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Old 12-06-2016, 12:03 PM   #1  
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Default Alaska Air Wins U.S. Approval for Virgin

by David McLaughlin
and Mary Schlangenstein
December 6, 2016 — 1:24 PM EST December 6, 2016 — 2:55 PM EST
  • First industry merger since US Airways-American combination
  • Alaska Air agrees to reduce codeshares as concession
Alaska Air Group Inc. won U.S. antitrust approval for its acquisition of Virgin America Inc., a takeover that extends years of consolidation in the industry and expands Alaska Air’s access to the lucrative cross-country market.
Under an agreement with the Justice Department announced on Tuesday, Alaska Air must reduce the scope of a marketing accord that allows it to sell tickets for American Airlines flights on over 250 routes. The change will ensure the merged Alaska Air competes against American rather than partnering with it, regulators said.
The restrictions will reduce by about 50 percent the volume of Alaska Air passengers on American flights, according to the government.
“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,” Renata Hesse, the head of the department’s antitrust division, said in a written statement.
The settlement with the Justice Department, which requires court approval, likely clears the way for the completion of the deal “in the very near future,” Alaska Air said in a written statement. The combined airline will become the fifth largest in the U.S. based on passenger traffic, displacing JetBlue Airways Corp., which lost to Alaska Air in the bidding to link up with Virgin America.
Alaska Air shares rose 1.1 percent to $84.05 at 2:48 p.m. in New York, while Virgin shares rose 0.6 percent to $56.80.
No Asset Sales

Alaska Air won’t surrender any assets under the settlement with U.S. regulators. While the concessions covering the “codeshare” agreement with American represent a revenue loss of about $60 million a year, the airline believes it will recapture 70 percent of that through its own passengers for a final negative impact of about $15 million to $20 million, Alaska Air said. The codeshare concessions involve 45 markets, the company said.
“We couldn’t be more excited about receiving DOJ clearance,” Alaska Air Chief Executive Officer Brad Tilden said in a written statement. “With this combination now cleared for takeoff, 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.”
Alaska Air’s $2.6 billion cash agreement to buy Virgin America, announced in April, adds to the string of mergers that have shrunk the number of carriers in the U.S. airline industry since 2005, leaving the top four operators controlling 80 percent of the market.
The deal is the first substantial airline merger since the Justice Department sued to block US Airways Group’s takeover of American Airlines in 2013. That deal ultimately was completed after the carriers agreed to sell airport assets to low-fare competitors.
Shrinking Premium

Alaska Air is paying $57 a share for Virgin America. While the offer was a 47 percent premium to Virgin’s share price at the time, it just barely eclipses the closing price of the shares, $56.45, on Monday. After accounting for debt and the capitalization of aircraft leases, the transaction was valued at $4 billion.
The deal will boost Alaska Air’s revenue 27 percent to more than $7 billion and should produce $225 million of annual savings after incurring integration costs of as much as $350 million, Alaska Air said when the deal was announced. Alaska Air expects Virgin America to begin adding to earnings in the first full year, excluding those costs.
The Virgin America acquisition will expand Alaska Air’s route network out of Washington state, Oregon and Alaska by adding important business centers in Los Angeles and San Francisco as well as adding flights into John F. Kennedy International Airport in New York, Newark Liberty International Airport in New Jersey and Reagan National Airport near Washington, D.C. Alaska Air also picks up new routes out of New York’s LaGuardia Airport.
The deal also gives the combined airlines extra market power to combat larger rivals that have moved to compete more directly with them by adding routes and cutting prices.
Cross-country routes between New York and California are among the most lucrative in the domestic industry. With the merger, Alaska Air hopes to become the carrier of choice within California, where it faces stiff competition from Southwest Airlines Co. and United Continental Holdings Inc.
Virgin Brand

The company will retain the Alaska Air name, brand and Seattle headquarters. It will explore how the Virgin America brand, which grew out of U.K. billionaire Richard Branson’s business empire and has strong customer loyalty, might be used in the combined airline, Alaska Air has said.
The combined business will have hubs in San Francisco and Los Angeles, where Virgin adds east-west routes to Alaska Air’s north-south strength, as well as in Seattle, Anchorage and Portland, Oregon.
Alaska Air has been on a growth spurt recently on the East Coast, capitalizing on an April decision by the Federal Aviation Administration to open up Newark Liberty to more competition. The carrier has started or is soon to start new routes between Newark and San Diego; Portland, Oregon; and San Jose, California, and it will add a third daily flight there from Seattle in the spring. Alaska Air also plans to add a new route from San Diego to Baltimore in the spring.

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The airlines’ merger is still being challenged by consumers in a San Francisco federal court case set to go to trial before U.S. District Judge William Alsup on Dec. 12. In October, Alsup issued an order directing the airlines to give him and those suing at least seven calendar days’ notice of the deal’s closing date, adding that “any consummation will be subject to divestiture.” A final pretrial conference in that civil lawsuit is set for Wednesday.American Airlines expects to remove its airline code from about 20 of the more than 80 Alaska Air routes in the codeshare relationship. It estimates that Alaska Air will take its code off of 40 of 270 American routes, said Martha Thomas, a spokeswoman for American.
“Even with these changes, we are committed to continuing our longstanding and valued relationship with Alaska,” Thomas said. American declined to comment on the expected financial impact of the codeshare concessions.
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Old 12-06-2016, 12:28 PM   #2  
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time to pay up brad & ben
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Old 12-07-2016, 07:30 PM   #3  
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Last hurdle has been cleared. Lawsuit has been settled. Looks like this thing is really going to happen in the next day or 2.

https://www.msn.com/en-us/money/comp...eal/ar-AAlhABA
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Old 12-09-2016, 08:37 AM   #4  
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another interesting article

The US Department of Justice's approval of the Alaska Airlines (NYSE:ALK)/Virgin America (NASDAQ:VA) merger came with conditions that highlight the reason why the DOJ's actions not only were taken to protect consumers, but also because there are larger industry competitive issues involved which the DOJ recognized. The DOJ and consumer groups voiced significant concern that consolidation of the airline industry has allowed the four largest carriers (American (NASDAQ:AAL), Delta (NYSEAL), Southwest (NYSE:LUV) and United (NYSE:UAL)) to control 80% of the US air travel market. While the Alaska-Virgin America merger still leaves it as a fraction of the size of the big four, it will heavily concentrate service in the western US by making Alaska the largest carrier within the West Coast states, surpassing Southwest, and the second largest from the West Coast states to the rest of the US, just below Southwest.

Codesharing
The first settlement area in the DOJ's approval of the Alaska-Virgin America merger regarded codesharing between Alaska and American Airlines. Codesharing is an industry practice in which an airline sells seats on another airline using the marketing carrier's own two letter code (AA for American and AS for Alaska). ALK gains a significant amount of revenue from its codeshare relationships with the majority of its revenue coming from its relationships with American and Delta.

Codesharing is used extensively in the international marketplace for a carrier such as United to place its code on the flights operated by United's partner Lufthansa (OTCQXLAKY) to Cairo, a city that United does not serve with its own aircraft. There is very little large jet codesharing in the US domestic market. Alaska has codeshare relationships with many other airlines including Delta and a number of international airlines. Those codeshare relationships are almost entirely end on end, meaning one airline operates its own service to a specific point where another carrier completes the passenger's journey.
The DOJ was not concerned about end-on-end codesharing where ALK or AAL codeshare to cities beyond each others' networks (such as to West Palm Beach using American via Dallas/Ft. Worth or to Juneau using Alaska aircraft beyond Seattle). The DOJ's concern was in markets which AAL and either Alaska or Virgin both serve or could serve based on their networks. The DOJ noted:
"Alaska's internal planning documents demonstrate how the incentives created by the codeshare agreement would likely reduce competition on the routes where American and Virgin compete today. In analyzing the proposed merger, Alaska executives reported to the company's board of directors that certain Virgin operations 'would not have (the) support of the American partnership.' Accordingly, early during the consideration process, Alaska executives developed a plan that called for changes 'that we think would need to be made' to Virgin's service following the merger. The plan contemplated reducing or eliminating service on many of the routes where Virgin and American offer competing service today, including some of the most traveled routes in the country."
Several examples highlight the DOJ's concern. Although American is the largest carrier at Los Angeles International Airport, it for years did not operate its own service between LAX and Seattle and Portland, OR, two of ALK's highest revenue routes on its system. AAL served the LAX-SEA and LAX-PDX markets via the ALK codeshare where ALK offers more than 50% of the seats in both markets. AAL recently added its own flights in part because Delta has aggressively expanded its service on the West Coast becoming the second largest carrier in the Pacific Northwest. DAL offers about 20% of the seats in both the LAX-SEA and LAX-PDX markets. Virgin America offers service in the LAX-SEA market along with American. ALK would thus have a codeshare relationship with or control under the Virgin America name (ALK will likely retain the Virgin America name and service level for a period of time) with 75% of the seats in the LAX-SEA market.
In addition, American competes directly against Virgin America in most of the transcontinental markets the two serve. Virgin America's executives have previously stated that the transcon market is particularly challenging. Virgin America's service started in those markets but its business model serves those markets on a point-to-point basis - without hubs on either end - while all other competitors are not only larger but also have hubs on one or both ends of the transcon routes. With the potential that the merger could allow Alaska to put its code on flights operated by American which are currently also served by Virgin America, the DOT decided to restrict codesharing between AAL and ALK.
ALK's SEC presentation highlights the settlement:

Essentially, the DOJ is requiring that ALK cannot codeshare in any markets that are also served by AAL, generally including to other airports in the same city. The DOJ also is requiring that AAL and ALK can codeshare on flights beyond each others' hubs but cannot combine their strength including via codeshares between or to each others' hubs.
AAL, which ranks below the new Alaska, Southwest, United and DAL in the intra-west coast market, will have to offer its own services. Likewise, the new AAL and ALK cannot piggyback on each others' transcontinental routes. AAL is the largest transcontinental carrier from LAX while the new ALK would take that title in most other cities on the West Coast outside of San Francisco, where UAL is the largest carrier.
There are two important factors that make the inability of AAL and ALK to codeshare in key markets particularly significant. While Virgin America started with an industry-leading onboard product that brought a discounted reclining business class type product to a number of transcon markets, Virgin America's product now trails most other competitors in the industry that now offer a lie-flat business class product in many transcontinental markets. Alaska offers only a traditional domestic first class product and its planes do not offer an individual in-flight entertainment system as most other carriers offer on their long haul domestic aircraft.
Without being able to codeshare with AAL which operates industry standard amenities on its transcontinental aircraft, ALK will either have to develop its own premium cabin product and operate it on a dedicated fleet of transcontinental aircraft or continue to offer a dated premium cabin product which is part of the reason why Virgin America has seen eroding market share and average fares in the transcon marketplace.
In addition to product, ultra low cost carriers are playing a larger role in the western US. Spirit Airlines (NASDAQ:SAVE) recently entered the Seattle market including LAX-SEA and is reporting average fares that are as low as one-third of what other carriers including ALK are reporting. Average fares in the LAX-SEA market have fallen by more than 25% over the past three years especially since the bare bones ultra-low cost product is a viable alternative for passengers on a two-hour flight. Being unable to codeshare means that ALK will have to compete not only with AAL and other legacy/low cost carriers but also with ultra low cost carriers that are pressuring fares in the western US.
Gates and Slots
The second part of the DOJ's requirement for approval of the ALK merger involved seeking DOJ approval if ALK disposes of airport assets or slots at certain airports. As part of the American Airlines-USAirways merger several years ago, the DOJ required that American and USAirways had to divest assets including gates at several airports as well as slots at Washington National and New York LaGuardia airports, The DOJ said that the big three legacy carriers could not bid on any of the assets and Virgin America successfully gained slots at both of those airports as well as at Dallas Love Field. The DOJ said that American could not operate flights from Dallas Love Field in addition to its presence at its hub at Dallas/ Ft. Worth (DFW). Virgin America moved its flights from DFW to Love Field and added service from Dallas to Washington D.C. and New York.
Given the codesharing restrictions, ALK cannot place the American code on any of the Virgin America flights at Dallas Love Field. It will have to either compete directly against LUV at Dallas Love Field without the benefit of AAL's presence in N. Texas or forfeit the gates. While ALK has lower unit costs than LUV, Virgin America's success at Dallas Love Field has been limited. Virgin America is operating an average of six or seven flights/day from each of the two gates. At most airports that might be considered acceptable but because of airport size restrictions gate utilization at Love Field's other gates exceeds 10 flights/day. Virgin America's Dallas load factor over the past year is six points below LUV's and ten points below DAL, the only other two airlines that offer commercial service from Love Field. Because the DOJ ordered that neither DAL nor LUV can acquire the two Love Field gates at the time of the American merger, the airport assets will likely remain underutilized and with poor financial results for ALK, the company will have to divest of the assets or it will have to aggressively compete with LUV and in the process add new pressure on fares from Dallas which saw some of the largest average fare declines as LUV added long-haul domestic flights.
Increased Competition
Finally, the Alaska-Virgin America merger will certainly result in an increased competitive environment. JetBlue (NASDAQ:JBLU) chose not to continue its bid for Virgin America as the price escalated. JBLU wanted to grow its presence in the western US and the transcon markets where it now has a very credible premium cabin product. LUV will very likely increase its presence in the West Coast markets. DAL has been building hubs at both Los Angeles and Seattle and will likely announce another round of expansion at both airports, made possible in part because of Delta's terminal moves at LAX as I discuss in my SA article. United has long been the largest of the big three global carriers in the West and will likely increase flights including to/from San Francisco.
Alaska's Financials Will Be Pressured
ALK has risen above much of the rest of the industry because of its strong profitability which will certainly be put under pressure. A pricey merger and increased costs as a result of the merger as well as revenue and competitive pressures that are growing in the Western US may make it harder for ALK to continue to post industry-leading profitability.

Source: Market Realist
Conclusion
While ALK quickly released an SEC filing minimizing the financial impact of the DOJ's requirements to grant merger approval, it will clearly face a bevy of strategic and financial challenges. Merger integration in the airline industry is rarely smooth or without financial challenge. The DOJ's requirements for approving the merger as well as the competitive environment and the product development challenges on top of a pricey merger will leave ALK with a full plate for the foreseeable future.
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Old 12-09-2016, 10:34 AM   #5  
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This is from the article:


Alaska's internal planning documents demonstrate how the incentives created by the codeshare agreement would likely reduce competition on the routes where American and Virgin compete today. In analyzing the proposed merger, Alaska executives reported to the company's board of directors that certain Virgin operations 'would not have (the) support of the American partnership.' Accordingly, early during the consideration process, Alaska executives developed a plan that called for changes 'that we think would need to be made' to Virgin's service following the merger. The plan contemplated reducing or eliminating service on many of the routes where Virgin and American offer competing service today, including some of the most traveled routes in the country."

Several examples highlight the DOJ's concern.


Amazing...this should concern every single one of us. SCOPE!
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Old 12-09-2016, 10:58 AM   #6  
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I really hope our negotiatiotors open that entire scope section of the TPA. Clearly we need more than just RJ weight, seat, and percentage.

WE NEED RESTRICTIONS ON CODESHARE TOO. Management said they make more money through codeshare then flying their own metal. Message received

Strong scope and industry leading pay/retirement or no vote!
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Old 12-09-2016, 08:03 PM   #7  
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Quote:
Originally Posted by plt32173 View Post
I really hope our negotiatiotors open that entire scope section of the TPA. Clearly we need more than just RJ weight, seat, and percentage.

WE NEED RESTRICTIONS ON CODESHARE TOO. Management said they make more money through codeshare then flying their own metal. Message received

Strong scope and industry leading pay/retirement or no vote!
When or where did management say "they make more money through codeshare then[sic] flying their own metal?"

Do you have a link or a source for that statement?
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Old 12-09-2016, 10:21 PM   #8  
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Quote:
Originally Posted by cesnacaptn View Post
When or where did management say "they make more money through codeshare then[sic] flying their own metal?"

Do you have a link or a source for that statement?
Yeah dude. In like half of the articles that have come out in the last few days.

"In a filing with the Securities and Exchange Commission, Alaska said the settlement means it will lose codeshare revenue of $15 million to $20 million in 45 markets. The 45 markets represent about $60 million of annual revenue, but the carrier believes it can recapture much of the lost revenue by operating its own flights on the affected routes."

This isn't the one where I saw the exact figures. Just 40 seconds on google. You can check out the justice department website for those if you'd like to see where I came up with that quote. There's about 60 pertinent pages regarding our future on there.

Here's my google search lol
https://www.thestreet.com/story/13917835/1/both-sides-claim-victory-after-doj-approves-alaska-virgin-america-deal.html


Who's side are you on??? We should be talking about picketing after that last email from the union. Have you read that yet???
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Old 12-10-2016, 01:04 AM   #9  
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Too bad the DOJ listened to the siren song....I was hopeful that
they would place enough conditions and restrictions on the deal
that The Anglers would pick up their toys and go home...looks
like this ship of fools is going to sail anyway.....
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Old 12-12-2016, 08:59 AM   #10  
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Originally Posted by Klsytakesit View Post
Too bad the DOJ ...looks
like this ship of fools is going to sail anyway.....

Sweet! Party on the Lido deck!
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