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Virgin America and Alaska Airlines tails
Virgin America and Alaska Air Group confirmed their merger plans. (Credit: Alaska Air)

Alaska Air Group confirmed reaching a $2.6 billion deal to buy Virgin America after a bidding war with JetBlue Airways.

“This was a hard-fought competition, and we were very happy to come away as the successful bidder,” Alaska Air CEO Brad Tilden told reporters today.

Virgin America President and CEO David Kush said he was also pleased with the deal. “The price paid is a big win for our shareholders,” he said.

The deal involves a cash purchase of Virgin America’s shares at $57 each, which is a 47 percent premium over Friday’s closing price. The merger was approved by the boards of both airlines, but still must face U.S. regulatory approval. That’s expected to be worked out by the end of the year.

Due to U.S. regulatory requirements, the British-based Virgin Group owns less than 25 percent of Virgin America’s voting shares. It licenses the Virgin brand to the U.S.-based airline. Virgin Group’s billionaire founder, Richard Branson, said in a blog post that he was saddened to see Virgin America sold, but noted that because of his limited stake “there was sadly nothing I could do to stop it.”

Branson stands to receive about $780 million from the deal.

The purchase raises Seattle-based Alaska Air’s profile in the rapidly changing airline industry. Including Virgin America’s ridership would make Alaska the nation’s No. 5 airline, vaulting it above JetBlue. The combined airline is projected to have more than $7 billion in annual revenues and operate about 280 aircraft, the airlines said.

Tilden said Virgin America’s routes “complement our geography really well,” particularly heading to New York and Washington, D.C., from San Francisco and Los Angeles. He noted that Alaska now flies to only one of San Francisco’s top 10 destinations; the deal would expand that list to all 10.

Image: Alaska Airlines and Virgin America routes
Alaska Airlines and Virgin America say their route networks are complementary.

The combined airline will be headquartered in Seattle, with Tilden in charge. It will offer 1,200 daily departures with hubs in Seattle, San Francisco, Los Angeles, Anchorage and Portland, Ore.

Alaska Air pursued the deal after looking at a variety of strategies for expanding its focus beyond Washington state, Alaska and Oregon, Tilden said. “We just wanted a little more canvas to work with,” he said. Once word got out that Virgin America was for sale, JetBlue entered the bidding war – but Alaska won out late last week.

“At the end of the day, our balance sheet let us go farther,” said Brandon Pedersen, chief financial officer for Alaska Air Group.

Virgin America is well-known for catering to Silicon Valley customers. Also, Tilden noted that both airlines focus on “bleisure” fliers – business-class plus high-end leisure.

Alaska said it will work with the Virgin Group on options for continuing to use the Virgin America brand. “We want to learn more about it,” Tilden said. Pedersen said there’s a chance that Alaska would transition the fleet over to its own main brand by 2020. Virgin America’s loyalty program, meanwhile, would be merged into Alaska’s.

Alaska currently operates Boeing jets exclusively, while Virgin America operates only Airbus jets. Ben Minicucci, Alaska Air’s chief operating officer, acknowledged that might lead to a learning curve for managing maintenance and pilot training. “We have no experience with the Airbus fleet, so that will be a challenge,” he told reporters.

But Alaska’s executives said they could handle the challenge, and Pedersen even joked about it. “We are big believers in single fleet,” he said. “In fact, so much so that we bought another single fleet.”

In addition to Alaska Airlines, Alaska Air Group operates Horizon Air, a Northwest-centered regional airline. Alaska Air and Virgin America set up a website, FlyingBetterTogether.com, to lay out the details of the deal.

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