JetBlue Airways would lose out, with Alaska Air expected to pay upwards of $2 billion if its bid succeeds.
Alaska Air Group Inc. has emerged as the likely winner of an auction for Virgin America Inc.
The company is nearing a deal to buy Virgin America after beating a rival bid by JetBlue Airways Corp., people familiar with the situation said.
There is no guarantee Alaska Air ultimately will clinch the deal, but if it does, an announcement could come Monday, they added.
Alaska Air is expected to pay upwards of $2 billion for Virgin America, which has a market value of about $1.5 billion, following a surge sparked by recent news that the company was in play, one of the people said.
Virgin America is 54%-owned by Richard Branson’s Virgin Group Ltd. and New York-based Cyrus Capital Partners LP. It went public in November 2014.
The combination would become No. 5 airline in the U.S. by traffic, eclipsing JetBlue, which currently holds that spot.
Alaska Air Group, parent of Alaska Airlines, is currently the No. 6 U.S. airline by traffic. The company, which has been consistently profitable since 2009, has a market capitalization of about $10 billion.
Based in Seattle, Alaska Airlines has been in existence for 84 years and is the only carrier from before the 1978 U.S. airline deregulation that hasn’t been in bankruptcy. The company has been winnowing costs over the past 15 years or so to fight incursions into its West Coast base by discounter Southwest Airlines Co. and others.
Dubbed a hybrid by some industry experts, Alaska Airlines has low costs but still offers passengers some perks, without a plethora of fees. The company formerly flew up and down the West Coast, from Alaska to Mexico. But it has filled out in its route map over the past decade and now serves most major markets in the East and Midwest and made a big bet on Hawaii a few years ago. Flights to that state now account for 20% of its capacity.
Currently the company is contending with a substantial buildup in capacity at its Seattle hub by erstwhile partner Delta Air Lines Inc., but it still hasn’t lost market share in that city.
The company has long said publicly that it wants to remain independent. It hasn’t made any acquisitions since the late 1980s, when it bought Horizon Air and, a year later, a rival called Jet America Airlines, which was based in Long Beach, Calif.
But a Virgin America take over would be the biggest deal in Alaska’s history.
The company uncharacteristically raised concerns to the U.S. Transportation Department after Virgin America was founded, claiming foreign ownership of the company exceeded federal guidelines. That forced a revamp of Virgin America’s ownership structure.
People familiar with the matter said the addition of Virgin America would vault Alaska to 15% of the seats offered out of San Francisco International Airport, Virgin America’s base, from its current 4%. Alaska’s position at Los Angeles International Airport also would rise substantially, said people familiar with the matter, to 11% of seats from 5%.
Alaska Airlines and Virgin America have only six routes that overlap, these people said. As measured by capacity, the number of seats times miles flown, that overlap amounts to just 6.6% of Alaska’s capacity.
Based in Burlingame, Calif., Virgin America is the ninth-largest U.S. airline by traffic. Launched in 2007, it only achieved profitability in 2013, after slowing its breakneck growth and starting to fill seats at higher fares.
Virgin America Chief Executive David Cush has complained that the company can’t get the gates or slots it needs to grow freely. Part of the problem, he has said, is that all the mergers have winnowed opportunities for smaller carriers.
A takeover of Virgin America would suggest consolidation in the industry is moving to the regional carriers and ultradiscounters, after mergers between 2008 and 2013 combined eight big carriers into four, which now control more than 80% of the U.S. domestic market.
U.S. airlines are putting up their best financial results in history, partly helped by low fuel prices, the industry’s move away from ruinous market-share wars that used to hurt the industry and by the fact that the sector is riding on one of the longest economic up-cycles in recent history.
The Wall Street Journal
Alaska Airlines and Virgin America near deal
