The proposed takeover by Alaska Airlines of its West Coast rival Virgin America has cleared its biggest hurdle. The U.S. Justice Department on Tuesday approved the $2.6 billion merger with conditions.
Justice Department antitrust lawyers demanded cutbacks to an important ticket-selling partnership in order to sign off on Alaska Air's acquisition of San Francisco-based Virgin America. The enlarged Alaska Airlines will have to stop cooperating with American Airlines where they have overlapping routes.
“Although this merger offers hope that a strengthened Alaska can be an even stronger competitor than before, because of Alaska’s extensive codeshare agreement with the world’s largest airline, the merger threatened to blunt important competition and reduce choices for consumers," said Acting Assistant Attorney General Renata Hesse of the Justice Department’s Antitrust Division. "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 government's terms do not appear onerous judging from the upbeat reaction from Alaska Air Group CEO Brad Tilden. He noted in a news release that his airline was not required to divest any assets as a condition of USDOJ approval.
"We couldn't be more excited about receiving DOJ clearance for our merger with Virgin America," Tilden said. "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."
The combination of Alaska Air and Virgin America will create the nation's fifth largest airline, headquartered in Seattle.
The boards of both companies approved the all-cash tie-up back during the summer. But management's plans to consummate the deal this year were delayed by more extensive review and negotiation with the Justice Department than initially expected. A consumer lawsuit brought by a San Francisco law firm on behalf of 42 frequent fliers must still be resolved for the takeover to become final.
That lawsuit in federal district court alleges the combination of Alaska Air and Virgin America will reduce competition and hurt consumers.
"Lawsuits of this kind are not uncommon with mergers," Alaska Air Group said in a statement Tuesday. "The company believes the plaintiffs' claims are without merit and plans to defend its acquisition of Virgin America accordingly."
The Alioto Law Firm unsuccessfully challenged a number of other airline mega-mergers in the recent past including Southwest Airlines with AirTran as well as American Airlines and US Airways.
Alaska Airlines and Virgin America will continue to operate as separate airlines and brands for an indefinite time period after the deal closes. It is business as usual for customers in the meantime. Alaska Air executives have acknowledged on conference calls with Wall Street analysts that integration of the two brands and their loyal followings will be complex and challenging.
Virgin America flies an all-Airbus fleet while Alaska Airlines has long been loyal to Boeing jets made in its home town. The on-board experience for passengers on the two carriers is also different. Virgin aims for a hip, sassy ambience on its jets with mood lighting, boarding music, video at every seat and touch screen drink ordering. Alaska offers a more traditional experience, but its passengers give it good ratings for reliability, customer service and use of technology.
Alaska Air executives have repeatedly hedged about which elements of the on-board products will be carried over to the combined carrier. Management's stated intention is to eventually operate all flights under the Alaska Airlines brand.