Can a larger Alaska Airlines challenge the Big 4?

Having secured approval from antitrust regulators at the Department of Justice (DOJ) last week, Alaska Airlines said it plans to close on its approximately $4 billion merger with Virgin America in the “very near future.”

What remains to be seen is how the merger will affect the competitive landscape of the U.S. domestic airline industry.

“I guess it depends on how aggressively Alaska moves to flush out a nationwide network, whether they do it organically or through other codeshares,” said airline industry analyst Bob Mann of R.W. Mann & Co.

The merger, he said, gives Alaska new assets, including Virgin’s transcontinental network and its landing rights at New York LaGuardia and Washington Reagan National airports. Those assets could help it compete more robustly with Southwest, Delta, United and American, which together control more than 80% of domestic traffic.

The DOJ approval came on Dec. 6, following months of delay, and regulators made it contingent upon Alaska both reducing existing codeshare flights with American Airlines and agreeing not to enter into codeshares with American on certain other routes.

“Although Virgin America has been making profits in recent years as the industry has benefited from low fuel prices and a relatively strong economy, its long-term prospects were dubious, said Seth Kaplan of Airline Weekly.”

The DOJ said that provision would reduce by approximately 50% the number of Alaska passengers flying on American. However, Alaska downplayed the impact of the stipulations on its American codeshare network.

“Alaska did agree to implement limited changes to its codeshare agreement with American Airlines,” the carrier said in its press release announcing the merger. Alaska and American partner on approximately 330 routes.

In a Securities and Exchange Commission filing last week, Alaska said it would lose codeshare revenue in 45 markets as a result of the provision. The DOJ targeted codesharing between Alaska and American to bolster competition. The codeshares, the DOJ said, discourage Alaska from competing aggressively with American on routes both carriers serve and encourage it to forego launching new service in competition with American.

In the DOJ’s Competitive Impact Statement, filed with the U.S. District Court in Washington, attorney Katherine Celeste wrote that Virgin America competes directly with American on 20 routes, or approximately two-thirds of its network. Virgin, she said, “has aggressively competed with American on many of these overlap routes in ways that have forced American to respond with lower fares and better service.”

As a result, the DOJ prohibited Alaska from codesharing with American on routes that Virgin America and American both fly. Regulators are also requiring Alaska to end all codeshares on routes that Alaska and American both fly.

In addition, the companies won’t be allowed to begin codeshares on routes emanating from one of their respective hubs. Allowing such codeshares, the DOJ said, would discourage future competition.

In one final measure, the DOJ is forbidding Alaska from giving up the two Virgin America gates at Dallas Love Field as well as Virgin’s landing rights at Reagan National and LaGuardia, unless Alaska receives prior approval.

Virgin was awarded access privileges at those capacity-constrained airports as a stipulation of the DOJ’s 2013 approval of the American-U.S. Airways merger.

The codeshare restrictions put in place by the DOJ don’t apply to Alaska partnerships other than the one with American, nor to any potential new partnerships Alaska might enter into.

In the past two years, Alaska has cut back its second-largest codeshare partnership, with Delta, by two-thirds, in part as Delta has upped its efforts to compete with Alaska in its Seattle hub. Mann noted that Alaska still has the option of rebuilding that Delta partnership or of starting a new codeshare alliance, perhaps with JetBlue.

Still, he said that if Alaska wants to build itself into a more substantial nationwide competitor to the Big Four domestic airlines, its new assets in New York, Washington and Dallas as well as the strong Virgin transatlantic network that it has acquired provide an opportunity. “It gives them the freedom to do a lot of creative things,” he said.

Seth Kaplan, managing editor of the newsletter Airline Weekly, said that in the long run, the merger might well have saved the Virgin America route network from disappearing altogether. The carrier, he said, has been the weakest financial performer among the remaining mainline U.S. airlines, and though Virgin America has been making profits in recent years as the industry has benefited from low fuel prices and a relatively strong economy, its long-term prospects were dubious.

“You could argue that if things were to turn down, Virgin America would not be viable, and it is better for consumers, even though on a few routes they would have one less choice today, to have a viable airline,” Kaplan said.

The Alaska-Virgin America merger will combine Alaska, the sixth-largest U.S. carrier, with Virgin, the ninth-largest, creating a combined airline that is the fifth-largest in the country.

On Dec. 7, one day after winning approval for the acquisition, Alaska settled a federal class action filed in September by consumers who said they would be harmed by the merger.

Sourse: travelweekly.com