Will Alaska Air-Virgin America Face Antitrust Issues?

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Alaska Air (NYSE:ALK) and Virgin America, who signed a merger agreement last month for a deal valued at $2.6 billion, have received a request to furnish more information about the proposed transaction from the US Department of Justice (DOJ). The request is the “second request,” which is believed to be a part of DOJ’s standard review process and is likely to extend the period for completing the deal by 30 days. Hence, the two carriers continue be confident about completing the deal and are working towards obtaining the regulatory approvals at the latest by 1 January 2017. In this article, we discuss the reasons why we anticipate that the Alaska Air-Virgin America deal will not face any significant antitrust issues.

Rather than curbing competition, like some of the previous mergers in the industry, the Alaska Air-Virgin America deal is likely to promote competition in the domestic market, which would be beneficial for passengers. This can be substantiated by the fact that the US Airline industry is moderately concentrated and dominated by the legacy carriers, who hold more than 70% of the market share. Alaska Air and Virgin America, on the other hand, hold a relatively smaller share of 4.7% and 1.9% respectively. Hence, a stronger Alaska Air post the merger, will provide passengers a new alternative to the existing network carriers, which will be able to provide quality services at competitive fares.

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Below, we use a commonly used industry metric called the Herfindahl-Hirschman Index (HHI) to calculate the level of concentration in the US Airline industry, and the possibility of the Alaska Air-Virgin America deal facing regulatory hurdles. The HHI is often used by regulators to evaluate the effects of a merger.

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Thus, we believe that since the US Airline industry is moderately concentrated, the Alaska Air-Virgin America deal will not face any significant antitrust concerns.

Have more questions about Alaska Air (NYSE:ALK)? See the following links:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Alaska Air Group

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