Virgin America just sold itself for a hefty price. Image source: Virgin America.
After a turbulent start to the year, most airline stocks had a relatively quiet March. Still, two major airline stocks posted double-digit gains during the month. Shares of Virgin America (VA) jumped 23.6%, while shares of Alaska Air (ALK 1.16%) climbed 11.0%, according to data provided by S&P Global Market Intelligence.
Virgin America and Alaska Air stock performance, data by YCharts.
Merger in the air
It's very easy to understand why Virgin America stock spiked during March. As of March 22, Virgin America shares were down about 2% for the month. The following day, Bloomberg reported that Virgin America was considering selling itself, after being approached by a potential buyer. This news sent the stock up 13%.
On March 28, numerous sources reported that JetBlue Airways (JBLU 5.63%) and Alaska Air had both submitted bids to buy Virgin America and that a deal could come together in as little as a week. This sent Virgin America stock even higher.
News of these potential deals also boosted shares of JetBlue and Alaska Air, albeit to a much smaller extent. JetBlue and Alaska have been vying for the No. 5 spot in the airline industry in terms of capacity and revenue, but they are just a fraction of the size of the four biggest airlines. Investors recognized that JetBlue and Alaska could both benefit from bulking up.
A good time to be a domestic airline
In addition to these merger rumors, Alaska Air stock also benefited in March from investors' renewed interest in airlines -- and particularly domestic-focused airlines. While all airlines are benefiting from cheap oil, global airlines have been hurt by everything from the strong dollar to the spread of the Zika virus in Latin America and terrorist activity in Europe.
Domestic-focused airlines like Alaska Air (and Virgin America, for that matter) are mostly insulated from these problems. As a result, they are expected to post solid profit growth in 2016, as long as oil prices stay low.
Merger accomplished: what's next?
Earlier this week, Alaska Air announced that it had agreed to purchase Virgin America for $2.6 billion in cash, or $57/share. That's nearly 50% ahead of Virgin America's share price as of the end of March, and an 86% premium to its share price at the close of trading on March 22, just before the merger talks became public. As a result, Virgin America stock gained more than 40% on Monday and now trades around $55.
Alaska Air paid a big premium to buy Virgin America.
Virgin America shareholders are getting this massive premium because Alaska Air had to win a bidding war with JetBlue to seal the deal. Just two days before the sale was announced, sources suggested that the price would be around $2 billion. The final price soared nearly 30% above that estimate.
Meanwhile, Alaska Air shareholders experienced a bit of sticker shock on Monday, sending the stock down as much as 6%. However, the stock has made up some ground since then.
While Alaska is paying significantly more than expected for Virgin America, the deal solidifies its place as one of the most important airlines for travelers on the U.S. West Coast. There's a lot of work ahead to gain regulatory approval for the deal and then integrate the two airlines. Nevertheless, the Virgin America acquisition gives Alaska Air a strong foundation for long-term share price appreciation.
