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updated 2:54 PM CDT, Jul 28, 2018

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Alaska Airlines begins wooing process for Virgin America fans

Alaska Airlines’ goal of winning friends and influencing people in the Bay Area, whose hometown airline is about to be absorbed by the Seattle-based carrier, began in earnest Tuesday night in San Francisco as Alaska executives and board members hosted a gathering for local leaders.

Some 250 business, political and community leaders were on hand at the Four Seasons Hotel in San Francisco for an event whose theme was “Flying Better Together.” The goal of the gathering of Bay Area who’s who was for them to meet and begin to get to know the leadership of the airline that is buying Virgin America, the Richard Branson-founded carrier that began service as San Francisco’s hometown low-cost airline nine years ago this month.

During that nearly a decade of service, Virgin built what many in the Bay Area have described as “almost a cult following,”with many regular flyers enthusing that they “love Virgin.”

Aware of that challenge, Alaska CEO Brad Tilden and his executive team have sought to express sensitivity to the cultural issues and the initial backlash from Virgin fans. That awareness was pointed up a few weeks ago when Tilden told the Wings Club, a group of aviation professionals in New York, that he was thinking of running the Alaska and Virgin as separate airlines within Alaska Air Group.

Such an outcome may or may not still be a possibility, but when I asked Joseph Sprague, Alaska senior vice president, after the Tuesday event, about Virgin continuing to function as a third carrier, he said: “ Initially it will be a third airline but by 2018 it will be merged into Alaska.”

But Alaska leadership is playing up a cultural fit they see existing between Alaska and Virgin, rather than addressing the different styles.

Sprague said “a lot of the integration pre-planning work has revealed an encouraging number of similarities from which we can build.” 

He noted that Tilden, in his comments to the group Tuesday, pointed out three such similarities: “both have an obsessive focus on the customer, we both want companies that are employee-driven and we both have a strong leaning towards innovation around the customer experience.”

Alaska’s San Francisco community gathering came exactly s week after shareholders of Virgin America approved the acquisition by Alaska Air Group, with Virgin’s chairman announcing the voting results at a brief shareholders meeting on July 26.

That Virgin shareholder approval was the next-to-last major hurdle for the takeover, with the remaining step being U.S. Justice Department approval. Closing by October is expected for the $4 billion deal ($2.6 billion in cash and the rest in assumed debt and other costs) that Alaska had to put together to beat out Jet Blue.

It’s quite possible that the shadow of Delta Airlines’ seeming predator pursuit of Alaska that left key Alaska supporters concerned Delta was seeking to force a takeover played a role in Alaska’s decision to acquire Virgin America for a very large premium.

But in addition to likely ending concern about Delta coveting a takeover, Alaska also gets Virgin’s lucrative California routes as well as keeping Jet Blue, the losing suitor in the Virgin bidding contest, from acquiring the routes.

In fact, it’s perhaps amusing to consider the community response if Delta, after a hostile takeover of Alaska, held a reach-out event with the theme “get to know us.” They’d have faced a ferociously hostile audience in Seattle.

But obviously Alaska, which has been successfully serving the Bay Area from three airport for years, isn’t perceived as a bad guy, more just a carrier that locals don’t know a lot about other than it has an excellent record in all the areas airlines get rated.

In fact, as Phyllis Campbell, Alaska board member and Pacific Northwest chairman of JP Morgan Chase, put it after the event: ‘I think it is emblematic of Alaska Airlines to reach out to the community in a spirit of collaboration and collegiality. Having dinners like this send the message that we want to be the best airline going forward for the Region and also the best citizen in terms of community partnership.”

In fact, the event was apparently successful enough from Alaska’s perspective that Sprague said “we will likely do additional events, both of our own and sponsoring others.”

Still there are Virgin supporters whose love affair with the airline was partly due to the fact it was the Bay Area’s hometown airline. And the takeover will mean not just the end of Virgin’s “hometown” ties, but also that California will no longer have an airline based in a state that has served as home to a variety of important carriers over the years.

As Mary Huss, publisher of Puget Sound Business Times, summed up when I asked her about it: “I think people were very proud that Virgin chose to locate and start up here when it did.”

But while Jet Blue lost the bidding to Alaska, it is seeking to woo Virgin fans away before Alaska can convert them by looking for ways to exploit what it senses as uncertainty of flyers about the transition. It has been touting giveaway deals to potential frequent users of Jet Blue’s longhaul service from New York to San Francisco and Los Angeles, including its tongue-in-cheek wooing of Jet Blue “virgins,” those who haven’t previously tried Jet Blue.

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Virgin deal should end business community concerns about Delta designs on Alaska

"We're viewing this as a combination that will make Alaska stronger and better positioned to remain a successful, independent, Seattle-based company for decades to come."

by Joe Sprague, Senior Vice PresidentCommunications & External Relations

There's no way of knowing the extent to which the shadow of Delta Airlines hung over Alaska Air Group's decision last fall to connect with Virgin America about a possible takeover.

But regardless, a local business community troubled for months that it needed to figure out how to help Alaska Airlines ward off what was perceived as a takeover effort by Delta Airlines can stop worrying. Alaska saved itself.

That's the underlying fact about the announcement last week that Alaska has agreed to buy Virgin America for $2.6 billion cash, with assumed debt, leases and other costs bringing the total to about $4 billion. That's a figure viewed by some experts as too much -- a huge premium that Alaska had to pay on Virgin's market valuation to beat out JetBlue to land the deal.

But it depends on what a company like Alaska is buying. And in Alaska's case, it's a twofer, or maybe a threefer, as it dramatically expands its California presence and keeps Jet Blue from acquiring Virgin's lucrative California routes. But maybe most importantly, it pretty much ends the concern about a Delta takeover strategy.

Concern over any Delta designs on Alaska should pass, if for no other reason than that the Justice Department wouldn't be likely to allow one of the Big Four carriers to buy number five, which is where the Virgin deal, once approved, would place Alaska.

That Justice Department point was offered by Joseph Shocken, president of Seattle's Broadmark Capital, when I asked him his thoughts after the Virgin announcement, since Shocken was perhaps the most outspoken business advocate of a "support Alaska" strategy over the past 18 months.

It was Shocken, whose business activity at his successful boutique merchant bank has made him somewhat of an expert on how mergers and acquisitions play out, who first reached out to me about "the business community needs to take sides and do so visibly against Delta."

I was receptive to Shocken's argument, and did several columns commencing with one that said Delta had turned from partner, which had been its relationship with Alaska, to predator.

The reaction of others I met with in the business community, not just in Seattle but across the state, after the first column indicated to me that Shocken wasn't merely crying wolf, particularly after a member of Alaska's board had confided "we're really worried."

So was the Delta issue a consideration for Alaska in its decision to approach Virgin America last fall about a sale?

Asked about that, Joe Sprague, Senior Vice PresidentCommunications & External Relations, said "We're viewing this as a combination that will make Alaska stronger and better positioned to remain a successful, independent, Seattle-based company for decades to come."

The deal still needs to pass through regulatory approval and as part of its information pack Alaska Airlines issued a timeline with the deal set to close January 1, 2017, and full integration by the first quarter of 2018.

The merge is likely to attract the scrutiny of Justice Department officials already pursuing allegations that America's biggest airlines have colluded to keep airfares high.

And since the takeover will mean California no longer will have an airline based in the state, which served as home to a variety of carriers over the decades, there may well be an effort to convince regulators it's not good for consumers.

For those who like a chuckle with their politics, it would amusing if Alaska-Virgin provided California's dynamic female Democratic duo in the U.S, Senate reason to clash for the first time with their Washington Senate Democrat counterparts.

But antitrust experts suggest the takeover of Virgin by Alaska probably will be seen by those federal regulators as a union that will better equip Alaska to compete against larger rivals.

And if the concern of Shocken and others who have watched the shrinkage of the airline industry by takeovers play out were legitimate, Alaska was destined to lose a battle with Delta so the prospect of an erosion of discount fares was bound to be an outcome, whether because if Alaska's growth or its decline.

The final piece of the Delta puzzle that needs to play out is the possible restoration of a Delta-Alaska partnership arrangement. The effort to achieve that is certainly a possibility with the retirement of Richard Anderson from the CEO role, since he was the key protagonist in the obvious beat-down-Alaska strategy. But since Anderson remains as executive chairman of the Delta board, he may still influence a Delta move to restore relations with Alaska, returning to partner instead of predator.

But the fact is any thoughts about that are not even on Alaska's agenda right now. 

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© Mike Flynn 2016

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