The big aviation news of the week is Alaska Air's takeover of Virgin America.
The spunky San Francisco-based airline was inspired by Sir Richard Branson because of his frustration with America's aviation experience. Branson's involvement, though, caused expensive delays for the startup as he wrestled with the government over foreign ownership requirements. Finally, the airline launched in 2007.
With its unique approach to air travel, including some clever on-board amenities, Virgin America developed a loyal following on its limited route network. The airline even flew between Anchorage and its home base in San Francisco during the summer of 2013.
Consolidation in the U.S. airline business is a big problem for consumers who value a competitive industry. After all, competition is the prime factor when it comes to the best airfare deals. But today, more than 80 percent of domestic air traffic is handled by four airlines: United, American, Delta and Southwest.
The same consolidation trend is a problem for smaller airlines, too. Alaska and JetBlue fall into that category. So does Virgin America. Smaller airlines find it difficult to compete against larger carriers. It's harder to get slots at busy airports such as San Francisco, Los Angeles and Washington, D.C. And it's harder to develop a loyal traveler base, because of a smaller airline's limited routes.
Both Alaska and JetBlue have done a good job on routes, organic growth and customer loyalty. Given time, perhaps Virgin America could have enjoyed more organic growth based on its award-winning service. But it ran out of time. Alaska and JetBlue bid for the airline, but Alaska ultimately offered a 47 percent premium on the stock, with a deal costing $2.6 billion. The overall value of the deal is pegged at more than $4 billion, because Alaska will assume Virgin's debts.
"Alaska Airlines has had good organic growth, coupled with financial success," said Joe Sprague, Alaska Air's senior vice president of communications and external relations. "But we also recognized that if we were going to be a larger player, it would be difficult without an acquisition."
Alaska's purchase of Virgin America is subject to government approval. What will all this mean for Alaska travelers?
• New routes. While Alaska Airlines maintains a robust north-south route structure along the West Coast, Virgin's routes are mostly east-west. None of Virgin's east-west routes go from Seattle. So the only new routes for Alaskans might be into Dallas's Love Field from Los Angeles. Because of Virgin's access to busy airports like San Francisco and Los Angeles, there may be an opportunity for additional service, particularly in and out of Silicon Valley. Virgin has valuable landing slots at Washington's Reagan National Airport, New York's LaGuardia airport and JFK. Sprague lamented that Alaska had "only the barest of crumbs" at Reagan and JFK.
• Aircraft: Virgin's fleet consists of 60 aircraft in the Airbus 320 family (A319, A320 and A321). Compare that to Alaska's fleet of more than 150 737s. Initially, Alaska will operate both types of aircraft side by side. Part of that strategy is due to Virgin's unique applications on the Airbus. "We recognize that product features on the aircraft are part of the Virgin brand," said Sprague. "The most important thing we can do is learn how those product features are a big driver of loyalty," he said. Features of the Virgin fleet include a variety of interior lighting, first-class cabins and the "RED" in-flight entertainment system. In addition to music and video, the seatback "RED" system offers travelers super-fast satellite-based (ViaSat) internet connectivity, streaming Netflix options—and there is on-demand menu service, plus a seat-to-seat chat feature.
• Frequent-flier plan: When the purchase deal closes, members of Virgin's loyalty program Elevate will be merged into Alaska's Mileage Plan.
• Fares: Since Virgin does not fly to Alaska, there is no impact on fares for local travelers. For travelers in California, there may be less downward pressure on fares. That's because Virgin is known as a discounter — and if one discounter is removed, fares could rise. That said, ultra-discounter Spirit Airways just launched Seattle-Los Angeles service for as little as $59 each way.
My take: Both airlines have a unique feel that makes them very popular with travelers. In this case, I think both airlines win: Virgin has plenty of airplanes on order and no clear path on how best to fill them. Alaska has the financial means to grow through acquisition. For travelers, the new, larger airline is better-positioned to compete with the "Big Four" airlines, in addition to carriers like JetBlue.
For Alaskans, this prospective merger means Alaska can remain strong and independent. Its headquarters will remain in Seattle and Alaska's Brad Tilden will be CEO of the combined enterprise.
Why do Alaskans want Alaska Airlines to remain strong and independent? Well, the airline is better-positioned to continue its feud with Delta Air Lines.
Delta, and to a lesser degree JetBlue, has the biggest impact on fares between Alaska and the Lower 48.
For example, the lowest fare between Anchorage and Seattle (on either Delta or Alaska) today is $313 round-trip, with a 21-day advance purchase. That all changes May 5, when JetBlue starts flying for $157 round-trip. It's the same story between Anchorage and Portland: Alaska and Delta are charging between $403 and $420 round-trip later this month with a three-week advance purchase. But on May 13, the price drops to $157 round-trip on JetBlue. The next day, Delta starts its nonstop between Anchorage and Portland for $165 round-trip.
Between Anchorage and Los Angeles, JetBlue is the low-fare leader, with fares as low as $196 round-trip starting May 13 into Long Beach. Nineteen miles away at LAX, Alaska and Delta are slugging it out: $269 round-trip on Delta or $281 for the nonstop Anchorage-Los Angeles flight on Alaska Airlines.
Competitive battles between airlines keeps rates down for Alaska travelers. That's demonstrated clearly in other Alaska cities, including Fairbanks, Juneau, Sitka and Ketchikan. Delta's flights to Seattle help keep the prices about 50 percent lower than when there was just one airline (Alaska). And it works both ways. Delta just announced it is dropping its daily Juneau-Seattle flight for the winter. The last flight will be on Aug. 31, 2016, although Delta indicated it plans to return in the spring of 2017. Just watch the fare to Seattle in August. Then check the rate in September.
The airline business is a tough business. Virgin America realized that size matters — and their fleet didn't measure up. Thankfully, Alaska Airlines was there to receive the "Hail Mary" pass from Virgin America — offering a graceful exit for the airline and its investors. Despite Sir Richard Branson's dismay at the sale of the airline bearing his brand name, he'll profit handsomely: Virgin Group's 30 percent share in the airline is worth $786 million. Because of the premium purchase price, the deal was approved unanimously by both boards of directors.
Now Alaska Airlines has a bigger fleet to face off against Delta, JetBlue and Southwest. Sir Richard has a bigger pile of money to apply to his Virgin Galactic space travel plans. A few travelers will miss Virgin America when it goes away. Of course, Alaska Airlines hopes those travelers will switch over to fly with them.
Online resource: http://flyingbettertogether.com/