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Alaska Air Group (ALK) Buys Virgin America: What's Ahead?

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The much-awaited Virgin America buyout by Alaska Air Group (ALK - Free Report) has finally been completed. Notably, the acquisition has created the fifth-largest U.S. airline (in terms of passenger traffic).

The completion of the deal – valued approximately at $4 billion, inclusive of debt and capitalized aircraft operating leases – was only a matter of time once the Seattle, WA-based carrier, received antitrust clearance from the U.S. Department of Justice (DOJ). Alaska Air trimmed the scope of its code-sharing agreement with American Airlines Group (AAL - Free Report) , thereby meeting the condition imposed by the DOJ for the approval. Subsequently, Alaska Air Group settled consumer lawsuit against the tie-up and removed the last hurdle.

We remind investors that the deal was announced in April this year. Alaska Air Group had outbid Long Island City, NY-based JetBlue Airways Corp. (JBLU - Free Report) on the deal to buy Virgin America.

Merged Entity: West Coast Powerhouse

The completion of the merger has enabled Alaska Air Group to significantly expand its presence, particularly in the West Coast, gaining greater access to key cities across the U.S. Following the completion of the acquisition, the merged entity has access to most of the West Coast hubs (Seattle, Portland, Anchorage, San Francisco and Los Angeles). It will also be serving the maximum number of non-stop destinations from the West Coast.

The merged entity will provide 1,200 departure options per day to 118 destinations across the U.S., Mexico, Canada, Costa Rica and Cuba. The combined entity, which will be headquartered in Seattle, boasts a fleet size of 286 aircraft. The average age of the fuel-efficient fleet is only 8.1 years, making it the youngest among the top five U.S. air carriers.

The transaction is expected to boost the carrier’s revenues to over $7 billion on an annualized basis. The merger resulted in the creation of a vast network offering flights to more than 800 destinations across the globe.

In a customer-friendly measure, Alaska Air Group announced that from Dec 19, members of the lucrative Mileage Plan of Alaska Air and Virgin America Elevate members will be eligible to earn rewards on each other's flights. Moreover, elite members will enjoy facilities like priority check-in and priority boarding on each other's flights.

Alaska Air Group will now strive to get the Federal Aviation Administration (FAA) certification. Following receipt of the single operating certificate, which is expected to take one year, the two airlines can operate as a single carrier. Reportedly, Alaska Air Group’s CEO and chairman Brad Tilden has stated that the picture regarding the amenities available on the erstwhile Virgin America flights will become clear only in the first quarter of 2017. The merger has also provided Alaska Air Group significant growth opportunities in key East Coast markets.

Consolidation Not New in Airline Space

Merger-driven consolidation has played a key role in the airline industry, limiting competition. Moreover, there has been a significant improvement in operating efficiencies following mergers. Airlines were in urgent need to improve efficiencies in the early phase of the current century. They were in the doldrums financially with exorbitant oil prices adding to their woes.

Consequently, major carriers like Delta Air Lines (DAL - Free Report) plunged into bankruptcy in 2005. However, a spate of mergers helped the industry rebound. For instance, Delta’s tie-up with Northwest Airlines a few years later helped the Atlanta, GA-based carrier turn the tide and build a strong position.

The Alaska Air Group-Virgin America merger is the first significant consolidation in the airline space since late 2013, when AMR (American Airlines' parent group) and US Airways had combined to create American Airlines Group.

Competition

Currently, 84% of aviation market in the US is governed by American Airlines, Delta Air Lines, United Continental Holdings (UAL - Free Report) and Southwest Airlines (LUV - Free Report) . The creation of the powerhouse following the latest airline merger will intensify competition for the above major carriers.

We note that the Southwest Airlines has a significant presence in the West Coast. Naturally, the creation of a powerhouse and its subsequent performance will be closely watched by the Dallas-based low cost carrier. We note that Hawaiian Holdings (HA - Free Report) also has a significant presence in the area, connecting multiple cities with Hawaii.

Investors will keenly await updates on measures taken by carriers to counter the threat likely to emerge following creation of the combined entity.

Whats in Store for the ALK Stock Following the Merger?

Shares of Alaska Air Group have been on an uptrend in recent times. The stock has comfortably outpaced the Zacks categorized Transportation-Airline industry over the last three months. The stock has gained 31.48% compared with the industry, which has advanced just 23.04% over the same period.

With Alaska Air likely to capture significant market share particularly in the West Coast following the merger, its top line is expected to be boosted significantly as more passengers avail its operations. This might translate into further stock price appreciation, allowing it continue the good work on the price front.

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