Airlines buying airlines. Mergers. These are the topics that rumors were made for. As I start hearing more rumors about the sale of Virgin America, I wanted to take a closer look at who might buy them — and who wouldn’t. Personally, would I buy them? No. I don’t have the money. If I did, it would be nice, though. A privately-held airline. Immune from Wall-Street capacity discipline bludgeons… heaven!
So now that we know I cannot buy Virgin American… who might?
BUYING VIRGIN AMERICA – JetBlue
They have A32X aircraft, they have a mixed-carrier model (low cost down the back, super premium up front, all while keeping costs under constant focus), and they also lack a strong presence on the west coast outside of the L.A. basin. Gobbling up Virgin America would instantly give them presence in SFO beyond their transcontinental flights. Furthermore, they’d be given instant ETOPS infrastructure that would allow them access to the Hawaii market.
It’s a good synergy. They even share the same reservations infrastructure. The synergy can be driven even further, despite the polar opposite coloring, as their brand identities both focus on targeting millennials and strong focuses on being their hub’s hometown airline. They both spend more money on marketing, because they have ‘hipper’ sounding names — “Even More Space” compared to “Main Cabin Extra” etc. The carriers are also around the same age, so handling the labor part of a potential merger should not cause as much strife as some of the previous merger debacles in this country.
BONUS: Airline Sampler – Where Have You Been All My Life JetBlue?
JetBlue would also offer Virgin America instant improvements in its premium cabin across the U.S. As of now, they are the only airline competing in the premium transcon segment with no truly flat product. Combine this with the fact that JetBlue has recently said that they see a desire to expand Mint, and you begin to see that the current domestic first cabin on the Virgin fleet could see its way into becoming a Mint for those of us not fortunate enough to live in a city airlines deem “premium heavy.”
I would be fine if this merger happened, as both a passenger and a finance nerd. The network synergies would benefit many passengers — including me personally. They also would likely not obliterate profitable, but overlapping, routes as, guess what, they don’t have many. The customer would win, except the Virgin America name would probably disappear due to its associated licensing costs and the fact that JetBlue has a larger base of international codeshare partners and catchment area.
BUYING VIRGIN AMERICA – Alaska Airlines
Nope. Virgin America is Alaska with A320s. Alaska would not buy itself, especially when in doing so they’d gain a massive fleet of an aircraft they wouldn’t want. No one would win in that scenario, and Alaska knows it.
BUYING VIRGIN AMERICA – Delta Air Lines
Delta is not about to purchase anything. Even with the retirement of Richard Anderson, purchasing a new airline that doesn’t boost core hubs nor really open up any additional markets for them is cost for a very, very, long term play. Now, yes, if Delta could acquire the A320s for fleet purposes and effectively absorb Virgin America as an amoeba absorbs a plasmid, I could see them considering it. Thing is, I can’t see how you can, as the world’s second-largest airline, say that buying an airline for its aircraft benefits the customers at all. If this was pre-legacy merger-mania yeah, the DOJ would go for it.
BONUS: American vs Delta Transcon on a 737 — Who Wins?
Besides, Delta and Virgin America are already friends. Delta is actually friends with every Virgin airline. Virgin Atlantic is practically Delta London. There’s no real reason here; they already get what they need from Virgin America.
BUYING VIRGIN AMERICA – United Airlines
Even the laziest of regulators would see right through this one.
BUYING VIRGIN AMERICA – American Airlines
American: See above. Not allowed. You are welcome to buy an airline to remove competition if your name is Southwest. American — no! You have to come up with a reasonable veil to pretend you are buying up someone to remove competition. I don’t see American doing this when they are already advertising themselves as the best in LAX. Buying up a competitor that doesn’t really compete with you is a waste of money and political capital that can be better used elsewhere!
BONUS: American Airlines Announced Haneda Service Out of LAX
BUYING VIRGIN AMERICA – Southwest Airlines
Again, not going to happen. Southwest has had ample opportunities to purchase airlines that better fit its model and already has decided against it. Also, it’s not like Southwest is weak in the Bay Area. Cross the bridge to Oakland and you have one of Southwest’s major west coast hubs. No one wins, so no one buys.
BUYING VIRGIN AMERICA – Hawaiian Airlines
I’d actually say they could be in with a shot. Recently, their CEO has realized that to further grow, they may have to leave the sanctuary of their archipelago. How? I really don’t know. Calling an airline that operates from Los Angeles to Chicago Hawaiian Airlines seems a bit of a marketing issue. But I guess Alaska has a lot of flights to Hawaii. Thing is, Hawaiian Airlines is part of a holding company. And HA is crushing it. So, this holding company could purchase Virgin America and operate it in the same lean and mean way they run Hawaiian. I’d change the name, though — licensing fees cost money.
BONUS: Flying in Economy Class on a Hawaiian Airbus A330 to Auckland
Do I see this happening? I’d say there’s at least a 50% chance. Hawaiian and Virgin actually could work well together. Hawaiian has plenty of A321neo planes on order for service to the mainland. It makes crewing easier, it makes cross-fleeting easier, and it keeps costs down. These are all things that the current Hawaiian management loves. It’s a plus in their eyes. Hawaiian and “mainland Hawaiian” could run like a well-oiled machine. It would not even be too much of a branding exercise. Again, both carriers brand themselves off of style and not being like anyone else. They both have a domestic first cabin. Furthermore, mainland feed from Virgin America could feed an interesting little secondary market Pacific hub out of Honolulu (more than already).
BUYING VIRGIN AMERICA – Spirit or Frontier Airlines
Same reasons for both. I’d rather not see this happen, but it’s not impossible. Wall Street loves a quick buck. Spirit grows like a weed and Frontier wants to grow like a weed, but may need outside blood. A320s, west coast, and lower/low-cost economy model look good to these airlines. Grab the cutlass and hoist the pirate flag, a raider would love to see this happen. I think it would end up only making a quick buck, and have dire consequences.
BONUS: I Did the Spirit Bare Fare Model … For Science
Oh boy – it’d be a disaster. Forcing the overton window of the market down by removing a mixed competitor would make every other airline worse. That much undisciplined ULCC capacity — just please no! Can you imagine how badly the rest of the airline institutional investors would freak out? We’d be down to 27″ economy seats and no frequent flyer programs in mere seconds! On top of that, the labor fight would be a bloodbath.
BUYING VIRGIN AMERICA – Bernie’s Ethiad Dream
What if the airline isn’t 100% for sale? What if the airline wasn’t even really for sale, but open for a liquidity and advisory injection. Enter Bernie’s dreamworld. Best part, it’s not impossible.
Who loves to invest in small airlines up to as much as they possibly can? What’s an airline that has not joined an alliance, invested in Virgin Australia, and has invested in numerous other airlines?
Etihad. From Abu Dhabi to The World.
They have money, they have motive, and they have opportunity. Etihad can invest up to 49% ownership in Virgin America, and some analysts at Bloomberg think they are interested. Not only do I want this to be true, but it’s good for both airlines. Etihad provides money and knowledge. Virgin America creates an American feeder network into the Etihad Universe, and we have seen that Etihad keeps airline names. Having said that, they bring the Etihad touch to them. Take Etihad’s money, and Etihad gives you a makeover. From Air Berlin to Air Serbia — the customer certainly wins.
BONUS: Why Air Serbia’s Business Class is the One to Beat in Europe
Virgin America once marketed themselves as a luxury carrier. Etihad is the premiere luxury carrier. Virgin America markets itself as stylish. I could go on, but the parallels are alarming and great. 49% of Virgin America is a lot of control. It would even get them into the Etihad Guest Frequent Flyer program partnership (forcing me to immediately status match). I can’t see any downside here.
The only thing that I’d want Etihad to change is to get rid of the Virgin brand. It’s not strong here. There are no mega stores, there is Galactic, but that’s not a house-name (yet). Either way, it’s entirely possible that the owners of Virgin America want to cash out as soon as possible. This could be the top of the boom in the airline market cycle. Summary – at least there are some options where the U.S. flyer doesn’t lose.
Good piece, Bernie. I expect it will be read in senior circles. If you err, you are too rational. This is a business where behavio(u)r is often not.
“an amoeba absorbs a plasmid”. Brilliant.
There is one possibility you haven’t considered: China. They have dumpsters full of cash to burn, and VA gives their burgeoning long-haul carriers feed. Only thing stopping them from a 49% “controlling” share is the current political climate in the US. What say you?
China, on the geopolitical stage is very much focused on its own domestic affairs. While they do rattle sabers, up to building/expanding South China Sea islands to assert dominance- every international move/purchase they make is to shore up their security or their industry. I consider the Chinese quasi-free market to act by way of stigmergy. Everything benefits China or just the elites within… it’s just not always coordinated or even pre-meditated. Purchasing 49% of a niche airline doesn’t project an image of power, or immediate profit. It’s a lot of risk. It is also not particularly showy. Now, if Virgin America was secretly Virgin Namibia- I could see there being many good reasons for the CAAC or one of its public-private partners reaching out and expanding their influence.
Now, yes, the above ignores the fact that the HNA group is pretty much a truly private entity. Thing is, the HNA group already doesn’t have the easiest time with the authorities at the CAAC.
I don’t see how an equity purchase would lead to the creation of an expansion of service between the United States and China.
Moreover, the Chinese airlines that CAAC actually cares about are all long-term members of the major legacy alliances. They have literally all the feed they can dream of.
If that wasn’t enough; it’s U.S. airlines that seem to be investing in China. Look at Delta and China Eastern.
Thanks for the response. Well considered.
Yes if China were to purchase VA it would be a private unaligned carrier or holding like HNA, CAAC difficulties notwithstanding. Heck, this could be their way to grow outside the auspices of the pencil-pushers.
>> Purchasing 49% of a niche airline doesn”t project an image of power, or immediate profit. It”s a lot of risk. It is also not particularly showy.
It does, however, bring legitimacy. The Chinese LOVE foreign names and brands, simply look up the Rothschild/Tsinghua University cockup to see an illustration of this. While VA may be a niche airline in the US, “Virgin” is certainly not a niche brand worldwide! For a homegrown struggling-for-recognition private carrier like HNA I can certainly see this value overriding any and all other practical or fiscal considerations.
>> Moreover, the Chinese airlines that CAAC actually cares about are all long-term members of the major legacy alliances. They have literally all the feed they can dream of.
Can one ever have too much feed? It’s certainly a better problem to have than “not enough feed”!
>> it”s U.S. airlines that seem to be investing in China. Look at Delta and China Eastern.
I believe this is as much about “showing face” to Beijing (translation: political investment) as much as an economic investment. Money talks and BS walks! Same with CX/CCA. Not saying it isn’t valid reasoning – it perfectly is – but I don’t feel it represents a trend one way or the other, nor does it stop cash flowing the other way.
I won’t discount Ethiad going ahead with the purchase for the sole purpose of showing tail feathers to the US3. I also won’t count out DL simply digging deeper into their wallets along with US regulators saying “sigh, better than foreign I suppose” and allowing the mulligan (or ground-rule-double, pick your sport.) As Jonathan pointed at above, rational business behavior not expected.
Awesome discussion. Hope more chime in.
I agree with you regarding the HNA group. They have more money than common sense, are shut out allying with foreign carriers due to layers of political red tape I cannot begin to comprehend. The thing that leaves me scratching my head is whether or not they would be allowed by the Chinese government to let that kind of capital leave the country in a manner that would benefit them, not Air China/China Southern/China Eastern. Even if they did, I can’t help but think it would feel like the time Li-Ning opened an office in Portland Oregon.
Good money can, in fact, be thrown after bad.
Regarding too much feed. You can actually have too much feed. If you start turning O&D heavy routes into connector friendly monsters, you are going to lower the average fare of the flight, lower the yields, and potentially even start sacrificing the seats that could be sold to last minute O&D travelers to connectors- spilling the “superior” customer to anyone but you. Feed has to be a balanced situation. Air China, China Eastern, China Southern (we’ll pretend they are sort of organized), and Cathay Pacific all focus the majority of their flights to the United States into major Alliance hubs for that reason. O&D + someone else selling the connecting fare. That would make them a way better pick for CX than HNA. HNA, by virtue of how the Chinese government hands out route authorities – is focused so deeply on point to point O&D with right-sized aircraft that VX would not only become an albatross that flew precisely nowhere they did (excluding Changsa-LAX) while eroding the yield of their tiny 787s to Chinese cities most Americans have only a vague affinity of.
Lastly, I can’t say you are 100% right about Delta’s injection of money into China Eastern was nothing more than a ring kissing- but I would ask you to read between the lines.
Don’t look now, AK actually submitted a takeover bid! (Along with B6)
Remember when Homer Simpson gets someone to deep fry his shirt at the carnival? Marge’s response is the most apt with regards to Alaska purchasing Virgin America.
“I didn’t say they couldn’t, I said you shouldn’t!”
I stand by that. Alaska is proudly all Boeing. A lie, of course, as Alaska Holdings certainly is not and operates numerous Alaska-branded flights with Q400s and Skywest Embraers/CRJs. Thing is, due to the local… misunderstanding of how airframe OEMS actually work- their marketing point of proudly supporting a Chicago-based firm actually works. Can you imagine what would happen with a ton of Alaska Airbuses? Well, I’d be happier. Instantly better First Class seat and a wider cabin. They’d also look pretty great in the AS livery.
Beyond the marketing clashes. It seems suspicious to me for Alaska to make a bid for an airline that overlaps so heavily with them. They are clearly going for the Southwest eats Airtran strategy. Will the courts let that happen a second time? Who am I kidding, this is America- of course they will! Should they? Probably not. Alaska has a fairly decent hub at LAX, another fairly decent operation at SFO. Alaska has an amazing amount of capacity to Hawaii. The only thing Virgin America has to offer Alaska is the removal of competition.
Great for yields, terrible for the traveling public.
If the bid is real, I hope JetBlue’s offer is more competitive.
>> It seems suspicious to me for Alaska to make a bid for an airline that overlaps so heavily with them. They are clearly going for the Southwest eats Airtran strategy.
Some are saying it’s a defensive play, to make sure a WN or B6 does not instantly encroach on the PNW. But you’re right I don’t see any obvious synergies in either fleet type, company culture, marketing (hip-&-happenin’ vs PNW-style laid-back) or route structure (unless AS is seriously hankering for east-coast airport slots).
The only way I see AS running VX is an at-arms-length type of arrangement, keeping operations and marketing seperate, sharing only a common money pot. Good luck keeping costs in check.
>> their marketing point of proudly supporting a Chicago-based firm actually works.
Chicago-based corporate HQ but Washington-state-based factories, which Aviation Geek Fest-goers will get to experience! 😉 I do appreciate QX sticking with their Bombardier Q400s, go Canada go!
The more I consider an arms length scenario, the less likely it becomes. No one runs a company that competes with itself. It would either result in a shell of Virgin America flying routes to feed Alaska with wildly inconsistent marketing and product, or it would result in a labor battle so large I could probably hear the fights from my house.
The defensive play angle has merit, but does AS really stand much to lose should B6 come to our coast? Both extensively codeshare with Emirates, in fact- on paper- they seem to have similar strategic goals. I know I am just theorycrafting for sport now- but imagine this. B6 buys VX. Later on, because of the synergies that now exist between a larger B6 and AS- they can merge to create a fourth legacy airline.
Oh what a day, what a lovely day!
>>Chicago-based corporate HQ but Washington-state-based factories
Hey, don’t forget South Carolina 🙂
Looks like Alaska’s bid is more competitive than JetBlue.
Is Alaska’s route network really that duplicative with Virgin America’s? SFO for Alaska hardly compares to operations in Seattle and Portland. Alaska is not going from SFO to the majority of places Virgin America does. Chicago, New York? No. Los Angeles, San Diego, Las Vegas? No.
From Seattle, Virgin flies directly to SFO and LAX, which makes it a competitor with Alaska, but it is hardly the only one. There is plenty of competition on those routes from the big four and those destinations don’t make much sense for making connections on Virgin American for Seattle passengers. Within the west you have direct flights on Alaska or Southwest, and on the east coast you have direct flights or more logical connection on Alaska or the big 3. Unless you were really enthralled by the on board experience with Virgin America, and maybe there is a Seattle passengers who is, why would you fly to Chicago via San Francisco, when you have plenty of more competitive options on other airlines.
Now suppose Alaska gains, from Virgin America, flights from SFO and LAX to New York, Washington, Chicago, Boston, and even Orlando, and Ft. Lauderdale. That makes Alaska’s existing pretty small operations much more efficient, and perhaps more sustainable. They become a more viable alternative to the big three and Southwest. It’s hard to see how that would hurt the customer.
Great article – shame to read this – never flown on them personally but know lots of people who have and they speak very highly of them
Have to wait and see I suppose
CAPA’s analysis of the sitch: http://centreforaviation.com/analysis/virgin-america-sale-speculation-hainan-jetblue-and-others-timing-could-be-critical-for-new-owners-273647
They do throw a bit of cold water on your B6/VX dream by speculating that they may not want to take on an acquisition at a time when they are in the process of driving down debt and reducing fiscal obligations, as much sense as the tieup makes. They also raise the possibility of HNA/Hainan, Etihad, AS, and DL as previously discussed.
As far as the regionals & independents growing into a “4th Legacy Carrier”, the US3 will raise Valhalla to stop that happening guaranteed – they are scared enough from the ME3 encroachment, not to mention blowback from their respective customer bases, who are also likely a) loyal to the individual brands; and b) connected and online – just look at the response to the AA and AS/EK loyalty program devaluations; and c) tying up potentially 6 labour loose ends will make CO/UA look like afternoon tea.
As I have always said. Etihad is the best for everyone forever.
Regarding B6, however. The analysis is based off of thinking where interest rates were not ridiculously low. This is America, not Europe or Asia- if you have too much debt after a merger that would give you a huge strategic advantage. Fakeruptcy (aka. Chapter 11) exists for that reason. Create a giant, make a bankrupt giant to make the labor contracts disappear by judicial fiat. Restructure the debt at lower rates. The stock is still higher as yield is up, ASMs are consistent, but markets are increased. Everyone wins except the employees and the taxpayers!
Always be suspicious of an American company saying it is trying to pay down its debt. It either means it is about to go raiding, about to be raided, or using it as an excuse to do something dumb- but restructure with Chapter 11 soon after.
It’s interesting how this industry works. According to this article by Bernie, he wasn’t even considering Alaska Air to purchase Virgin America. So I wonder how the whole integration program will go for these two…
Bernie – I wanted you to be right! Though, I might have wanted B6 ahead of Etihad…who knows, maybe a final larger bid will come to scupper Alaska, but doesn’t look like it for now. Honestly, even with hindsight, this was the best coverage of the whole thing.
As everyone here has probably already heard, IT’S ON!!
Announcement from AS: https://blog.alaskaair.com/alaska-airlines/news/flying-better-together/
Richard Branson’s comments: https://www.virgin.com/richard-branson/virgin-america
Looks like AS really wants California, and VX’s transcons to the east coast. Then figure out this ‘company culture’ thing on-the-fly. Best of luck I suppose!
Sad to see that Mr. Simpsons’ shirt has been so deep fried.
Running two airlines separately, in a way that somewhat competes with themselves doesn’t say synergy.
This can’t be good. I haven’t figured out the long term ramifications as I have been too busy laughing at people who are sad to see Alaska operating Airbuses. Does no one remember when Alaska used to operate MD-83s?
CAPA just posted their analysis of the merger: http://centreforaviation.com/analysis/alaska-air-group-virgin-america-alaska-deleverages-to-expand-us-market-share-275085
“Deleverages to expand US market share”. Putting it lightly.
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