Smaller airlines upbeat on Virgin America acquisition

April 4
1:18 AM 2016

Billionaire Richard Branson-owned Virgin America's offer to sell itself is a major reason for smaller airlines to cheer up. Smaller airlines in the US are finding it difficult to expand and grow. Some small airlines are also forming into a group to bid for acquiring Virgin America. Larger players may not bid however, owing to regulatory hurdles. 

Lower oil prices are propelling margins of airlines upwards. The surge in profitability is giving more strength to airlines to go for acquisitions. However, four largest US carriers, which have over the 80 percent of the market share in US domestic aviation, may not participate in bidding for Virgin America in the wake of regulatory hurdles. Delta Airlines, United Airlines, America Airlines and Southwest Airlines have control over 80 percent of the domestic market share. 

MarketPlace referring a report by The Wall Street Journal (WSJ), said that JetBlue and Alaska Air have been in the process of bidding for Virgin America. However, so far no airline has come out with an official statement. After witnessing a robust year in 2015, Virgin America is on the block. Virgin America recorded encouraging profits for the year. 

Samuel Engel, head of the aviation practice at ICF International, said "These companies are some of the few left to consolidate. Virgin America, JetBlue, Alaska and Hawaiian, as well, are carriers that are a meaningful size and yet, are not of the kind of scale that could easily compete with a 700- or 800-aircraft Delta, United or American."

Bloomberg further adds referring sources in the know that Alaska Air Group Inc  have been nearing closer on buying Virgin America Inc. Negotiations on acquisition are at advance stage and on the other hand, JetBlue Airways Corp made its last minute bid for the acquisition. Consolidation phase in the US aviation sector that took off in 2005 swept off five of 10 major airlines in the US. Second-tier carriers are JetBlue, Alaska and Virgin America. 

Virgin America's market value is estimated to be $1.37 billion on March 22 and $1.47 billion on April 1, 2016. VX Holdings, a Richard Branson-owned fund, and Cyrus Capital Partners hold 54 percent in Virgin America. Alaska Air's market value is pegged at $10.2 billion.

Richard Aboulafia, an airline analyst with the Teal Group, said "Last year was a phenomenal year. You had a combination of lower airfares and higher profits for everyone involved. The industry is at the tail end of a massive wave of consolidations that included Delta pairing with Northwest, United with Continental, and American with US Airways. Eventually that dynamic was going to catch up to the smaller players."

Virgin America, Alaska Airlines and JetBlue are smaller carriers competing in a tier below. Alaska Air is believed to be nearing a $1-billion buyout deal on acquiring Virgin America. The move is expected to combine tow popular smaller airlines. If the deal gets through, it'll be latest consolidation in the US aviation industry. Alaska Airlines needs to divest some airport slots since its network has some overlaps with Virgin America, as reported by The New York Times.

Virgin America has investments in Dallas Love Field airport. Airlines generally prefer larger scale of operations including bigger markets, higher efficiencies and attractive corporate contracts. Generally, these parameters are not reachable for smaller airlines. Delta Airlines has paired with Northwest, United Airlines teamed up with Continental and American Airlines with US Airways. Some aviation analysts see that the current situation is ripe for smaller players. 

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