Virgin America and Alaska Airlines tails
Alaska Air Group and Virgin America cleared an important regulatory in their quest to merge.(Alaska Air Photo)

The U.S. Department of Justice approved Alaska Air’s proposed merger of Virgin America, marking the final regulatory step for a deal that will see the combined airline become the nation’s fifth largest carrier.

The deal, announced in April, involves involves a $2.6 billion cash purchase of Virgin America’s shares at $57 each, which was a 47 percent premium over its price at the time. Virgin shares closed at just a hair under $57 Tuesday. Including debt and aircraft operating leases, the transaction is valued at about $4 billion.

Brad Tilden
Brad Tilden, chairman and CEO Alaska Air Group.

“With this combination now cleared for takeoff, we’re thrilled to bring these two companies together and start delivering our low fares and great service to an even larger group of customers,” Alaska Air Group Chairman and CEO Brad Tilden said in a statement.

The purchase raises Seattle-based Alaska Air’s profile in the rapidly changing airline industry. Including Virgin America’s ridership vaults Alaska past JetBlue to No. 5 on the list of U.S. air carriers, behind American, Delta, Southwest and United. The combined airline is projected to have more than $7 billion in annual revenues and operate about 280 aircraft, the airlines said.

As part of the deal, Alaska agreed to scale back its codeshare agreement with Virgin competitor American Airlines, but Alaska said the majority of its codeshare flights will not be affected.

The Justice Department said the codesharing agreement allowed Alaska to market American flights on more than 250 routes, created incentives for Alaska to compete less aggressively on routes that both carriers serve, and might have led Alaska to decide against launching new services in competition with American.

Justice officials filed an antitrust complaint in the U.S. District Court for the District of Columbia that would have blocked the merger if Alaska did not scale back the codesharing agreement.

“Today’s settlement ensures that Alaska has the incentive to take the fight to American and use Virgin’s assets to grow its network in ways that benefit competition and consumers,” Renata Hess, acting assistant attorney general for the Justice Department’s Antitrust Division, said in a statement.

Though the deal has cleared all regulatory hurdles, it still faces a lawsuit from a group representing Virgin customers who argue that the deal is not in the best interest of travelers.

The combined airline operation is to 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.

The deal could help Alaska lure a different type of passenger. While both airlines tend to attract a lot of “bleisure” fliers – business-class plus high-end leisure — Virgin America is well-known for catering to Silicon Valley customers.

The all-Airbus Virgin America fleet and the all-Boeing Alaska Airlines fleet are retaining separate branding for now. However, analysts expect the Virgin America brand to be assimilated eventually into Alaska. Other Virgin airline brands, such as Virgin Atlantic, are owned by the British-based Virgin Group and unaffected by the Alaska deal.

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