Virgin tells Alaska “I do”; What now for rejected suitor JetBlue?

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After what Alaska Air Group CEO Brad Tilden described as a “hard fought competition”, his company walked away with the $4 billion prize – a rare opportunity to grow via an acquisition-merger with Virgin America. So what now for the JetBlue Airways, the other suitor in this airline love triangle?

Tilden made clear in an investor/media conference call Monday that Alaska been looking for opportunities to grow for a couple of years and made an initial approach to Virgin America in late fall last year.

Reports began circulating last week that Virgin was negotiating with two potential buyers, fellow west coast independent Alaska and east coast independent JetBlue. Though none of the companies confirmed the talks, Tilden’s remarks today appear to verify that the bidding battle for Virgin was indeed between Alaska and JetBlue and both were intent on winning. (Tilden said it was still a “great deal” in the end and Alaska paid a fair price.)

So where does this leave the loser? One of the interesting aspects of this merger deal that makes it almost unique in recent US airline industry consolidation is that all three players are in strong positions financially with healthy balance sheets and earnings. So whichever way the cards fell, the airline without a partner was not left stranded without a penny; far from it. New York-based JetBlue’s 2015 operating margin improved 10.1 points year-over-year to 19%; revenue rose 10.3% to $6.42 billion while expenses lowered 1.9% to $5.2 billion, producing operating income of $1.23 billion, well more than double that of the previous year.

JetBlue’s traffic growth is also healthy, seeing a 10.3%  increase to 41.71 billion RPKs last year with average load factor of 84.7%, up by 0.7 point. And the airline is embarked on a cabin refresh and scheduled to take delivery of 10 more Airbus A321s this year, so its reputation for comfortable aircraft and good service seems set to further improve.

Most important, for a small, independent US carrier, JetBlue has a good network, especially in the northeast and southeast. Its almost hub-like operations out of New York JFK, Boston and Orlando allow it to attract both the business traveler looking for premium comfort at competitive prices (JetBlue’s Mint lie-flat seat service has proven very popular) and the leisure traveler who doesn’t want to be squeezed on price or comfort. This has been a winning formula for JetBlue.

But that does not mean it will be easy to deliver this formula if the US airline industry environment shifts once more. Assuming Alaska and Virgin America are granted regulatory approval for their merger, then JetBlue stands alone not just against the four merged mega carriers of American, Delta, Southwest and United, but also against a fifth competitor that is larger and appeals to the same type of customers that JetBlue attracts.

Alaska executives today referenced what they called the “under-served, low price, premium service” market sector in the US as one in which a combined Alaska and Virgin can grow. The question is can JetBlue also continue to grow in that same market sector when the three become two?

Most important, a combined Alaska-Virgin makes it harder for JetBlue to compete on the west coast. And, assuming this deal is completed, it’s difficult to see where else JetBlue can go to achieve a similar level of quick growth. Yes, there are still the ultra-low costs out there like Spirit, but none that has the network and business model synergies that Virgin potentially offered.

That likely explains why JetBlue put up a hard fight for Virgin. And it might indicate the potential for JetBlue to be a strong opponent of the deal – possibly seeking concessions such as slots at San Francisco or Los Angeles LAX.

Ultimately, JetBlue may have had a tougher time getting a deal through the regulatory review because of the greater overlap of city pairs. But it will have an even tougher time finding a new bride as attractive as the Virgin that is walking up the aisle with another suitor.

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