airlines management is expressing confidence about integrating its rival Virgin America, whose pending acquisition was announced Monday. Any airline merger poses challenges and this one is no exception.
Alaska Air outbid rival JetBlue Airways to acquire Virgin America in what Alaska Air CEO Brad Tilden described as "a hard fought competition." Alaska Air won the bidding war with a $2.6 billion all-cash offer that was announced Monday.
The combination will create the fifth-biggest domestic U.S. airline. Alaska Air instigated the bidding by reaching out to San Francisco-based Virgin America to discuss a possible takeover. Talks began last fall according to Tilden.
Both Alaska Airlines and Virgin America have loyal followings. Virgin flyers went online after the takeover was announced to fret about the loss of their carrier's amenities, style and sass --reflected for example in a musical safety video.
Virgin's young fleet of Airbus jets feature mood lighting, boarding music, video at every seat and touch screen drink ordering. Alaska offers more traditional service on its all-Boeing mainline fleet.
Tilden hedged about how much of the Virgin brand might survive.
"What I'll just say is we want to learn more about it. We believe it is driving a big revenue premium for Virgin," Tilden said on a conference call. "So there is a chance that we could use the Virgin America brand in some form down the road."
In a blog post, Virgin mogul Richard Branson implied if it were up to him alone, he would not have sold.
"I would be lying if I didn’t admit sadness that our wonderful airline is merging with another,” Branson wrote. "Consolidation is a trend that sadly cannot be stopped.”
The integration hurdles include the aforementioned dissimilar fleets. Virgin America currently flies 63 Airbus 319 and Airbus 320 narrow-body jets. The Alaska Airlines mainline operation exclusively flies the Boeing 737 model. It has 152 in its fleet with more on order.
From a customer point of view, the legroom in the main cabin is the same on both airlines.
Alaska Air executives have previously evangelized about the simplicity and cost-savings from using a single jet model, but did not sound worried Monday about taking over an Airbus operator.
Alaska CFO Brandon Pederson said most of Virgin America's planes are leased, so Alaska Air could transition to a single model type, "if we should choose to do that starting in 2020."
During a teleconference between Alaska Air management and Wall Street analysts, the combination of the two unionized work forces emerged as potentially the biggest challenge of this merger.
"We want to integrate the employees well," said Alaska COO Ben Minicucci. The Alaska Airlines pilot group was consulted during the acquisition negotiation and gave its blessing afterwards. The merging of pilot seniority lists and cross-training of flight crews has been a sticking point in prior airline combinations such as US Airways and America West.
Another source of turbulence in past combinations has been the merging of reservation computer systems and other IT networks. Alaska Chief Commercial Officer Andrew Harrison said in this case, both partners share the same Sabre platform for their bookings.
"We feel very confident that we're going to have a good process here and come out with a better product," Harrison said Monday.
Alaska's current management will be in charge of the combined carriers with the head office in Seattle.
Alaska brass said it expects one-time costs around $300-350 million to effectuate the merger. It also expects the combination to produce around $225 million from "synergies" annually, including from enhanced revenue.
In the short term, travelers on both airlines are unlikely to experience changes. Flight schedules and reservations will be maintained.
"For the next several months, until the transaction is officially approved by shareholders and regulators, it will be business as usual and Virgin America and Alaska will continue to operate as independent airlines," a customer update posted Monday on the Virgin America website said .
Alaska Air management said Monday that it hopes to get approval from Virgin America's shareholders by June. The merger also has to undergo antitrust review from the U.S. Justice Department, with approval expected later this year. Alaska management said they expect the deal to close in the fourth quarter of 2016.