First Thoughts on Alaskan-Virgin America

 

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Many of us reacted with a degree of disappointment that Virgin America is slated to be sucked into Alaskan Airlines and vanish from the world.

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This iconic image linked VA to it’s home in San Francisco (555 Aviation Boulevard, Burlingame to be exact).

I love Virgin America, and I admire Alaskan Airlines. Virgin America’s birth was a long drawn out process and a legal minefield that just about every US airline fought tooth and nail to stop. Part of its restrictions are that it’s founding father, Richard Branson was legally prevented (under various protections offered airlines in the US no other industry would ever be given), to own a controlling shareholding. Indeed they had to prove that it was in fact to be operated by US based and owned business before being allowed to fly.

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Created by Armstrong Aerospace, Alaska’s new branding will help take it into a new era.

It’s premise was to do everything better, and having taken flight just before the massive financial and economic crash of 2008/9 it was born into one of the most difficult periods anyone could have possibly foreseen. That it survived it, grew and prospered says a great deal about the determination of its founders, its staff and its business model.

The recent IPO raised $360 million, but it had its dangers once share holdings went public. Airlines are sitting on large piles of cash, they’ve never had it so good in terms of cash flow and profits, and after operating at a loss since it came into existence, the last two years has seen Virgin America in profit and growing.  It’s recent decision to buy A321’s was a high spot for 2017.

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There respective networks are highly complimentary

Now all of that is out of the window. The orders with Airbus are easily cancelled with little in the way of penalties and I just don’t see Alaskan ever committing to Airbus when it’s home base, (despite Boeing’s technical relocation to Chicago and its line location diversification), is in Seattle. More to the point the economics of transforming a majority 737 feet into an Airbus fleet, shareholders just wouldn’t wear it.

For Alaskan, the routes that Virgin America controls give it the East Coast access it’s always dreamed of, making it a minor national rather than just a major regional carrier.  It will have a major toehold at SFO and LAX. It makes perfect sense to me that Alaskan was prepared to raise the game to get Virgin America. Alaskan itself is the only US airline with investment grade stock and it was sitting on a pile of $2 billion in cash. Shareholders are never keen on excess cash, which they see as theirs, so it’s either do something with it or give it back to shareholders, by buying back their shares.   It became even more  viable when it became clear that there was no way Delta would ever be allowed by the Justice Department  to make a hostile offer for Alaskan stick, and the money wouldn’t be needed to mount a defence.

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Personally I think it’s a bit more than just a west coast airline now.

Delta in many ways has probably spurred Alaskan on even more.Their determination to rattle Alaskan with ever increasing operations at SeaTac and threaten more and more competition on Alaskan’s own turf must certainly have been a driving force behind the need to expand beyond the threat. The best means of defense is attack and while Delta can cope easily, it will make it and the other airlines sweat a little more.

My preference for the outcome is that Alaskan would actually look at Virgin Atlantic and Delta as an example. It’s such a valuable brand and experience that Delta (which owns 49% of VS) bought it to preserve the alternative option for its passengers, and the brand has grown because of it. Yes there were legal impediments to it being otherwise, but it works.

Why not grab the synergies, and at the same time use the unique brand experience so loved by the VA guests (as they and Alaskan like to call them), and let it run its own profitable operation, entwined with Alaskans?

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As an example, in terms of passengers the combined group is only 2 million passengers behind British Airways in size, but proportionately much more profitable.

Sadly that’s not the way it works in America. It takes a major character with a defined and principled goal to understand that absorption and the complete eradication of the opposition isn’t always the best path. They call it a merger but that’s not what it will be and we all know it. The merger website clearly states, “Alaska Airlines and Virgin America will continue to operate as separate airlines until closing, and while they pursue a single operating certificate. Once combined, the company and customer-facing brand will be Alaska Airlines”

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Willie Walsh of IAG may well not be my favorite airline boss, (he’s just a bit too profit driven and not people driven), but his decision to allow the various airlines inside IAG operate on their own (while still forcing through aircraft and behind the scenes synergies), despite the temptations to absorb them completely, as had been done with British Midland, Dan Air, British Caledonian, has had massive advantages. People choose brands, and Virgin America is very much something people consciously choose. I certainly do.

I have every respect for Alaskan. They try to make the world of aviation a better place. Arguably Virgin do it better still, and I think it’s eradication is a long term mistake.

It won’t be seen that way because Alaskan profits will rise and passenger numbers will soar, so it will always be seen as a sound strategic move, a success. I suggest that it would be even more successful, and even more profitable, if ownership didn’t mean the expunging of a brilliantly crafted airline, customer choice and style, but an opportunity for both airlines to work to their respective strengths and grow together.

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I was looking forward to the A321 in VA livery.

It will be some time before the two are fully commercially merged. January 2018 is the first time they expect to be able to operate under a single AOC. Alaskan doesn’t have the resources to convert the interior branding out of the A320 series fleet, so one can only imagine a rather haphazard and random fleet for the next 5 years, it can’t afford just to offload the A320’s either, most are on lease and the penalties would be high.

Whatever happens, JetBlue is probably safer now than ever before; we stand on the cusp of a long period where there are but five major airlines and a tiny, almost irrelevant minority of small independents who will have a rough time finding profit on routes they can barely afford to compete on.

Capitalism serves many well, but ultimately it seeks the vey thing that will kill it, a monopoly. In airline terms, we’re one tiny step closer. Only Government stands in the way.

As to its creator and founding father Richard Branson, his response to the whole thing was; “There was nothing I could do, I don’t want it to happen but the law prevented me from owning a larger stake in the airline”.  Now It’s true he couldn’t have a bigger shareholding so once the majority pushed it through he could do nothing, but I’m not convinced he would have. Only the other day, financial reports were suggesting that it was Virgin Group and Cyrus Capital who were behind the sale. They each stand to make almost $500+ million. Branson needs money; Virgin Galactic is still nowhere near going anywhere and its thunder is being stolen by firms like Space-X, Virgin Atlantic needs more investment to keep it viable, and now he wants to build a supersonic ‘affordable’ jet. Keeping the proverbial pie in the sky costs a lot of money.

My favorite though was an ad from spurned suitor JetBlue today: “We Couldn’t Fare less”…

In the words of Frank Underwood: “You might say that, but I couldn’t possibly comment”.

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