Virgin America Can Help Alaska Airlines Up its Game on Several Fronts
Alaska Airlines’ acquisition of Virgin America makes a lot of sense, but its decision to ditch the Virgin brand and stick with the Alaska name and its folksy image doesn’t.
With new entrants threatening to destabilize Alaska’s dominance in the Pacific Northwest, it was high time that the airline did something to diversify its route network beyond its core market. But if the airline wants to hold on to Virgin America’s customers and effectively compete against the other mainline carriers on a national level, it not only needs to up its game in terms of on-board service and amenities, it also needs to rethink its marketing to appeal to a younger and more urbane customer. Simply put, Alaska’s wintry and nature-focused image, bare bones service, and confusing regional name isn’t going to cut it in the big leagues.
Alaska Airlines has been on the periphery of the U.S. airline market, both figuratively and literally, for some time, commanding just 5% of the total domestic market. It sat on the sidelines and was largely overlooked amid the recent merger mania in the airline industry, watching helplessly as its mainline competitors – Delta, American, and United – all grew bigger and stronger. While Alaska was profitable and well-managed during that time, it was considered too small and too regional to be a serious merger candidate for one of the other major carriers. Those carriers all ran coast-to-coast service and intercontinental routes, while Alaska’s route network was limited to the western half of North America, with limited service east of the Mississippi river.
But while Alaska was smaller than its mainline rivals, it was also more profitable on a relative basis, posting returns on invested capital (ROIC) that were typically double that of the big guys. Part of the secret to Alaska’s success was its codeshare agreements on routes in and out of Alaska and the Pacific Northwest. These code share flights with American and Delta effectively limited competition on travel to and from Seattle, Alaska’s biggest hub, as well as on travel to, from, and within the state of Alaska. As a result, Alaska Airlines was able to charge a premium on many of its key routes, contributing to the airline’s overall profitability.
But in 2012, things began to change. Delta announced a massive international expansion out of Seattle, with new nonstop service to cities across Europe and Asia. At first, Alaska welcomed the announcement, as it stood to profit from the increase in passenger traffic that would now connect through Seattle. But Delta had other plans. In 2013, the airline announced a major expansion of domestic service to and from Seattle to feed its new international routes. By 2014, Delta began to phase out its codeshare flights with Alaska and started to directly compete against it on nearly every major route in and out of the Seattle area.
But Alaska wasn’t going down without a fight. It dropped fares, added more seats to its planes, revised its baggage fee policy, and rationalized its fleet to match demand. But the airline quickly figured out that nickel-and-diming customers would only take the airline so far. If Alaska was to survive in this new environment, it would need to expand. So, between the summers of 2013 and 2014, Alaska launched service to 18 new markets, many of which were undeserved tertiary cities, like Raleigh-Durham, Nashville, and Charleston, South Carolina. It then took on Delta directly by offering competing service in and out of its small hub in Los Angeles, announcing flights to Baltimore, Crested Butte, Monterey, as well as San Jose and Liberia in Costa Rica.
While Alaska continued to lose market share to Delta in Seattle, its austerity and expansion efforts helped it maintain its high profit margins in 2015. It successfully expanded into smaller markets, but it failed to crack into many of the big ones due to capacity constraints at major airports across the nation. Andrew Harrison, Alaska’s executive vice president and chief revenue officer, told investors during Monday’s conference call that it took him and his team five years just to get one flight in and out of New York’s JFK airport. This meant that if Alaska wanted to take the big boys on in their home turf, they would need to buy its way in. Alaska targeted the one airline left in the U.S. that had access to these larger markets (and they could afford), Virgin America.
Virgin America has landing rights in many of the cities Alaska wanted to serve, but was unable to do so effectively because of airport capacity constraints. VA has a strong presence in the lucrative “trans con trifecta”—San Francisco International (SFO), Los Angeles International (LAX), and New York’s JFK. It also has highly coveted slots at severely constrained secondary airports, like Washington’s Reagan National, New York’s LaGuardia, and Dallas’ Love Field. There was also little overlap in Alaska and VA’s route network (only seven city pairs), which would be helpful in getting regulatory approval of the deal from the government.
But while this merger may look great on paper, it is far from perfect. Even though both airlines effectively do the same thing, they each do it very differently, making it difficult to see how they can ever combine their operations efficiently. For example, Alaska primarily flies Boeing jets whereas VA exclusively flies Airbus jets. While the Boeing 737 and the Airbus A320 are similar in many ways, there are enough differences between the two that it will make it difficult for the combined airline to mix and match crews and switch aircrafts from one route to another.
But it is the differences inside the companies themselves that seem the most distressing. The two have completely different corporate cultures. VA is hip and cool while Alaska, well, isn’t. VA’s planes have soothing mood lighting, peppy and young flight attendants, fun safety videos, advanced audio visual systems with on-demand entertainment, Richard Branson, all-leather seating and power ports—for all of its customers. Alaska doesn’t.
Alaska has Jenn, its automated help bot; something called pet embargoes; the much-maligned “slimline” seats, with an in-flight safety card and magazine where the AVID screen should be; and of course, that mysterious Eskimo (their words, not mine) painted on the tail of all of its planes.
Alaska Airlines is the epitome of what VA would call a “blah airline.” To say that these airlines offer different in-air experiences would be a massive understatement. But that is because the two have catered to customers in very different markets: Alaska, the West Coast leisure traveler; and Virgin America, the bi-coastal, tech-savvy, urbane “bleisure” traveler, which is a horrible portmanteau signifying travelers who combine a business trip with leisure. These travelers usually spend more than the typical leisure passenger and expect a more sophisticated and upscale in-flight experience in return.
It is this segment of the market that Alaska’s chief executive, Brad Tilden, said he was targeting when acquiring Virgin America on Monday’s analyst conference call. But instead of embracing VA’s carefully cultivated culture, he went on to say that the VA brand was gone and that the VA culture would be assimilated by Alaska’s Eskimo.
Alaska just unveiled a major brand refresh in January, its first in over 25 years. The result? A more colorful “Eskimo” on its tails and modern fonts, which still say “Alaska Airlines.”
That simply won’t be enough to win over the typical bi-coastal frequent flyer, let alone the typical VA passenger or other members of the “bleisure” squad. Alaska has a huge opportunity to adopt the Virgin America brand, but it has instead chosen to trash it for its new colorful Eskimo.
What does an Eskimo mean to a young 20 or 30-something traveling between the liberal bastions of New York and San Francisco? Trust me, it won’t be a warm feeling of hospitality, but rather a cold shiver of native repression.
Furthermore, the name “Alaska,” is likely to conjure visions of a distant wilderness where bears live and Sarah Palin goes hunting.
Virgin America isn’t owned or controlled by Richard Branson’s Virgin Group. It pays the Virgin mothership an annual royalty fee of 0.7% of its revenues to use the Virgin name and brand. It is debatable if the fee is worth the money. The combined airline is projected to have annual revenues of more than $7 billion, which would translate to a fee of around $49 million.
If Alaska took on the Virgin name, it wouldn’t be the first time an acquirer adopted its target’s brand. America West did it in 2005 when it acquired US Airways. It was a good move as US Airways signified a legitimate national airline instead of a regional desert puddle jumper. America West was the better airline but it went ahead and changed its name to reflect what the company wanted to be instead of what it used to be.
But it is understandable if Alaska doesn’t want to pay millions of dollars to use the Virgin name or pay for the privilege of having a fossilized Richard Branson rep its brand in ads. But it could adopt Virgin America’s culture without using the Virgin name or logos. After all, the Virgin Group does not have exclusive rights to mood lighting, fun safety videos, and clever marketing. Alaska bought Virgin America outright, so it (hopefully) made sure to retain some of its talent as well. They can help Alaska move beyond its stodgy identity so that they can take on the big guys.
Alaska needs a real brand overhaul if it’s going to fly coast to coast. If it passes on adopting the Virgin America name, it should embrace a new name, which speaks to the airline’s reach and its desires to be the premier airline serving the West Coast. Indeed, almost anything at this point would be better than “Alaska Airlines” – even an old regional name, like “America West,” would better represent what the brand is today; that is if they could buy the rights from American Airlines, which acquired US Airways, to use it.
In any case, Alaska has fought hard to get where it is today. Competition took them out of their comfort zone, forcing them to grow from a regional airline to a national one with coast-to-coast service. But its acquisition of Virgin America does not automatically make them a major player just yet. After all, the combined company only commands 7% of the domestic air travel market, a fraction of rivals like American with 25%, Delta with 20%, Southwest with 19%, and United with 18%.
But that combined 7% share is greater than JetBlue’s 5% or Spirit’s 3%, making the new company the king of the little guys. It can stay that way, until it is devoured by one of the large carriers. Or it can use Virgin’s network as an opportunity to steal market share and grow even more. To get there, it needs to make some changes. Alaska’s management should do more than take note of VA’s culture—it should make it its own.