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Alaska Air buys Virgin America, and Gets a Winner

4/4/16 | POSTED BY Brian Clark |

Alaska bought Virgin today, and for this ex-VX exec (I left forever ago in 2008), it is a day filled with many emotions.  I’m sorry to see the Virgin brand go (and it *will* go, make no mistake -- Alaska won’t keep it and the 0.7% licensing fee it would owe for the Virgin brand), but I know it was the right thing to do for Virgin America.  I know my former teammates won’t want to read that, but in the long haul they likely would have encountered much tougher times.  Here’s why.

Virgin simply *had* to take this deal

Virgin’s large investors (congrats Cyrus Capital!) just escaped with a massive haul.  $2.6B, given Virgin’s current position and future prospects, is something that you don’t walk away from.  Think about it.  Virgin owns virtually nothing tangible.  They own only a handful of their 60-or so jets.  They have some gate and slot assets (gates at SFO, LAX and Love Field, and a few slots at JFK /LGA /EWR /DCA).   But they are still only 1% the size of a combined United /Delta /American /Southwest.  Daunting.

The nail in the argument is that they hold no fortress position at any airport (nothing close) which is truly how airlines get their value and defend against incursion.   With large, powerful (and cash-rich) competition looming, it foreshadows a very difficult and risky future (keep in mind the largest airlines now measure *profits* the way Virgin measures *total revenue*).  In the game of musical airlines, you do *not* want to be the small airline left without a dance partner.

Organic growth would have been a dead end

Here’s another way to think about it: it would have taken a decade to add another 120 aircraft (at 1x/month) if you could even afford that, but by then (2026) you wouldn’t be even as large as *today's* Alaska Air fleet of 200-or so total aircraft.  Heck, Southwest and United each have over 700 mainline jets, Delta is over 800, and American is nearly 950!  No loyalty program or route network, no matter how well designed (tongue-in-cheek), can effectively compete over time with that size.   Alaska knows all this, which is why they are buying Virgin!

Virgin does own an iconic brand, nurtured at Virgin America by their incredible teammates (I was not an “employee”, I was a “teammate”) and an ultra-hip product.  But sadly great people and cool lighting aren’t enough to ensure a competitive future.  Especially if oil shoots up again.  Or highly-profitable competition decides to acquire other airlines to compete against you.  Neither of those are controllable variables, and if I were a board member at Virgin (they never asked), that would have kept me up at night.  Better to sell now while the iron (and profits) are hot.

This might turn out somewhat favorably for Virgin’s “Guests”

Virgin never had “customers”.  We always greeted our “Guests” onboard.  Best thing Fred Reid ever taught me – how to value customers.  I am sure most Virgin America guests view this acquisition with fear and trepidation – and sadly they *can* expect to lose most of what they loved (great people, cool onboard experience, an aspirational brand).  But now those Elevate points might be a little easier to earn (with more places to fly) and a little easier to burn (more cool destinations to spend your points).  Tradeoffs, tradeoffs.

My take?

Overall, this is a financial reach for Alaska at a very high price, but certainly a defensible and worthy move for them as they aim for size and defensibility on the west coast.  For Virgin investors, 100% the right move no matter how nostalgic you might be.  And for those of us who conceived, designed, and launched Virgin – the memories are to be treasured and experiences are to be leveraged.   And never forgotten.