How will the Alaska Airlines and Virgin America merger affect your air travel program?

Posted in Blog

By Olivier Benoit, Practice Area Leader

On April 4, 2016, Alaska Airlines and Virgin America announced their intent to merge. If completed, this merger would create the 5th largest U.S. airline. Based on 2015 numbers, the new airline would carry nearly 39 million passengers, surpassing JetBlue which carried 35 million passengers last year. It would become the leading second-tier U.S. airline, but still significantly smaller than any of the major four airlines, which all carried more than 140 million passengers in 2015.

But what would this merger mean for you?

Contractual Overlap and Conflict

From an Air program perspective, the combination of two smaller niche carriers on the surface seems like a minor story for most corporate clients. However, many clients have one of these carriers in their current programs.  The combination of the two may create conflict/overlap with the larger joint venture carriers.  For example, a client may have an Alaska deal to cover some west coast markets while relying on one or more of the JV carriers for transcontinental markets.  As Airlines are hitting record profit levels, they are more and more focused on contracted goal compliance. Clients that could manage a program with one of these carriers,  may not be able to maintain an agreement with both due to increased conflict with the major joint venture carriers.

To illustrate this point, let’s review the first quarter 2016 market service levels based on Advito’s proprietary QSI data for travel from New York to the west coast.

  • For Newark (EWR) to Los Angeles (LAX) and San Francisco (SFO), Virgin America is the only competitor to United’s dominant position  (UA QSI 66% and VX 20% for LAX; UA 74% and VX 18% for SFO).
  • Although United pulled out from New York – Kennedy (JFK), the transcon market is still highly competitive. On the JFK to LAX market American is leading with 30% QSI followed by Jetblue at 26% and Delta and Virgin America are on par at 22% each.
  • On JFK to SFO route Virgin America (27%), Jetblue (26%) and Delta (25%) are on par followed by American (22%).

Impact on market competitiveness

On one hand, one more merger and one less airline means less competition in the market. On the other hand, it creates a stronger competitor to the major players on the west coast and on the highly valuable transcontinental routes.  Although slot and gate swaps may be required, the Virgin America and Alaska routes are mostly complimentary with very little overlap. Therefore we expect this proposed merger to receive government regulatory approvals with minimal issues.

Pricing

The final impact on average fare paid for corporate buyers will depend on the market demand level in 2017 more than the changing competitive conditions on some routes.

What’s next?

It’s important to note that this merger is not a done deal. While the two airlines have made their intent to merge public, there is still a chance for other developments to occur. For one, the merger has to receive regulatory approval. Secondly, there is still room for other airlines to counteroffer.

It’s also important to note that even after a merger is finalized, there still remains some level of uncertainty. While Virgin America and Alaska Airlines have complementary routes, they have very different fleet types, and corporate cultures.  How they handle the blending of their work groups and business models may too have an impact on travelers and managed travel programs. Alaska will have to decide whether or not they will keep the two brands separate, as is customary in EMEA mergers, or if they will adopt the U.S. trend of consolidating the two brands into one.

As a travel manager, you can use the guide below to help gauge your level of impact:

Corporate client did not have deals with either of these carriers: The merger will have minimal impact.

Corporate clients that had contracts with both: The merger will have limited impact. The combined carrier may now be a better option than other smaller carriers.

Corporate clients that had agreements with only one of the two airlines: They will need to evaluate the situation and determine how best to move forward.

For more direction, contact us at advice@advito.com and we will assess your potential impact and make recommendations to alleviate your risk. We will also work to find you incremental savings opportunities.

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