Alaska Air stock falls sharply on difficulties with Virgin, Horizon Air
 

Wow... 13% drop.

ALK... wow. Time to buy? Or more bumps ahead...

It's been a trying year for ALK. I'm not a buyer. :td:

Have to see which of the legacies step in to deliver the coup de grace while AS is down.

Why would Alaska buy Virgin, then remove the only advantage it had on many of the Virgin routes just as competitors like B6, AA, United, DL are adding a lot of capacity on these same routes? On transcons, Virgin is far behind all competitors in the premium cabin and more expensive than competitors in economy.

Then to switch to the Alaska product which takes away what little differentiation VX has while raising wages up up to AS levels just sets up a financial disaster. The conference call made it seem like management at Alaska still does not know what they spent billions of dollars on or how they are going to make the VX network profitable. After much prodding by analysts they said they would be looking at the VX network at some point in the future. They really sounded like they had no idea what they were doing.

Competition is increasing every day and the only strategy they have implemented in California is to add a bunch of new routes and hope that people pay for it and that there are enough pilots to fly them.

They are getting killed on transcons and intra California flights now and it will just get worse with the AS product and giving away premium seats. They are not going to make money as the bottom feeder carrier from California.

UA’s conference call was panned last week but the one for ALK today made the UA management team look like geniuses.

Sure seems like they wish they could just hit the undo button on the whole deal...

You sure about that? I'm not saying that it isn't trickier than they'd hoped, especially with the QX problems happening simultaneously, but they didn't get into a bidding war with B6 on a whim.

(1) No
(2) Overall, a down market day
(3) Stock overreaction, as is common. I'd say that half of the drop was justified, and half was overreaction.

I'm LA based and travel mostly for leisure. I know that pricing does not equal yields, but ... VX seems awfully expensive for their transcons out of LAX, especially when compared to the likes of Delta.

If it wasn't for the BUR-SEA flight, I'd switch entirely. As it is I'm not going to requal for next year, so I guess I'll be a free agent.

Full transcript:

https://seekingalpha.com/article/411...all-transcript

Most interesting quote (to me):

Yes, I think they are having tremendous buyers' remorse...

My next two SFO/JFK are on DL, for $13xx/RT, on lie flat seats with lounge access on both ends.

Most interesting (generally) to me is you rarely find such candor out of a board room.

Disappointing that there wasn't more focus on the Horizon debacle and the lasting impact that will have on Alaska's reputation. Allowing that to happen (and continue and continue) will ultimately be as or more important than many of the Virgin integration challenges. It's really tough to win back a customer treated so poorly for all these months.

If you read that in context, with the preceding statements from Brad and Ben, you'd see they're talking about the frustration of getting the integration process behind them so they can get back to doing what they do best, running an airline.

Just my $0.02 of course, but if you read the entire transaction between Hunter Keay and the senior leadership, there's nothing that would lead any reasonable person to conclude there's "buyer's remorse" of any kind.

In my personal opinion....Alaska has probably the best revenue management team there is. You pretty much never see a mainline that has a plane flying with under 95% of the seats full. I've had to fly WN and AA a couple times recently, and that isn't the case there.

Once the the integration is complete and the Virgin name retired, I full expect we'll see the same success. If I had cash to spend, I'd be buying AS stock right now!

Revenue management IS the problem. The load factors have been fine but they are filling planes with low fare tickets booked in advance. Very few people are paying for main cabin select and first on Virgin. The pricing for premium seats on transcons is crazy when the competition all have better products at lower price points. Now conditioning people to expect free upgrades and offering a product that is even worse than the current one makes the situation far worse. Sure you can fill the plane with $129 transcon fares with elites all flying in First with a free upgrade but they have not thought through how to make those routes profitable.

Mint is killing off any premium transcons commanded. DL is also stepping up Premium transcon offerings. AS has failed completely in revenue management. They can fill seats but not at a profit and the trajectory continues to be down not up—most especially in California.

Alaska is still profitable so their revenue management team must not be selling seats at a loss.

Have you even looked into the earnings call? I have and they seem to be completely clueless.

The problems are not AS as a whole, but the VX route maps. AS management is in over their head now that they finally got into the premier west coast markets that are a whole lot more competitive than PNW.

The VX routes are down 8% PRASM YOY, because BOS/FLL-LAX/SFO are complete financial disasters. That's before the additional capacity that will go into the market next year + increased labour cost of VX pilots and crews. Yet they think it's a temporary problem that can some how be solved by putting B739. Completely out of touch.

They seem to be completely unaware that the transcon market has been changed with the mass proliferation of mint which hurts AS/VX far more than the legacy carriers. The next 3 quarters will be when mint enters BOS-SAN, JFK-LAS, BOS/JFK-SEA. At the same time, AA will be adding capacity on JFK-SEA/SAN and same with DL. And both AA/DL will bring in additional lie flat capacity. So while legacy VX network is getting hammered this past Q, it will reach all transcon routes in AS by this point next year.

And this is before all the new routes they are adding later this year and early next and all the capacities added by WN, AS RASM has no where to go but down.

And remember, they don't have all the hurricane cancellations and North East to Florida basic economy fare matching that all other major airlines had to deal with.

No other airlines spent half of their conference call complaining about weakness in intra-cali and cali transcon markets. Why is it only AS that faces these problems?

Remember that the main point of acquiring VX was to keep B6 from acquiring it. Knowing what to do with the asset, or how to compete in markets inherited with VX, was a secondary concern at dealmaking time and apparently still eludes AS to a disturbing degree.

An apt analogy is NBC News acquiring Megyn Kelly. She didn't / doesn't fit into the NBC culture or talent lineup, they didn't know how to deploy her, but the main point of the deal was to keep her off CNN or ABC News. Now that the deal is done NBC still doesn't know how to leverage the asset; her morning talk show is inane and disastrous, and viewers / customers have fled. You've got a veteran political anchor (Fox ideology aside) literally dancing like a loon in front of a live studio audience; it's desperate and pathetic. Neither NBC or Kelly know what to do. The critics are laughing. But, hey, at least she's not hurting us on CNN.

That's Alaska at this stage of the merger.

I've said since the deal was announced that AS is due for a big dose of welcome-to-the-NFL-kid, and here it comes. The airline has always had a sweetheart relationship with hometown boosters in Alaska and the PNW. It's never had to compete with the big guys, or in a market (SFO) that is somewhere between indifferent and hostile to AS.

My wife and I flew F ORD-SEA-YVR and back this week and, while I know it's only a midcon, the shabby old cabin, small portions of one-choice-only food, seats that barely recline, and defiantly poor service (on one segment out of four) are not going to make it in the bigs. AS is crazy to think they'll earn their slice of the transcon pie ex-SFO with a service standard out of the 1980s.

The most shocking part of the call was that they admitted that they have not even looked at the VX network and determined what is working and what is not. It has been 2 YEARS since they started negotiations for the purchase. Every conference call for several quarters before that since the introduction of Mint VX management was saying that their yields and profitability on transcons were going down. VX made nearly all its profits on transcons. AS management had access to far more financial detail available and yet they have not bothered to even come up with a strategy as to how they can compete in what should be the airline's most profitable routes.

They completely ignored the problems at Horizon which are now biting them in the behind. They completely ignored the years of warning by VX management that profitability was going to be a challenge. Then they choose to completely alienate VX customers and just switch to the AS product thinking that an even weaker product will somehow magically attract high flyers in California. They thought people would flock to the AS credit card with their "World Famous" companion fare. Well Southwest is offering a companion pass for everybody in California for all of next year that signs up for their card.

They have been focused so much on the mechanics of merging systems that they have completely forgotten about running the airline and having a strategy to attract the very customers you need to keep the airline profitable. They have no idea what they just purchased in VX and now have rising wages and maintenance costs to deal with very soon.

AS bought VX at the very peak of the cycle. They haven't even faced a poor economy yet.

Hopefully this is a wake up call to management to figure out how they are going to move forward but their current belief that everybody loves AS and will fly them no matter what the competition is doing or what the other available products are will need to change. Otherwise, they will be in serious trouble as the VX network drags the rest of the airline down.

They did not foresee the ever increasing competition into California and it seems like they are willing to back off on some of those fights, esp. transcon to/fr CA.

Also, I am not sure if they were factoring in the impending salary increases when thinking they were well positioned to compete. As they evolve beyond a regional (NW) airline, they will need to be paying Big 3 salaries as labor is now demanding.

This blind (and parochial) belief in their own goodness is as ridiculous in its way as the Continental managers who took over United believing they could force captive hub constituents to fly United, no matter what they charged or how they debased the product.

That strategy worked out horribly for UAL and the everybody-loves-us strategy for AAG, a product of provincial Seattle booster culture, is going to hurt them too. The product, network, and fares are not objectively lovable.

Half the problem with Horizon is difficulties with flight crew recruitment, and that is because of a stubbornly low pay offer. If you're a young qualified FO, SkyWest and Endeavor are outbidding Horizon for your services every day and twice on Sunday. Welcome to the NFL, AAG.

Virgin is/was a California airline. If you were going to cut back on California, there was really no point to the acquisition. A better (though more costly) option was to make the product more competitive. They probably should have kept the Virgin branding and added lie flats to the transcons.

Now they are facing the same issue faced by every other airline that has bought an airline based in California. The ALK stock price reflects the value of VX as -0-. The stock price is now the same as pre-merger. AirCal was completely dismantled by AA and there are many other examples before that.

Spot on. Many of us have been saying the same since the merger was announced.

The AS brand is not an asset in SFO, and when you factor in they destroyed VX, the AS brand may actually be a liability in the SFO mindset. It's a much different mindset than they're accustomed to dealing with in SEA, where much of the clientele is happy to support a local business rather than sending the money to Atlanta, Dallas, or Chicago.

I agree that RM for AS is a huge issue, anecdotally based on the routes I fly. It's either super cheap, or super expensive, never in between. In F, it's always super expensive and I'd guess rarely sells.

Settling to a place where the fare cost distributions end up more normalized across both cabins would likely improve PRASM, but I guess if that were true, they would've done it already...right?

You're misinterpreting the stock price: that's the market saying that Virgin America is (or will be, long run) worth what ALK paid for it. The road to realizing that value may be bumpy.

There certainly are people in the industry knowledgeable about managing multiple regional carriers, and with post-merger integration. If they didn't know concretely what they were going to do with VX by the time the due diligence period closed (let alone the financial transaction), they blew it.

They already blew it as they admitted that they still hadn't even looked at the VX network. ALK just got themselves a boat load of debt and a new network for which they have not even begun to come up with a plan to make competitive. The stock value has gone to pre-acquisition levels and 100% of the profits accrued in the quarter came from the AS network which subsidized the losses as QX/VX in the peak summer travel season.

Costs are rising at QX and will go up substantially as early as next week at VX when the pilot mediation is concluded. Maintenance costs are going up this quarter. Competition for the whole of next year will get more and more intense. The weight on AS just gets heavier and heavier.

Plus a winter full of delays and cancellations at SEA, LAX and particularly SFO is coming soon

Exactly--if they are having trouble in the summer, things are down hill from here.

To better understand what is happening, just go to the UA or AA forum during the times of their mergers. A LOT of the same types of posts during that timeframe. This merger is still in its infancy. And so far they are handling it better than UA is even to this day and theirs started in 2010.

This merger is part of the reason for me switching from UA to AS Oct 2016. Being SFO based AS by itself was a no brainer for not using. Adding VX made it viable. I gave UA almost 5 years before pulling the plug. I am willing to give AS the same consideration to work out their kinks and be viable. Granted AS and VX are MUCH smaller in scale and have minimal international considerations compared to AA or UA so it shouldn't be as complicated.

During the bidding process they didn't want B6 to get VX and at least saw potential with the VX routes. Now that they are doing the merger they have to get down to the nuts and bolts of what will work as a combined airline. UA and AA stock suffered in the early stages but recovered as things got better. Still don't know what UA is doing that they can't seem to fully integrate the 2 airlines. But AS seems to be at least moving forward. As they get under one operating certificate overlapping routes will start to go away and they can better utilize those planes. Just remember, they are still 2 separate airlines with one owner.

Of course there will still, and always, be the VX lovers who will still complain 5-7 years down the line. There are still a lot of CO lovers that complain about UA on the UA forum. 7 years from starting and 5 years since the merger UA and CO flyers are still blaming the other airline for all the problems. I would hope AS learns form the UA CO disaster and makes a better airline. But there will still be the haters.

As for the markets, yesterday was a big down day for all the markets so I would attribute at least have, if not more, of the 13% to this and the rest to the statements made. Just look at UA stock during and after the merger. It is doing much better today than during the merger. Merger statements will make it go up and down depending on what is said. But hopefully the stock makes a big recovery after all is said and done. If UA can do it even with the problems they are still having I would hope AS could do it too and not have as many problems 5 years down the road. I am looking closely at Alaska stock and just may buy some but haven't fully decided yet.

CO and UA merged at the bottom of the cycle. ALL airlines in the US have gone up substantially since then. AS/VX happened at the very top of the cycle. There were also not substantial wage gaps between UA/CO. This is not an issue of AS/VX employees not getting along. This is about taking over an airline that was already facing serious competitive/financial pressures in the best airline climate the US has seen financially since deregulation and not having a clue how to change that course. We all know that the best of times for airlines will not continue indefinitely. VX management were smart to get such a huge premium at the peak of the market from an eager buyer that was so blinded by the prize they didn't bother to think about what they were purchasing. Immediately seeing much higher recurring costs with no clear path to increasing profit generating revenues is not a good place to be.

...and I am not sure they have also factored in that Branson wants to bring Virgin America back once Alaska drops the brand ;).
Full circle. Alaska just ends up with some slots and Airbus narrowbodies.

So those customers disenchanted by the loss of VX will be very happy to see it come back!

I wasn't around this forum when the other mergers happened, but I can assure you there are vast differences here.

VX had a model that was rather unprofitable in the shorter range routes, but made that back and plenty on midcon and mostly on transcon routes. They were able to charge a premium because the product was much better than rest of the market and were not capturing enough corporate contracts to attract more competition in these routes. Since mint introduction, the main area of profit for VX has been hit upside down. Routes that were the most profitable before like JFK/BOS/FLL-LAX/SFO have been savaged by a better and lower CASM product. Now if B6 was successful in purchasing VX, it would have probably updated VX aircraft and use them on most of the transcon routes while keeping its lower CASM aircraft for the leisure routes and E90s for the high frequency business routes. However, that did not happen, so B6 went on a massive mint expansion that has drew legacy carriers also into bringing premium product on line in markets that VX used to do well.

AS management solution to this problem is to put A320 on N/S routes while putting 739s on transcon routes. But the problem is A320 still don't have the CASM to compete against WN on the west coast routes, where comfort level is less of a factor. That's even after they reconfigure to have smaller FC cabin.

And on transcon routes that have mint, they are going to have an even harder time to sell FC, since they have to price it about the same level (around $600) but the product is no where as good. So routes that used to get a lot of paid FC will now consist mostly of upgrades. And even in Seattle area, they will loose some exclusive corporate contracts since DL and B6 offer clearly better J product to NYC. Y prices will be low since carriers with flat bed will use margins for J product to undercut Y prices.

AS management is complaining about $100 O/W transcon tickets. Guess what, B6 is still making money on those routes, so those low fares are not going away. They fundamentally don't realize the game has been changed.

And it will get worse next year once WN adds more to their Cali network and start flying to Hawaii.

Even if a "new VX" does come to fruition, I doubt there'll be much of an impact. Where is Branson going to set up shop, SFO again, to become the third airline hubbed there? LAX, with an incredibly crowded market? SEA, which is running out of room, and where AS has fended off DL fairly well because of hometown loyalty?

Maybe he'd have slightly better chances from PDX, and he could have some decent success out of a dehubbed airport like PIT, but I don't see him directly taking on AS out of spite. He'd be throwing money away--and, thanks to the 25% ownership rule, largely others' money.

Independence Air or Skybus all over again: trying out of second-tier or third-tier cities that probably can't support a reasonably sized operation out of that city as a hub...

There is zero chance that Branson will start another airline in the US unless some major carrier somehow disappeared. VX investors made out like bandits and the chance of that repeating is also close to zero.

I tend to agree with this. AS is like a vacationer who got suckered into an impulse buy of a timeshare, and now a year later the reality of maintenance dues is starting to set in :)

The really gnarly problem from my perspective is the lack of integration early on in the merger. As an AS elite, I refuse to book VX flights right now because I get minimal (until recently, no) benefits onboard. That's keeping their customer base much more segregated than it should be, and is preventing them from realizing most network efficiencies from the transaction yet.

Hopefully when they get it all integrated, things will get better. The problem is that they aren't doing this in a vacuum, and the competition (especially DL and B6) is getting better really fast - they're getting squeezed on both ends and in both hubs by a competent network airline and a competent low cost airline.

If high-value passengers desert Alaska for DL/B6 out of frustration at the merger problems, and discover the grass is greener on the other side, it's going to be really hard to win them back once the operation is actually running smoothly.