Virgin America’s market cap was about $1.15 billion a week and a half ago. Speculation began about a buyout and the company closed worth closer to $1.5 billion on Friday.
Last Monday JetBlue and Alaska Airlines were revealed to be the leading contenders to buy Virgin America. Yesterday it looked like Alaska would seal the deal at about $2 billion.
Now the Wall Street Journal is reporting that Alaska will wind up the victor — but at a cash price of $2.5 billion.
Alaska Air Group Inc. is expected to announce on Monday that it won the auction for Virgin America Inc., besting rival JetBlue Airways Corp. in a frenzied bidding process that culminated in a cash price of about $2.5 billion, according to people familiar with the matter.
That’s more than double Virgin America’s value before the speculation began a couple of weeks ago, and nearly a 50% premium over Friday’s close. When there’s frenzied bidding, the winner usually loses because they’ve had to pay so dearly to secure their prize.
What does Alaska actually get here?
- Virgin America operates Airbus aircraft. Mainline Alaska is all Boeing. Does Alaska really want a new aircraft type? There could be some cheap narrowbody aircraft on the market soon. (Delta, please pick up the white courtesy phone.)
- A handful of slots and gates at congested airports like New York JFK, Washington National, and Dallas Love Field. (Perhaps they could sell the Love Field slots to Delta.)
- A San Francisco hub, to add to Alaska’s already-strong operations on the West Coast in Seattle, Portland, and Los Angeles. That means overflying their own hubs for intra-West Coast travel.
- A strong consumer-friendly brand they’re likely to dismantle or at least degrade. Their premium domestic first class product won’t survive Alaska management.
They take a West Coast competitor off the board, which benefits United at least as much as it does Alaska. They grow themselves in San Francisco, which is great for codeshare partner American Airlines.
At the end of the day they don’t get that much for $2.5 billion. (Virgin America did have half a billion in cash at year-end, so the net cost is ultimately somewhat lower.) They’ll be the number five carrier in the country, though much smaller than the top four. They’ll be a bit bigger in Los Angeles. They get a San Francisco hub. And they get to wade into the intensely competitive premium transcon market. They get very little they couldn’t have accomplished piecemeal for $2.5 billion, though.
And they get the massive distraction of implementing a merger. Alaska is one of the most on-time airlines and one of the most profitable. But their focus is going to be on Virgin America, as much as defending Seattle from Delta.