Alaska Air buys Virgin America in a $2.6 Billion Dollar Merger

On Monday, April 4th, Alaska Air announced that it will buy Virgin America for $2.6 billion dollars. Alaska Air is paying $57 per share and will take on the existing Virgin America debts and aircraft leases of $1.4 billion dollars, making the total value of this deal $4 billion dollars.

In fact, Alaska Air beat out its nearest competitor, JetBlue, to buy Virgin America, to become now the fifth-largest airline in the U.S., after American Airlines, Delta Airlines, United Airlines, and Southwest Airlines. The new combined airline will retain Alaska Air's brand, and will have about 18,300 employees and 280 aircraft, with its major bases in cities such as Seattle and San Francisco.

Source: bizjournals.com

This merger may attract regulatory scrutiny by the Department of Justice because in recent years, there have been many consolidations and mergers of U.S. airlines, resulting in some who believe that these airlines are colluding in order to keep fares high. In fact, in the past decade, the number of major U.S. airlines has decreased from nine to four. According to the Washington Post, "the remaining big carriers - Delta, Southwest, American, and United - fly about 80% of all domestic passengers." These mergers have resulted in less competition, helping airlines to raise prices and increase their profits. If the Department of Justice does look at this deal, they would be looking at "whether the merger will create a better competitor to the big airlines" by giving Alaska Air and Virgin America the flexibility to lower prices, or whether this deal will actually allow Alaska Air and Virgin America raise their prices (Washington Post).

The airline industry, at least in the U.S. domestic market, has the characteristics of an oligopoly, which we have been learning about in class, as it has 4 airlines that dominate the market with 61.1% of the market share, many passengers, and generally standardized flights. In addition, the big airlines also has more control of prices, and airlines have less freedom to enter or exit the market, especially because of the high price of starting an airline. As a result, passengers have less choice between airlines to find cheaper prices. Some of this is a result of deregulation of the airline industry in 1978, with the passage of the Airline Deregulation Act of 1978. This act initially led to increased competition, greater efficiency, and lower prices. However, starting in the past decades, airlines have started merger, which has resulted in less competition.

It's unclear as of now what effect this merger will have on the airline industry and prices for consumers and whether or not the Justice Department will be looking into the merger, but airlines seem to be trending towards more mergers, larger airlines, and less competition.

Questions:
What effect do you think this merger will have on the airline industry and on consumer prices?
Do you think the Justice Department will look into this merger?
In the case of the airline industry, deregulation has both increased competition at times and decreased competition at times. In general, do you think deregulation of industries is a good idea?

Sources:
https://www.washingtonpost.com/news/business/wp/2016/04/04/alaska-air-buys-virgin-america-in-4-billion-deal/
http://www.seattletimes.com/business/boeing-aerospace/alaska-air-clinches-virgin-america-deal-for-26b/
http://money.cnn.com/2016/04/04/investing/virgin-america-alaska-air-deal/
http://www.investopedia.com/ask/answers/011215/airline-industry-oligopoly-state.asp
http://www.denverpost.com/business/ci_28501683/airline-consolidation-has-created-airport-monopolies-increased-fares