Alaska Air, Virgin America Cool Their Jets as They Await Deal's Approval
21 October 2016 - 8:40AM
Dow Jones News
The Justice Department is making Alaska Air Group Inc. and
Virgin America Inc. cool their jets on a $2.6 billion merger plan,
fanning speculation that regulators believe consolidation in the
industry has gone too far.
Alaska's Chief Executive Officer Brad Tilden said that while
he's confident the department will rule in his favor, "there is a
process at play" and "we're not quite there yet."
Although the regulatory approval process has taken longer than
expected, he wouldn't say whether Alaska has a backup plan if the
merger isn't approved. "I just don't think we can go there," Mr.
Tilden said in an earnings call on Thursday.
A Justice Department spokesman declined to comment.
The combination would create the nation's No. 5 airline by
traffic, eclipsing JetBlue Airway Corp., which stopped bidding for
San Francisco-based Virgin America as the price climbed.
Alaska Air and Virgin have few overlapping routes, and the
merger would boost Alaska's presence in Los Angeles and San
Francisco.
Since 2008, two separate presidential administrations have
cleared four megamergers among much larger carriers. Those deals
created the four largest U.S. airlines, controlling more than 80%
of domestic capacity.
J.P. Morgan analyst Jamie Baker said the department may be less
amenable to another big merger, and could ask for concessions such
as asking Alaska to change code-share agreements with American
Airlines Inc. and Delta Air Lines Inc. He estimated those
relationships drive about $350 million in annual revenue to
Alaska.
In a separate earnings call on Thursday, American's Chief
Executive Doug Parker said losing Alaska code shares "wouldn't be a
real impact."
Virgin America may have to pay Alaska a $78.5 million breakup
fee if the deal is terminated.
In May the Justice Department made a routine "second request"
for information about the deal. The airlines said at the time they
wouldn't close their deal before Sept. 30, then extended the
deadline to Oct. 17.
That date came and went, and the two airlines said talks with
the Justice Department were still going well. They said they were
aiming to close the deal in the current quarter. Seattle-based
Alaska Air has booked $36 million in one-time merger expenses in
the past two quarters and has raised $1.5 billion in financing for
the deal.
There are signs Washington regrets approving previous mergers
and curtailing competition. The Justice Department in mid-2015 said
it was probing possible illegal signaling at the largest four
carriers, a possible effort to raise fares. The status of that
investigation isn't known, and the department has declined to
comment.
In September, the chief of the Justice Department's antitrust
division, Renata Hesse, said many legislators and think tanks have
called for tougher antitrust scrutiny of the industry. This week
the Transportation Department announced new rules designed to
protect consumers from anticompetitive behavior by the major
airlines.
The Alaska-Virgin deal would be tiny compared with the large
transactions that have gone before. The combined airline would also
much smaller than their four giant competitors: American Airlines,
Delta, United Continental Holdings Inc. and Southwest Airlines
Co.
On Thursday, Alaska shares rose 2.5% to $75.29. Virgin America
shares were up 0.4% at $54.35, just below the deal price of $57 a
share.
Write to Susan Carey at susan.carey@wsj.com
(END) Dow Jones Newswires
October 20, 2016 17:25 ET (21:25 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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