Airline Weekly - April 4, 2016
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Airline Weekly - April 4, 2016

The Eskimo and the Virgin: Why mess with success? Alaska Airlines thinks buying Virgin America will keep it on top

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Cover Story

The Eskimo and the Virgin: Why mess with success? Alaska Airlines thinks buying Virgin America will keep it on top

Aside from its much smaller rival Allegiant, Alaska Airlines was the most profitable airline in the world last year, measured by operating profit margin. That’s right—in the entire world. So why, rather than just resting on its bountiful laurels, is Alaska on the verge of executing the biggest strategic move of its life?

By now you’ve heard: Alaska seems poised to buy Virgin America, its popular but perennially underperforming West Coast rival. A deal, if confirmed and then approved by regulators, would mean more consolidation in an already consolidated industry—a fifth merger after Delta-Northwest, United-Continental, Southwest-AirTran and American-US Airways (or sixth, counting the merger that arguably started it all: America West-US Airways).

Why does Alaska want Virgin? All else being equal, after all, it might be perfectly happy keeping things as they are. Alaska is happily harvesting outsized profits in Seattle, one of the country’s strongest economies. It’s growing seat-mile capacity just as rapidly—about 8%—in Portland, Ore., its second busiest hub city and one with a similarly strong economy. Growth in the state of Alaska is slower given the oil bust, but inbound summer tourism there is up. Hawaii remains a strong market. And the airline is making good inroads in California cities like Los Angeles, where it benefits from a deepening partnership with American.

Alaska, moreover, continues to exploit a seemingly limitless list of new route opportunities, in stark contrast to Virgin America’s recurrent inability to find new markets that work. Alaska has opened new transcontinental routes like Seattle to New York JFK, Nashville, Tenn., and Charleston, S.C. It’s opened new Portland routes to Atlanta, Minneapolis, Austin, Omaha, Kansas City and St. Louis. It’s opened new international beach routes like Los Angeles to Liberia, Costa Rica. And it’s introduced E175s operated by SkyWest, many deployed from Portland but others used to open new Seattle routes like Oklahoma City and Milwaukee. Overall, it grew ASM capacity 11% last year, supplementing this CASM-depressing expansion with RASM-enhancing developments like an updated credit card deal with Bank of America, a surge in Mileage Plan members, partnerships with more foreign carriers flying to Seattle, a brand refresh, a new extra-legroom product, plans to buy more large regional jets and (as it announced just last week) the creation of a new subsidiary to handle some of its ground handling while competing to handle ground handling for some of Alaska’s competitors.

All the while, Alaska retains a formidable cost advantage versus the Big Three. It has emerged from a Seattle capacity war with... (441 of 1,764 words)

Also Inside this Issue:

Were China’s Big Three airlines—Air China, China Eastern and China Southern—happy with their performance in 2015?

In many respects, yes, with steep declines in fuel outlays driving solid profitability—much better profitability, in fact, than they enjoyed in 2014. But the fourth quarter was less rosy, for China Eastern and China Southern, at least. And all three face economic, forex, competitive and labor cost challenges as they roll into the second quarter of 2016. There’s also uncertainty about the sustainability of their voracious overseas growth.

Foreign airlines are naturally expanding in China too, responding to what’s so far been strong outbound overseas demand. American was the latest to announce a new route, responding to Delta’s new Los Angeles-Beijing route with an application to do likewise.

At home, Delta is busy negotiating a new pilot deal, now under the auspices of a federal mediator. And in London, its partner Virgin Atlantic is adding more U.S. service while partnering with Flybe for traffic feed.

Virgin Atlantic, however, was hardly alone among Virgins in attracting the attention of industry watchers. Virgin America, as discussed in this week’s cover story, could soon be absorbed by Alaska. And Virgin Australia, owned by several other airlines, could soon lose Air New Zealand as a shareholder.

Shareholders in Gol, including Delta, can’t be pleased with the LCC’s monstrous losses, mostly the result of Brazil’s economic and currency meltdowns. Cash flow problems are becoming so severe, in fact, that Gol is now fighting to avoid bankruptcy.

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