Alaska Air Group A Step Closer To Buying Virgin America

Shares of Alaska Air Group (NYSE:ALK) have been on an uptrend in recent times. The stock has comfortably outpaced the Zacks categorized Transportation-Airline industry over the last three months. The stock gained almost 19% compared with the industry, which advanced just 10.45% over the same period.

The Seattle, WA-based carrier, received further good news as it moved a step closer to buying the California based low-cost carrier Virgin America (NASDAQ:VA) , following the receipt of the antitrust clearance from the U.S. Department of Justice (DOJ). Alaska Air Group intends to acquire Virgin America for approximately $57 per share. The deal, which is valued approximately at $4 billion, inclusive of debt and capitalized aircraft operating leases, was announced in April.

Attached Rider

The anti-trust clearance is however not free of conditions. Although Alaska Air Group won’t have to sell any assets, it will have to reduce the scope of its code-sharing agreement with American Airlines Group (NASDAQ:AAL) . Alaska Air Group currently derives around $190 million revenues annually from the agreement.

According to a report on Wall Street Journal, the modification of the agreement implies that Alaska Air Group would have to forego code-sharing revenues in about 45 markets, which amounts to $15 million to $20 million annually. The routes where the DOJ has prohibited the Alaska Air/American Airlines code sharing pertain to the ones where Virgin America and American Airlines currently compete. The same is also prohibited on routes where Alaska Air Group was likely to launch operations (in combination with American Airlines) following the closure of the deal. Alaska Air Group was not too perturbed by the condition and appeared confident of recovering the lost revenues.

However, Alaska Air Group’s code-sharing deal with another heavy-weight airline — Delta Air Lines (NYSE:DAL) — which accounts for approximately $65 million of Alaska Air Group’s top line annually — was left untouched by the DOJ.

DOJ’s Approval Did Not Come Easily

The DOJ’s approval did not come immediately. The deal was initially expected to be closed by Sep 30. However, that was not the case as the companies agreed not to close the deal before Oct 17, to allow the antitrust division of the DOJ more time to review the proposed merger. Delays continued even after Oct 17, making its fate uncertain.

This approval is a positive step toward the completion of the deal, which is expected “in the very near future.” Now, the lone hurdle that remains, is the ongoing lawsuit in the federal court of San Francisco, which was probably the reason why a date for closure was not mentioned. However, Alaska Air Group remains confident about the successful resolution of the dispute. Consequently, we expect investor focus to remain on updates regarding the lawsuit, the resolution of which would help the deal to close. This would then create the fifth largest U.S. airline (in terms of passenger traffic).

Zacks Rank

Alaska Air Group currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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