Saturday, June 4, 2016

With Virgin America Merger is Alaska Airlines Now King of the West?

With options for growth in the U.S. domestic market limited, Alaska acquired Virgin America earlier this year in a deal worth $4 billion including debt. The merger combines two airlines with sizable west coast operations 

Alaska, which is a significantly larger airline than Virgin America, has hubs in Seattle and Portland where it serves destinations all over the United States and Latin America. Virgin America's route network is primarily focused on trans-continental routes from San Francisco and LA to the east coast and west coast shuttle flights 

Alaska dominates air travel in the Pacific Northwest having garnered a loyal fan base. Facing a stiff insurgency from Delta Air Lines in Seattle, Alaska has still maintained a 44% share of the market. Alaska also controls Portland International Airport with a 44.5% market share.  Alaska has recently focused on expanding its trans-con offerings from Seattle. Last year, Alaska began service to Baltimore Washington International Airport and resumed service to Washington Dulles.   

While Alaska may be the biggest player in the Northwest, it has a much smaller presence in California. Alaska currently has a 4.5% market share in LAX, a 10.1% market share in San Diego, and a 15.3% market share in San Jose. 

Alaska's plan to grow out of the Pacific Northwest and into a truly west coast airline runs through San Diego and San JoseFrom San Diego, Alaska serves a smattering of interior west destinations along with a variety of Latin American and Hawaiian destinations. In 2015, Alaska expanded its international offerings out of San Diego to include San Jose and Liberia, Costa RicaAlaska also serves Puerto Vallarta and San Jose del Cabo in Mexico from San Diego  

In 2010, Alaska Airlines deemed San Jose a focus city. From San Jose, Alaska serves the interior west, Hawaii, and the airline's hub cities: Seattle and PortlandBeginning on June 5th, Alaska will begin 3x daily service to San Diego and 3x daily service to Orange County, California. 

While Alaska has made expanding in California imperative, growth is greatly limited due to the overbearing presence of Southwest and the crowded nature of the California air travel market.  

A quick way for Alaska to increase its growth and market share in California was to acquire Virgin America. Virgin America aids Alaska greatly in California by increasing Alaska's market share in the all-important San Francisco and LA markets while providing Alaska with a trans-continental brand popular with customers.  

LAX is Alaska's primary gateway to Latin America with service to Guadalajara, Mexico; Liberia, Costa Rica; and Puerto Vallarta, Mexico; just to name a few. From LAX, Alaska also serves small California destinations such as Santa Rosa and Medford. One glaring omission from Alaska's route offerings from LAX is of the trans-con variety. Alaska's only trans-con destination from LAX is the D.C. region with service to both Washington National and Baltimore Washington. 

Virgin America, on the other hand, serves Boston, Chicago, New York JFK and Newark, Washington Dulles and National, and Orlando from LAX.  

In San Francisco, which is Virgin America's primary hubAlaska has a much smaller presence compared to at LAX. Like at LAX, Virgin serves many east coast destinations ranging from Boston to D.C.  

In this aspect, the route networks of Virgin America and Alaska line up nicely, with only one region, the D.C. area, receiving an excessive amount of service. 

Trans-continental routes are some of the most profitable in the United States. Recently, JetBlue and American Airlines have brought lie flat seats to the trans-con market as the U.S. carriers wrestle for control of the lucrative top end of the market.  

Virgin America is known for its plush white leather seats, fleetwide Wi-Fi and power outlets, and a modern ambience, all of which have allowed the airline to gain a loyal following in Silicon ValleyCompared to Alaska, Virgin America provides a much better trans-con passenger experience that can compete with JetBlue and American. Could Alaska conceivably use the Virgin America brand only for trans-continental routes? 

While there are major costs associated with using the Virgin brand and operating essentially two different airlines, the Virgin brand emanates modernity and freshness which has led to the airline's success in California.  Alaska is a regional brand while Virgin America resonates not just in California but in all of the U.S.   

There are still many unknowns in the merger of Alaska and Virgin America. Will the DOJ force Alaska to concede slots in New York, D.C, and/or Dallas? How will Alaska integrate the Virgin brand or will it get rid of it for good?  

However, one thing is certain: with the acquisition of Virgin America, Alaska has the most robust west coast route network out of all the other U.S. airlines with bases stretching all the way from Seattle to San Diego.


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