AirKarp

Five factors determining whether Alaska keeps Virgin America’s A320s

by Aaron Karp
Apr 05, 2016

Executives at Alaska will quickly be faced with fleet decisions following the planned Jan. 1, 2017 closing of the merger.

If a computer program designed a Boeing vs. Airbus test case, it likely couldn’t come up with a better scenario than the proposed Alaska Airlines-Virgin America merger. Both airlines (excepting Alaska regional affiliate Horizon Air’s fleet) are all-narrowbody aircraft operators with North America-only networks and both have signed up for next-generation, re-engined narrowbodies.

These two airlines’ management teams, faced with very similar aircraft needs, have made opposite choices: Seattle-based Alaska operates all Boeing 737s and San Francisco-based Virgin America operates all Airbus A320 family aircraft. Alaska has 37 737 MAX aircraft on order and Virgin America has 40 A320neo family aircraft on order.

Virgin America, in fact, was the first airline in the world to make a firm commitment to the A320neo. Interestingly, after three other A320neo customers chose the Pratt & Whitney geared turbofan engine to power their aircraft, Virgin America became the first to choose the CFM International LEAP engine to power its neos; a variation of the LEAP exclusively powers the MAX (more on this later).

If the merger gains regulatory approval, the executives at Alaska, who will run the combined airline, will quickly be faced with fleet decisions following the planned Jan. 1, 2017 closing of the transaction. Given that gaining access to Virgin America’s facilities and slots at San Francisco (SFO) and Los Angeles (LAX) International Airports was the primary attraction of acquiring Virgin America—not aircraft—will Alaska executives move to dump Virgin America’s Airbus fleet? There is certainly a perception that this will happen. But Airbus has a unique opportunity to convince a Boeing believer that its offering is, if not better, at least just as good and worth keeping around.

Here are the five biggest factors that will determine whether any or all of Virgin America’s 60 A320 family aircraft (with three more still set to be delivered) will remain in a post-merger Alaska’s fleet and/or whether Alaska will take delivery of any or all of the 30 A320neos and 10 A321neos Virgin America has on order:

  1. How open-minded will Alaska executives be? “One of the things that does happen when you do something like this … is we’ll get a chance to look under the covers of another company that has done some things very well,” Alaska president and CEO Brad Tilden told analysts and reporters on an April 4 conference call. He and other Alaska executives repeatedly said during the call that while they don’t have much familiarity with Airbus aircraft, they are looking forward to learning about Virgin America’s fleet. What will they learn? If they like what they see, could it dent their Boeing bias?

  2. It is relatively easy, and pain free, for Alaska to get out of the Virgin America fleet. Nearly all of Virgin America’s A320s are leased, not owned, and those leases start expiring in 2020. So Alaska could just let the leases expire and walk away from the aircraft. Alaska CFO Brandon Pedersen said there is a “favorable cancellation provision” on Virgin America’s future A320neo order, indicating Alaska wouldn’t have to pay a heavy penalty for not taking delivery of these aircraft. The 30 A320neos aren’t set to deliver until starting in 2020, so Alaska would have a little time to think about this. However, one of the first decisions Alaska would have to make post-merger is whether to accept 10 A321neos Virgin America has agreed to lease from GE Capital Aviation Services (GECAS) with deliveries starting in the 2017 first quarter and set to be completed by the end of 2018. But since this is a lease deal (and GECAS probably wouldn’t have too hard of a time placing these aircraft elsewhere) cancelling the A321neos likely wouldn’t be too costly for Alaska.

  3. Maintenance costs and fleet commonality. Alaska is a strong, strong proponent of the advantages of operating a single fleet type, so the company’s executives will spend considerable time analyzing how much higher maintenance and other fleet-related costs will be if it moved to a dual fleet. However, as mentioned above, there would be some maintenance commonality regarding neo and MAX engines since Virgin America is going with the LEAP-1A to power its neos. (The MAX is powered by the LEAP-1B.)

  4. Without the Virgin America A320 family fleet, how would the “new” Alaska maintain its growth? Tilden said the post-merger Alaska would seek to maintain the same annual 4%-8% growth rate as the pre-merger Alaska. This growth rate would not include the increase in size from combining the two airlines; in other words, the combined Alaska/Virgin America would generally plan to get about 4%-8% bigger per year compared to the combined size of the two airlines pre-merger. So if Alaska drops the current A320 family aircraft and backs out of the future A320neo family deliveries, how will it grow as much as it plans? This is where Boeing could swoop in and offer a sweet deal to Alaska on additional 737NGs and 737 MAXs to (a) keep Alaska as an “all-Boeing” operator and (b) deliver a serious blow to Airbus—Virgin America, which routinely wins plaudits for its service aboard its A320s, was a real Airbus success story, demonstrating exactly what could be done with an A320 cabin.

  5. That brings us to the final major factor: What kind of product does the “new” Alaska plan to offer passengers? Tilden said he believes Alaska and Virgin America have “more in common than not,” but acknowledged there are key differences in the two airlines’ products. Virgin America is known for mood-lit cabins, customized leather seats and cutting-edge seatback inflight entertainment systems. Alaska’s more utilitarian cabins offer “direct-to-your-device” IFE in which passengers download a Gogo Video Player onto their own portable device prior to takeoff. One of the big questions Alaska will have to answer post-merger is whether its onboard product is suited for the kind of high-end passengers traveling transcontinental on Virgin America from SFO and LAX to New York. Indeed, after beating out JetBlue Airways in a bidding battle for Virgin America, the last thing Alaska wants to see happen is for Virgin America’s high-end transcontinental customers to switch to JetBlue or other airlines because they are no longer getting the “Virgin” service on those 5-plus hour flights. Might it be simplest to keep at least some of Virgin America’s A320s—and the service they are designed to provide—for these transcontinental flights?

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