Photographer: David Ryder/Bloomberg

Alaska Air Agrees to Extend U.S. Review of Virgin Takeover

Updated on
  • Extension comes after Justice Department said to raise concern
  • Airline says deal is still on track for early fourth quarter

Alaska Air Group Inc. and Virgin America Inc. have agreed to give U.S. antitrust officials more time to review their $2.6 billion deal after the government raised concerns that the combination may undermine competition in some markets.

Alaska didn’t specify how much more time it’s given to the Justice Department to complete the review. The airlines had originally agreed not to close until Sept. 30, effectively setting a deadline for the Justice Department to give a nod to the deal or seek to block it.

The antitrust division now has several more weeks to complete its review, according to a person familiar with the matter. Alaska said the review is progressing "as expected” and the companies are on track to close the deal early in the fourth quarter, as they have said all along.

"We continue to feel confident that the DOJ will agree that our combination will allow us to better compete against the Big Four airlines and provide consumers on the West Coast more choices and lower fares,” the carrier said.

Alaska Air and Virgin America aren’t discussing a settlement with the Justice Department that could resolve the government’s concerns and clear the way for the merger, another person familiar with the matter said. Still, the extension of the review gives the airlines an opportunity to propose asset sales that could mollify the antitrust division.

Front-Office Meeting

Virgin America shares rose 1.6 percent to $54.05 in New York. Alaska Air shares declined less than 1 percent to $65.77. Mark Abueg, a Justice Department spokesman, declined to comment.

Representatives of Alaska Air and Virgin America met with antitrust division chief Renata Hesse and other officials last week to address the government’s concerns that the transaction may pose a risk to competition, a person familiar with the situation previously told Bloomberg News. Such top-level meetings have often signaled that the antitrust division has worries about a merger that could lead to a lawsuit to block it.

Raymond James analyst Savanthi Syth predicted that the deal will close, possibly with an agreement to sell gates or take-off-and-landing rights, in a note Thursday. Out of Alaska’s approximately 220 routes, Virgin America only has direct overlap on six, Syth said.

"While any airline consolidation would likely be scrutinized heavily following the legacy consolidation phase, we believe that due to limited overlap and relatively small market share that does not significantly alter control of the industry, the merger should still close accordingly," Syth said.

Complementary Takeover

Alaska Air argues the Virgin America takeover is largely complementary and would expand its route network out of Washington, Oregon and Alaska by adding important business centers of Los Angeles and San Francisco as well as rights to operate at New York’s LaGuardia and Kennedy, New Jersey’s Newark Liberty and Washington’s Reagan National airports.

Cross-country routes between New York and California are among the most lucrative in the domestic industry. With the merger, Alaska hopes to become the carrier of choice in California, where it faces stiff competition from Southwest Airlines Co. and United Continental Holdings Inc.

Consolidation Wave

Alaska’s agreement to buy Virgin America, announced in April, would extend a round of consolidation that has shrunk the number of carriers in the U.S. airline industry since 2005, leaving the top four operators controlling 80 percent of the market. This is the first substantial airline merger since the Justice Department sued to block US Airways Group’s takeover of American Airlines in 2013, a case that ultimately settled after the carriers agreed to sell airport assets to low-fare competitors. The government’s decision on this tie-up will be closely watched for its view on the current state of competition in the airline industry.

The Justice Department sent a strong signal with the American-US Airways settlement that it wants to infuse competition from the low-fare carriers into the industry. Under that settlement, which called for several divestitures, Virgin America won the right to sublease two gates given up by American at Dallas’ Love Field, beating out larger rival Southwest at its home airport.

Love Field Gates

Those gates haven’t been strong performers for Virgin America and the Justice Department may be concerned they would be given up to another airline after the merger. The antitrust division likely would want to ensure that the Virgin gates continue to be operated by a low-cost provider after the merger.

Southwest and Virgin America also bought flight slots divested by American and US Airways at Washington’s Reagan National and New York’s LaGuardia airports, while JetBlue Airways Corp. won flying rights at Reagan. A slot allows for one takeoff or landing. The flying rights are valued because flights at Reagan and LaGuardia are limited by congestion-control rules.

Bill Baer, who preceded Hesse as chief of the antitrust division and who still oversees it as the Justice Department’s No. 3 official, is keeping a close eye on concentration in the airline industry. He started an investigation last year into possible improper collusion between carriers over seating capacity, a crucial factor in determining fares. He also sued United, seeking to block its acquisition of takeoff-and-landing rights from Delta Air Lines Inc. at Newark Airport, saying the deal threatened to raise fares. United dropped its plan to buy the slots.

— With assistance by Brendan Case

(Updates with analyst comment in ninth paragraph.)
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