Alaska Air To Buy Virgin America For $2.6 Bn.: Why Is Richard Branson Selling His Innovative Commercial Aviation Company To A Rival? [Update]

Alaska Air will soon buy Sir Richard Branson’s Virgin Air. The two companies were in the advanced stages of intense negotiations. While the merger would undoubtedly invite a close scrutiny from government regulators, it is perplexing to note that a path-breaking and innovative commercial aviation company is being compelled to consider a sell-off to a rival.

Virgin America Inc., backed by outspoken billionaire businessman Richard Branson, may soon be sold to Alaska Air Group Inc. However, people privy to the information aren’t confident that a final deal has been made. In fact, though the negotiations are supposed to be in advanced stages, the deal may even fall apart, especially if Alaska’s closest competitor, JetBlue Airways Corp., chooses to pursue the acquisition with equal intensity, reported Bloomberg. Incidentally, Alaska Air, as well as JetBlue, have both made a offer to the airline, after Virgin America announced it is ready, and looking for a buyer.

Even if Alaska Air does reach an agreement to acquire Virgin Air, there are many details and finer points that need to be carefully worked out. However, an announcement may happen as soon as tomorrow.

Alaska Air buying Virgin Air would add another deal to a long list of consolidations that began in 2005. The comparatively fast-paced mergers that followed, witnessed five of the 10 biggest U.S. carriers,being scooped up. Needless to say, the mergers have drastically shrunk the industry in the last decade. In fact, four large and multi-tiered operators, namely, United Continental Holdings Inc., Delta Air Lines Inc., Southwest Airlines Co., and American Airlines Group Inc., collectively control 80 percent of the American domestic airline market, reported the Wall Street Journal. The second tier of lower-cost airlines is intensely competed in by JetBlue, Alaska, and Virgin America. The ultra-discounters, such as Spirit Airlines Inc., make up the rest of the bunch.

Why is Richard Branson intent on selling Virgin Air? Branson envisioned an aviation company that would be built around the definition of “cool.” Virgin Air was initially meant to ferry people from New York to California in style. The path-breaking idea behind founding the aviation company was to offer a lower-cost carrier that won’t compromise on the service. In fact, Branson worked hard to ensure his company would never be identified with the category it was so fiercely competing in, instead, he attempted to create an entirely new segment, referred to as an airline-within-an-airline.

While the level of service was definitely higher than what traditional airline companies offered, there were only marginal differences in airfares. Moreover, Virgin Air routinely innovated with onboard ambience by offering purple lighting, and attempted to beat other rivals with services like onboard Wi-Fi and interactive video displays.

However, Virgin Air’s innovation inside the aircraft did not help it thrive amidst the giants and veterans of the business. Virgin Air had once grumbled that it had a tough time competing with bigger rivals for adequate space at the airports where it desired to operate, creating logistical and operational nightmares, besides destroying any chances for the company to offer lucrative prices. Besides these hurdles, the U.S. regulators, fearing a U.K. citizen would garner a lot of power, forced Branson’s company to give up a board seat, put its stake under a trustee, and name a new chief executive officer, before allowing the carrier to begin operations in America.

Interestingly, Virgin America offers its services to just 24 cities in the U.S. and Mexico, however, it is these regions where Alaska Air intends to fortify its stand. With an 84 year existence and a market capitalization of $10 billion, Alaska Air won’t have much trouble forking out about $2 billion for Virgin Air. If Alaska Air does end up buying Richard Branson’s commercial aviation company, it would be its biggest deal.

[Photo by Clive Brunskill/Getty Images]