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Why Virgin America is a tempting acquisition

Tracey Samuelson Mar 29, 2016
A Virgin America plane lands at San Francisco International Airport on March 29, 2016 in Burlingame, California. JetBlue Airways and Alaska Air Group are reportedly preparing takeover offer bids for Virgin America airlines. Justin Sullivan/Getty Images

Why Virgin America is a tempting acquisition

Tracey Samuelson Mar 29, 2016
A Virgin America plane lands at San Francisco International Airport on March 29, 2016 in Burlingame, California. JetBlue Airways and Alaska Air Group are reportedly preparing takeover offer bids for Virgin America airlines. Justin Sullivan/Getty Images

JetBlue and Alaska Air are said to be preparing offers to buy Virgin America, according to the Wall Street Journal. None of the companies are talking publicly about the deal, but it’s generally a good time to be an airline – largely thanks to the low price of oil.

“Last year was a phenomenal year,” said Richard Aboulafia, an airline analyst with the Teal Group. “You had a combination of lower airfares and higher profits for everyone involved.”

Those higher profits give airlines more steam for an acquisitions and more money to fuel growth.   

Aboulafia says the industry is at the tail end of a massive wave of consolidations that included Delta pairing with Northwest, United with Continental, and American with U.S. Airways.

“Eventually that dynamic was going to catch up to the smaller players,” he said.  

Samuel Engel, head of­­­ the aviation practice at ICF International, said these companies are some of the few left to consolidate. “Virgin America, JetBlue, Alaska, and Hawaiian, as well, are carriers that are a meaningful size and yet, are not of the kind of scale that could easily compete with a 700- or 800-aircraft Delta, United, or American,” he explained.

Engel added Virgin America has specific benefits, such as its investment in the Dallas Love Field airport, but he said airlines generally seek scale — bigger markets, the efficiencies that come with size, and the lucrative corporate contracts that are hard to chase as smaller entities.

There are also reasons why the larger airlines are not on the rumored list of bidders for Virgin America.

“The prospect of any of the three legacy carriers going after Virgin America would raise all kinds of regulatory red flags,” said Rob Britton, principal of the aviation consultancy Air Learn. “They’re big, they’re growing, they’re handsomely profitable. I think ­­­they’re not interested.”

Moreover, mergers, for all their benefits, are still difficult for airlines, requiring the integration of management, labor, technology, and cultures.


 

Correction: The original version of this story misstated the name of Northwest Airlines. The text has been corrected. 

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