Folks:
Alaska Airlines paid $2.6 billion to buy Virgin America. You might think “Well, they bought 57 high-quality Airbus-brand airplanes so of course they had to pay a lot.” Yet it seems that Virgin leases its planes (press release) and the balance sheet shows only $180 million in “Property Plant and Equipment,” which is presumably how an Airbus would be categorized.
If the U.S. had a truly competitive market for air travel, wouldn’t the value of Virgin America be a lot lower? An established company such as Alaska wouldn’t even want to bother buying a competitor but would instead just lease its own Airbus fleet from a standard source and then start operating them on whatever routes that Virgin America currently operates. Given how unions and airlines work, this should actually be a lot cheaper because Alaska would hire new pilots and flight attendants at first-year pay rather than bringing in senior union members.
Other than oligopoly rents being extracted from American consumers due to a lack of competition, how else can we explain the high value of an incumbent airline with virtually no physical assets?
maybe what they paid for was all the terminal access contracts and the brand, allowing Alaska Airlines to expand way faster in US proper.
I thought there was scarcity on gates and landing slots at major airports. You and I can’t just start an airline and start landing at SFO. I think that’s the major part of the value.
moga, Chris: Your theories are confirmed by http://www.bloomberg.com/news/articles/2015-06-16/forget-about-airline-mergers-now-it-s-all-about-trading-airport-slots
However, isn’t this evidence of government-incumbent collusion against consumers? Airports with scheduled service are owned by governments (typically local or state). If their mission were to support a competitive marketplace why would they allow airlines to lock in gates and lock out competitors? If citizens’ interests are paramount, why not auction gates every 6 months or so to the highest bidder? That way the airport gets the maximum dollars of revenue to recoup capital investment and operating costs and consumers have a chance to avoid paying monopoly prices to an airline that has gathered up all of the gates at what the Bloomberg article calls a “fortress hub.”
Even if the government was auctioning slots daily, it’s too late at this point to have a competitive airline market in the US – there are only a handful of players left and hardly anyone willing/able to start a new airline. In the long run, any profitable airline gets shaken down by its union so long term sustained profits are impossible. At some point, fuel prices tick up but the labor cost structure can never be reduced and raising ticket prices reduces the # of leisure fliers so either you are flying empty seats or far fewer flights. Things look good at the moment with low fuel prices but this cannot last.
Buyouts are all financed by the Yellen, so the valuation is whatever it takes to maintain full employment. Fortunately, the taxpayers are only on the hook for $2.6 billion in this time. Better than the $2 billion Google borrowed for Nest, which produced nothing.