With four U.S. airlines taking up 80% of American domestic air travel, the United States Justice department has been explicitly reluctant about approving any further airline industry consolidation efforts, but they may have to confront another merger as Virgin America (NASDAQ: VA) chose Alaska Airlines (NYSE: ALK) over JetBlue (NASDAQ: JBLU) in a competitive bidding process that resulted in the hefty $2.6 billion purchase.Virgin America has received top marks from industry critics and passengers, and is known best for its customer service, plane ambiance, and sophisticated in-flight entertainment system. After its 2007 launch, it only became profitable in 2013 and still only operates a fleet of 57 planes compared to Southwest's (NYSE: LUV) 715 and Delta's (NYSE: DAL) 809. Despite the airline's smaller size, it has a recent market capitalization of $1.3 billion.
For some of the country's smaller airlines, the Virgin America takeover would bolster its business and perhaps let them compete with the major domestic competitors. In weighing a JetBlue or Alaska Airlines takeover, there were many pros and cons that analysts believe came into play. For JetBlue, the acquisition would have added strength to its West Coast operations, where the airline is currently underperforming.
But the bid from Alaska Airlines peaked over JetBlue as the company eyed Virgin American to eliminate a West Coast rival while expanding its flight coverage to Mexico. Alaska Airlines primarily operates Boeing (NYSE: BA) aircraft, so gaining Virgin America's 57 Airbus fleet add questions to how it will handle additional maintenance operations costs, though many believe the opportunities afforded by the addition are greater than the downside of moving away from a single-fleet type.
The move comes as a surprise and as a major disappointment to some. Virgin America is known for its above-average customer experience, so losing that could lead to less customer choice. But smaller U.S. airlines like Alaska Airlines were eager to acquire Virgin America, which just concluded its most profitable year, to amass more market share by automatically gaining more routes and passengers overnight.
Alaska Airlines ultimately benefits from Virgin America's strong California presence, but also the airline's Hawaiian routes. The airline is positioning itself to grow in the lucrative non-domestic North American space, and Virgin America offers it this opportunity without having to battle for landing slots, gates, and regulatory approval.
Despite the purchase, many are unsure whether the Justice Department and its antitrust regulators would approve the transaction after the Justice Department has been vocal about its disapproval of its own decision to allow the recent large airline mergers. If Alaska Airlines is able to secure government approval, though, the acquisition could position them as competing with the U.S. "big four": Delta, Southwest, American (NASDAQ: AAL), and United (NYSE: UAL). A decision from the U.S. Justice Department is expected by January 2017.