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It’s been a while in the pipeline, but finally, Alaska Air group has gained US antitrust approval for its planned takeover of Virgin America Inc. The deal will significantly grow Alaska’s ability to compete in the lucrative transcontinental US market. The approval led to Alaska shares closing 2% higher at $84.80, while Virgin shares were up 0.6% at $56.80. The new combined airline group will be the 5th largest carrier in the US, displacing JetBlue; with 80% of the US aviation market being controlled by the top 4 airlines.
To get approval, Alaska had to make some concessions to the US antitrust authorities. Alaska will have to reduce the width and breadth of its marketing for American tickets. The change is designed to ensure that Alaska is competing with American rather than being a partner. This measure will result in a 50% reduction of Alaska passengers on American flights. This reduction is expected to cost Alaska $60 million in lost revenues, although, with the increased revenue from Virgin America passengers, the overall impact should be in the $15 to $20 million range.
In a written statement, Renata Hesse, the head of aviation antitrust at the DOJ, stated that “Today’s settlement ensures that Alaska has the incentive to take the fight to American and use Virgin’s assets to grow its network in ways that benefit competition and consumers.”
The deal does not involve Alaska surrendering any of its assets, although the concessions on codeshare flights with American will affect 45 markets, according to Alaska.
The approval almost brings to a close the process started in April, with Alaska’s $2.6 billion cash bid to purchase Virgin America. Although the deal is still subject to court approval, this should be a formality after the approval of the DOJ. Brad Tilden, Alaska’s CEO, is quoted in a written statement: “We couldn’t be more excited about receiving DOJ clearance. With this combination now cleared for take-off, we’re thrilled to bring these two companies together and start delivering our low fares and great service to an even larger group of customers.”
New Opportunities for Alaska
When completed, Alaska will be able to offer some major expansion to its route network out of Washington and Oregon. The company will also be able to expand its business into JFK, Los Angeles, San Francisco, Newark Liberty International, and Reagan National Airport. The deal will boost Alaska’s revenue by 27% up to $7 billion.
The new combined company will have major hubs in Seattle, Anchorage, Portland, Oregon, as well as Los Angeles, and San Francisco. Alaska plans to keep the Virgin brand along with its corporate structures unchanged and will look at further expanding and developing both brands.
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