Explaining the Alaska Airlines – Virgin America Merger
Earlier this week Alaska Airlines announced it would acquire Virgin America in a cash deal worth $2.6 billion. The merger is the latest instance of consolidation in the U.S. airline industry. With a fleet of 280 planes making 1,200 daily departures, the combined Alaska-Virgin would become the fifth largest airline in the country, serving 39 million passengers annually.
Alaska’s aggressive bid – more than $1 billion over Virgin America’s market capitalization at the time of the announcement – is a sign of confidence in an industry that only recently returned to profitability. Dramatically lower fuel costs are one cause of record profits. But airlines’ improved financial performance is also the result of reduced competition at many of the nation’s major airports.
Effect on Airfares
According to analysis from the Associated Press, since 2005 the number of large carriers has been reduced from nine to just four – American, United, Delta, and Southwest. Together the big four control 80% of the U.S. market.
The result? At 40 of the nation’s top 100 airports, a single airline operates a majority of passenger capacity. Over the past decade domestic airfares have grown at a rate faster than overall inflation, even before accounting for increasingly prevalent baggage fees that add $25 or more to the cost of a flight.
Despite recent history, there’s reason to be hopeful that this latest merger won’t lead to higher fares, and might even benefit passengers. As explained in a post on the blog of travel data analytics service Hopper:
“Virgin’s network is a good complement to Alaska’s existing service. . . . The overlap is relatively small, accounting for only 15 nonstop markets which makes up about 40% of Virgin’s network but less than 10% of Alaska’s, meaning that few routes will suffer reduced competition after losing a carrier.”
George Hobica, founder of Airfarewatchdog.com, told ABC News that “whenever airlines combine, that gives consumers a larger network to fly on…members [may] suddenly have more miles or points to use . . . and in the event of a flight delay or cancellation it’s easier to reroute passengers on a larger network.”
But the potential benefits, and costs, of the Alaska-Virgin merger will be unevenly distributed. The Hopper analysis points out that:
“Increased competition for the dominant domestic airlines is likely to be good for consumers on the whole. However, in overlapping markets, Virgin’s prices are about 18% lower on a weighted like-for-like basis, so Virgin customers on those routes might get hit with slightly higher prices.”
Most of the overlapping routes are along the West Coast, where both Virgin American and Alaska Airlines maintain hubs at SFO and SEA, respectively.
Effect of Loyalty Programs
The effect of the merger will be similarly mixed for members of Alaska Mileage Plan and Virgin Elevate frequent flyer programs. Though the expanded Alaska-Virgin network will give passengers more options for redeeming their miles, past airline mergers suggest that program members should be wary of eventual point devaluation and loyalty status reductions.
In a Q&A after the merger announcement, an Alaska Airline spokesman said that:
“Both loyalty programs will remain distinct until the transaction closes – with no short-term impact on members. All Alaska Airlines and Virgin America loyalty program members are able to earn and use points and miles as usual during this transition. In the future, the programs will be merged . . . loyalty points accrued in Elevate during the transition period will be transferred and honored.”
Whether you stand to benefit from the merger depends on what program you’re currently enrolled in. Alaska’s Mileage Plan is already rated the best airlines reward program, and has a higher point valuation than does Virgin, leading Zach Honig, editor-in-chief of The Points Guy blog to conclude that, “if points are combined at a 1:1 ratio, Virgin America customers will likely come out ahead, especially due to Alaska’s strong partnerships with international carriers.
Consumers who have been hurt by past industry consolidation might actually benefit from this latest merger, which brings together two well-regarded, relatively small carriers. Alaska and Virgin each have distinct regional focuses, so joining the airlines might create a sum of parts that’s greater than the whole, with improved nationwide service and minimal adverse effects on fares.
Still, fans of mood-lit cabins and entertaining safety videos will be sad to hear that the Virgin brand is being subsumed by Alaska. Richard Branson himself voiced trepidation about the acquisition of the airline he founded, saying that, “I would be lying if I didn’t admit sadness that our wonderful airline is merging with another.”
For the time being, Richard will have to wait with the rest of us before reaching a final verdict on the effect of the merger. Alaska Airlines and Virgin America will continue to operate separately while awaiting approval from regulators and shareholders. The deal is expected to close in January of 2017.