Monday, April 4, 2016

Alaska Air buys Virgin America in a $2.6 Billion Dollar Merger

On Monday, April 4th, Alaska Air announced that it will buy Virgin America for $2.6 billion dollars. Alaska Air is paying $57 per share and will take on the existing Virgin America debts and aircraft leases of $1.4 billion dollars, making the total value of this deal $4 billion dollars.

In fact, Alaska Air beat out its nearest competitor, JetBlue, to buy Virgin America, to become now the fifth-largest airline in the U.S., after American Airlines, Delta Airlines, United Airlines, and Southwest Airlines. The new combined airline will retain Alaska Air's brand, and will have about 18,300 employees and 280 aircraft, with its major bases in cities such as Seattle and San Francisco.

Source: bizjournals.com
This merger may attract regulatory scrutiny by the Department of Justice because in recent years, there have been many consolidations and mergers of U.S. airlines, resulting in some who believe that these airlines are colluding in order to keep fares high. In fact, in the past decade, the number of major U.S. airlines has decreased from nine to four. According to the Washington Post, "the remaining big carriers - Delta, Southwest, American, and United - fly about 80% of all domestic passengers." These mergers have resulted in less competition, helping airlines to raise prices and increase their profits. If the Department of Justice does look at this deal, they would be looking at "whether the merger will create a better competitor to the big airlines" by giving Alaska Air and Virgin America the flexibility to lower prices, or whether this deal will actually allow Alaska Air and Virgin America raise their prices (Washington Post).

The airline industry, at least in the U.S. domestic market, has the characteristics of an oligopoly, which we have been learning about in class, as it has 4 airlines that dominate the market with 61.1% of the market share, many passengers, and generally standardized flights. In addition, the big airlines also has more control of prices, and airlines have less freedom to enter or exit the market, especially because of the high price of starting an airline. As a result, passengers have less choice between airlines to find cheaper prices. Some of this is a result of deregulation of the airline industry in 1978, with the passage of the Airline Deregulation Act of 1978. This act initially led to increased competition, greater efficiency, and lower prices. However, starting in the past decades, airlines have started merger, which has resulted in less competition.

It's unclear as of now what effect this merger will have on the airline industry and prices for consumers and whether or not the Justice Department will be looking into the merger, but airlines seem to be trending towards more mergers, larger airlines, and less competition.

Questions:
What effect do you think this merger will have on the airline industry and on consumer prices?
Do you think the Justice Department will look into this merger?
In the case of the airline industry, deregulation has both increased competition at times and decreased competition at times. In general, do you think deregulation of industries is a good idea?

Sources:
https://www.washingtonpost.com/news/business/wp/2016/04/04/alaska-air-buys-virgin-america-in-4-billion-deal/
http://www.seattletimes.com/business/boeing-aerospace/alaska-air-clinches-virgin-america-deal-for-26b/
http://money.cnn.com/2016/04/04/investing/virgin-america-alaska-air-deal/
http://www.investopedia.com/ask/answers/011215/airline-industry-oligopoly-state.asp
http://www.denverpost.com/business/ci_28501683/airline-consolidation-has-created-airport-monopolies-increased-fares

3 comments:

Daniel Jun said...

Fun. Theoretically speaking, this recent merger should result in increased prices. However, I have to wonder whether the increased prices are airlines having to make more to pay for increased staff and the like, or if a shadowy group known as the "Big 4" are collaborating with the malicious intent of increasing prices of plane tickets. <--Facetious.
Anyway, I, like most of America, believe anti-trust laws are the coolest, most useful thing since the printing press. I don't know if regulation is necessary now, but at the rate that things are going, I believe regulation of airlines will become a necessity.
In general, deregulation is good. For example, book publishers. There are lots of book publishers, they fight for the best authors, translators, editors, reviewers, etc. Thus, regulation is not strictly necessary. There are also cases where the market is so small for a certain product that regulation is not necessary either (looking your way, Seednovel). Regulation is mostly necessary in necessities and industries heading towards monopoly.

Jack Loar said...

I don't really think that this merger will result in increased prices for most consumers. While I can see Alaska/Virgin America raising their prices, I don't think it will have much affect on the other airlines because for the most part they will remain relatively independent. Even though it is not unlikely that major airlines do collude when setting prices, there are factors that keep prices lower based on what people can pay and other airlines, like Spirit, that charge much lower prices than most airlines.

I do think that the Department of Justice will look into this merger just because of the size of the acquisition. Even though there are extreme barriers to entry for airlines, it is important to maintain competition. I agree with Daniel that regulation is not always necessary or the best idea, but in the case of these few large corporations that control a large share of their market, some regulation becomes a necessity.

Jared Mayerson said...

The fact there there are only a few major airlines may not be a problem right now but allowing mergers like this gives these airlines the ability to form a very powerful oligopoly. Air travel is a very popular method of transportation and will continue to grow. If only a few companies control all of the fares, they can set them as high as they'd like. Prices are already high and they aren't even taking advantage of this issue yet. Consumer prices may not increase right away, maybe never, but I don't think that they should have the option. I do think that the Justice Department should look into this merger to make sure it will not lead to these undesirable effects. For something as important as air travel, I think a little regulation is necessary.