Last week, Alaska Air Group finalized its $4 billion acquisition of Virgin America. The merger brings together two beloved airlines which in some ways are similar and other ways very different. Both carriers have loyal customer bases and award-winning résumés. Alaska has always emphasized its customer service and performance and has been awarded “Highest in Customer Satisfaction Among Traditional Carriers in North America” by J.D. Power, nine years in a row. Virgin America is revered by travelers for its innovative and high quality in-flight experience, and has been named top airline in the country in Condé Nast’s reader’s choice awards. The merged airline is surely positioned to compete with the traditional “Big 4” U.S. airlines.
This is a critical time for airlines as the industry moves closer to maturity. For a few years, airline companies have been experiencing growth in capacity and profit margins. Low fuel prices has benefited bottom lines across the industry but have consequently led to higher wage demands from union workers. Rising profits and higher growth—in terms of capacity (available seat miles)—are wonderful in the short-term, but cannot be sustained as competition for passengers increases and is accompanied by lower ticket fares. 2017 will see a changing landscape with expectations for higher fuel costs, slower growth, and increased ticket prices, not to mention the positive and negative impacts of a Trump administration which intends to cut taxes and put money back in American’s pockets. Companies within the industry will have to adapt to these internal and external changes.
Integrating two seemingly different companies is a challenge for any business, no matter in which industry the merger occurs. Factor in industry trends and uncertain political policies and you have a real difficult task at hand. Although two companies may appear incompatible on paper, they can be much more complimentary than expected—and it is those synergies which encourage M&A activity. Alaska and Virgin America both have cultures which aim to satisfy, and even impress, their customers. The combination of superstar customer service airlines could jolt the industry and put pressure on the big competitors who earn a combined 85 percent of revenues. Making sense of mergers means identifying synergies. I hope to be flying on a cozy, innovative, and friendly Alaska flight soon.