"Alaska Airlines is paying $2.6 billion to buy 100% of the equity of the airline, after a high-altitude bidding war with JetBlue, a rival. It is also taking on the airline’s debt and leases, bringing the total pricetag to $4 billion. The new carrier will become America’s fifth-largest.
Alaska is betting that Virgin America, with bases in Los Angeles and San Francisco, will complement its strongholds in Seattle, Portland and Anchorage, solidifying its presence on the west coast. It will also gain Virgin America’s east coast slots, in New York and Washington, DC, where Alaska has struggled to gain access. Still, the price is steep, says Loizos Heracleous of Warwick Business School in Britain. Alaska will pay $57 for each of Virgin’s shares. They have been trading between $26 and $38 over the past year. Brad Tilden, Alaska’s boss, says that the tie-up could result in $225m of annual cost savings and revenue benefits. Acquisitions are often accompanied by bold claims about synergies, says Mr Heracleous. So far the market seems sceptical: Alaska's shares tumbled as investors got wind of the deal."
http://www.economist.com/news/business-and-finance/21696326-new-carrier-will-become-americas-fifth-largest-alaska-airlines-purchase-virgin
In the paragraph that follows these quoted paragraphs, an important fact is brought to light. America, Delta, United and Southwest, all obviously, airlines, now have control over 80% of this market. So while it seems that in the short run, Alaska Airlines made a very risky, if not, poor choice, in the long run this decision may have enabled them to stay in competition, or actually to move into the competitive arena for the first time. However, JetBlue may have intentionally lost the betting war in order to acquire Hawaiian Airlines, who likely has less debt than does Virgin, which may be a better decision in the long, for JetBlue than Alaska.
ReplyDeleteThis article further calls forth skepticism on the airline industry. It seems like the constant control and inflexible use of gates and ports among only certain airlines causes this to be an oligopoly. Alaskan airlines needed to purchase Virgin America just to get access to certain airports.
ReplyDeleteThe sole purpose of the airline business, like any other business, is to make a profit preferably increasing profit. Saving passengers money is not part of its mandate. I agree with what Elise has to say as the airline industry is works like an oligoply where you have to work really hard in order to get access to different routes
ReplyDeleteI completely agree with Aadil in the fact that any business needs to expand and make more profit any way possible. Furthermore, I also support Mike's claim in which Alaska's pricy move will pay off in the long run. As there are obviously the airline powerhouses like Delta, United and Southwest, Alaska Airlines believes they can compete with them. It will be very interesting to see how Alaska Airlines evolves from this huge expansion in the upcoming years.
ReplyDeleteSounds like a necessary measure to compete with the existing market of other airlines. It appears to be a tough market, and profits don't just come by sitting and waiting for them. Aggressive moves to expand the business will be vital to sustain in the market and to have a shot to compete with larger competitors in the long run.
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