NEW YORK — Alaska Air Group Inc. said on Monday that it would buy Virgin America Inc. for $2.6 billion to become the top carrier on the U.S. West Coast and compete more effectively with larger airlines.
The deal appears to end what Alaska Air Chief Executive Officer Brad Tilden called a “hard-fought competition” to purchase Virgin America.
JetBlue Airways Corp. had also made an offer for the offshoot of billionaire Richard Branson’s London-based Virgin Group, which had become famous for its mood lighting and media-rich entertainment on flights.
The deal would create the fifth-largest U.S. airline after a decade of mergers that have shrunk the industry to a handful of companies. The top four control more than 80 percent of the U.S. travel market.
Virgin America accounts for about 1.5 percent of U.S. domestic flight capacity, while Alaska Air and its Horizon Air subsidiary account for 5 percent, Deutsche Bank analyst Michael Linenberg wrote in a recent research note.
Shares of Alaska Air were down 4.6 percent at $78.22 in morning trading, while Virgin America jumped 40 percent to $54.47. That was still below the $57-per-share bid, which represents a premium of about 86 percent from Virgin America’s stock price before reports in March that the airline was considering a sale.
IMPACT AT MCCARRAN
It’s unclear how the acquisition will affect operations of the two carriers at McCarran International Airport. Both airlines have a relatively light presence in Las Vegas with Alaska Air offering an average 14 flights a day to five cities and Virgin America, 13 flights a day to four.
But the joint operation would boost it to become the No. 5 carrier at McCarran, just behind Spirit Airlines and ahead of Las Vegas-based Allegiant Air, if the company doesn’t trim any flights.
Alaska offers nine daily round trips from Las Vegas to Seattle, its primary hub, with flights also to Salt Lake City; Portland, Oregon; Bellingham, Washington; and Anchorage, Alaska.
Virgin America averages seven daily round trips from Las Vegas to San Francisco with service also to Los Angeles International Airport, New York’s John F. Kennedy International Airport and Love Field in Dallas.
Virgin America has had a vested interest in McCarran since it began flying in 2007 with Las Vegas being one of its launch cities. The company’s interest in the city has prompted its minority investor, Virgin Group founder Richard Branson, to make several appearances in Las Vegas.
The companies face major hurdles in the integration, although Alaska Air expressed confidence in its ability to tackle them.
It must juggle the contracts of workers with disparate pay, benefits and seniority. Alaska Air said its unions and pilot leadership were on board with the merger.
The company will also have to train pilots and maintenance crews on a new aircraft type from Virgin America’s fleet of Airbus Group SE A320-family planes. Alaska Air currently flies Boeing Co 737s.
Alaska Air said it might continue to use the Virgin America brand in some form.
The company said it was buying California-based Virgin America to expand in Los Angeles and San Francisco and offer more connections to international airline partners. It would also benefit from Virgin America’s corporate contracts and cult-like status among travelers who work for technology companies.
The combined company would retain Alaska Air’s Seattle headquarters.
“While California is actually our second-biggest state in terms of flying, we don’t fly east-west out of there,” Tilden told reporters on a conference call Monday, noting the company had been considering an acquisition for a couple years.
“We’ll go from serving one out of the top 10 destinations out of San Francisco to serving all 10.”
Alaska Air said in a statement that the deal would generate $225 million in annual synergies once the companies are fully merged. It expects one-time integration costs of $300 million to $350 million.
Because of the deal, Alaska Air plans to slow down its share repurchase program this year and probably next, Chief Financial Officer Brandon Pedersen said.
The companies said they expected the deal to receive the necessary approvals from Virgin America shareholders and U.S. regulators by Jan. 1.
Alaska Air Chief Operating Officer Ben Minicucci said he expected few antitrust concerns because the two companies have “minimal” overlap of routes.
Sterne Agee CRT analyst Adam Hackel said the deal would help Alaska Air compete with Delta Air Lines Inc and American Airlines Group Inc, which have embarked on major expansions in Los Angeles.
Bank of America Merrill Lynch, UBS Investment Bank and Cowen & Co were financial advisers to Alaska Air, while Evercore Group LLC advised Virgin America. Legal advisers were O’Melveny & Myers LLP to Alaska Air and Latham & Watkins LLP to Virgin America.