Alaska Wins Virgin America for a Whopping $2.5 Billion

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.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. I totally agree with these concerns. I do not get it, and I’m waiting to see what comes of it, and what I’m missing. Their brands and equipment don’t line up. If Alaska wants to increase its presence at airports that aren’t slot controlled, why not use $2b in cash for that rather than wasting lots of it on parts of VX that they don’t want, plus that price premium?

    But as a VX flyer, who doesn’t ever fly their first class anyway, I’m excited about the prospect of my VX points becoming AS miles with their many wonderful redemption options. I sure hope that’s what happens, at least.

  2. Think you forgot a b(illion) somewhere in that first sentence. Makes for a very interesting valuation.

  3. The next question is would it be prudent to start picking up VA miles through BoA credit card or other means like we did before the US Air/AA merger? I know Alaska devalued in a lot of people’s minds this past week, but I somehow think that will cool with time if Alaska’s other rewards don’t follow suit. Time to pick up VA miles or pass?

  4. Well, the money they save by not letting travel hackers book Emirates first class will more than cover this. And the distraction means they probably won’t be itching to do more devaluations. And…I get direct connection to SFO for CX redemptions. Win for me.

  5. As an AA EP I would look at flying San Francisco to Washington now on an AA codeshare rather than UA non-stop on that route but it does appear to be a pretty ridiculous valuation.

  6. I understood the deal at a lower price – it was about shutting out B6 and preparing for the eventual divorce and custody battle for SEA with Delta. AS could keep the 55′ pitch on transcons out of their hubs, and have SFO as a new revenue stream to many of the current AS cities. They’d implement enough of the VX culture on the long-hauls to keep west coast fliers from defecting to United or Delta, but keep it off the legacy AS routes.

    But at 2x market capitalization, I don’t get it. The only thing I can think of is that one of the ME3 is stepping in with a stake, either now or eventually. In that case, money probably doesn’t matter as much as opportunity for international feed. And thus the fliers in the current Q400 cities should probably be a bit worried.

  7. I think this was mainly a defensive strategy to keep Jet Blue out of the West Coast. And Alaska is an incredibly well run airline. I have no doubt they will make this merger a success.

  8. Is there any, and I mean any, possible chance Alaska keeps Amex and Citi and transfer partners and/or does everyone just dump a giant amount pre finalized merger into their VX accounts?

  9. I think your assessment is accurate. However, I’m thrilled to about the possibility of new route(s) out of National that I can credit to AA or AS.

  10. @Nick possible, but the Middle East carriers would be lighting a match under the otherwise-quieted charges leveled by the big 3 US airlines and at a time where they have less cash to burn as a result of lower energy prices.

  11. How exactly can AS “sell” DAL gates that are leased from AA and revert back to AA in 2024?

  12. Wow. And I thought Southwest wasted a pile of money buying Airtran. This deal makes that one look golden. It’s insane.

    If Alaska wanted to flush a pile of money down the drain, why didn’t they just cut all partner redemption mileage prices in half?

  13. I’m a big Alaska Airline fan and Gold 75K. Living in PDX and SAN, this doesn’t help me at all and that’s what’s important (to me). All I get is a few more flights from NYC area routing through low visibility flight delay SFO instead of having to change in SEA. I don’t even get a SAN to LAX feeder to Asia. Boo.

  14. JetBlue/VA would have been a dream merger. That’s why Alaska had to pay any amount to stop it.

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