Will The Alaska Air-Virgin America Deal Get Delayed?
Alaska Air faced yet another hurdle in its acquisition of Virgin America, in a deal worth $2.6 billion. The deal has been under the lens of the Department of Justice for a while now, to assess for any anti-trust issues. Earlier in May, the two carriers had received a “second request” for more information. Although the request was termed customary, it delayed the closing of the deal by at least 30 days. Since then, another extension has been asked for by the DoJ, in order to complete the review. This, in turn, has made investors wary, causing Alaska’s stock to dip.
Fall in Alaska’s Stock Price- An Over-reaction
However, according to our analysis, the deal should pass the anti-competition review quite smoothly, as its share of the U.S. market, even after the combination, would remain really small as compared to the legacy carriers, who together dominate over 60% of the market.
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On a related note, Virgin America’s flight attendants, recently, rejected the salary contract negotiated by its union, creating confusion on the way forward for the two airlines. The contract would have provided an immediate 7.5% pay hike, in addition to a signing bonus. Further, Virgin’s employees could have expected pay hikes after the completion of the merger. The affect of the rejection of the contract is two-fold. On one hand, Virgin’s employees, who are paid a considerably lower salary, will see no instant improvement in their pay, missing out on raises until integration completes. Apart from that, 8% of the work-force at Virgin is expected to be laid-off. On the other hand, this dismissal will deter the two airlines from achieving operational efficiency at the get-go. This comes as a blow to Alaska’s management, which hoped to quickly integrate the two airlines, their employees, and reservation systems, in order to realize the operational synergies.
The market’s reaction to the two snippets of news can be read as mostly an over-reaction. Trefis believes that the deal between Alaska Air and Virgin America will be successfully completed before the end of the year, without any litigation issues. Consequently, the stock should bounce back to levels seen earlier in the year.
Have more questions about Alaska Air (NYSE:ALK)? See the following links:
- Why Are The Air Fares Offered By The U.S. Airlines Falling?
- What Is The Role Of Passenger Airlines In The Air Cargo Industry?
- How Did Alaska Air Perform Operationally In August?
- Why Have We Revised Alaska Air’s Price Estimate To $69 Per Share?
- Alaska Air Reports Another Strong Quarter Backed By Rapid Capacity Growth And Lower Fuel Costs
- Alaska Air Q2’16 Earnings Preview: Capacity Growth, Fiscal Discipline To Support Earnings
- How Will The Virgin America Deal Impact Alaska Air’s Share Repurchase Program?
- Will Alaska Air-Virgin America Face Antitrust Issues?
- How Will The Virgin America Merger Impact Alaska Air’s Cost Of Capital?
- How Will Alaska Air’s Market Share Change Post The Virgin America Deal?
- Why Is Alaska Air Acquiring Virgin America?
- How Will Alaska Air Benefit From The Virgin America Deal Operationally?
- How Will The Expected Return On The Alaska Air-Virgin America Merger Compare With The Previous Deals In The Sector?
- How Will The Virgin America Deal Alter Alaska Air’s Capital Structure?
- Has Alaska Air Paid A Fair Price For Acquiring Virgin America?
- Alaska Air’s Earnings Rise On The Back Of Rapid Capacity Growth And Lower Fuel Costs
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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