News broke yesterday that Virgin America had received a takeover offer and was shopping itself to potential buyers.
We can eliminate United as the acquirer — the Justice Department would pretty quickly shut down such a degree of consolidation in San Francisco where United has a hub and Virgin America is based.
Virgin America in San Francisco
I suggested it was conceivable that JetBlue, a more boutique-style carrier focused on New York, could bulk up on the West Coast by aligning itself with Virgin America. I’m not predicting it but it would increase competition overall rather than reducing it. And it would presumably pass muster with anti-trust review.
Marisa Garcia makes the case that the most likely acquirer is Delta and offers four reasons, though I’m ultimately skeptical of the arguments which is decidedly not to say that Delta wouldn’t try something of this sort.
- Slots at Dallas Love Field. Delta wound up without any slots as a result of the federal government’s extracted settlement from American Airlines to sign off on the US Airways merger. Delta is squatting on slots at the airport, and to date they haven’t wanted to buy slots they’ve wanted those slots for free.
- Delta can afford them. They can afford a lot of things. Mostly they’ve been buying into non-US airlines like China Eastern, Gol, Aeromexico and Virgin Atlantic.
- Provide feed to Asia. It’s not clear that Virgin America’s strength in San Francisco could convince that local market to connect to Delta’s route network out of Seattle versus taking United’s non-stops. It makes little sense for Delta to try to build a parallel Asia network out of San Francisco to compete with their Seattle flights.
In Seattle they faced domestic competition from Alaska but not transpacific competition. In San Francisco they face United’s larger domestic connecting network and already-entrenched extensive Pacific flying, as well as incumbent corporate contracts. Any new San Francisco Asia flights would depress Delta’s yields on out of both San Francisco and Seattle.
- Delta could maintain separate brands. Virgin America has a strong brand identity. Outside of slots at constrained airports like Love Field and Washington National, it’s primary asset is its brand. Delta can buy 60 planes far cheaper than it can buy Virgin America.
If they leave the brand intact they lose the opportunity from merger synergies and really gain just the very limited income stream from the airline’s operations and the ability to redirect their schedule. And of course other suitors could maintain Virgin America as a separate brand, too, so this isn’t really a differentiator.
At just $1.5 billion in revenue and 7 million passengers, Virgin America would be a local market strategic acquisition and not a broad-based game changer for the four largest US airlines. Any of them other than United could make a case that Virgin American’s two dozen destinations don’t create too much concentration from a legal standpoint.
American and Delta might get some scrutiny over Los Angeles, and Delta over New York, but those concerns could be easy to dispense with in furtherance of the overall deal.
For Virgin America they’d get aircraft that wouldn’t have to go out weight-restricted for their Hawaii routes.
As with the US Airways acquisition of American, I hope this doesn’t happen of course.