It's been more than three months since West Coast airline Alaska Air (NYSE:ALK) announced plans to buy its smaller rival Virgin America (NASDAQ:VA). However, there is less clarity than ever about Alaska's plans for the popular Virgin America brand.
Last month, Alaska Air CEO Brad Tilden even floated the idea of keeping the Virgin America brand around indefinitely in order to maintain the loyalty of Virgin America's customer base. However, this would be prohibitively expensive and inefficient. Alaska Air needs to adapt its own brand to satisfy as many Virgin America customers as possible, without alienating current Alaska Air customers.
One company, two brands?
When Alaska Air announced that it had won the bidding war for Virgin America, it stated that Alaska Airlines would be the surviving brand. This wasn't very surprising, given that it is more than three times larger than Virgin America.
However, some airline analysts have noted that the two carriers have much different corporate cultures and public images. As a result, Alaska risks alienating Virgin America's employees and customers. After loyal Virgin America fliers began raising concerns about the disappearance of their favorite airline, Alaska Air's management started to backtrack on its stated plan.
In a speech last month, Tilden stated that he was looking at running two separate brands forever. To support the feasibility of this approach, he pointed out that numerous airline companies in Europe operate multiple brands.
Keeping Virgin America forever doesn't make sense
It's a clever move for Tilden to suggest that the Virgin America brand could stick around forever. Just showing that he understands the brand's appeal could help keep Virgin America customers loyal. Furthermore, no matter what Alaska does in the long run, Virgin America will keep operating as a separate airline for at least a couple of years.
Nevertheless, running two airlines side by side is inefficient and wouldn't make sense in the long run. On the cost side, the two brands probably wouldn't be able to share customer-facing staff. Operating separate Boeing and Airbus fleets would drive up maintenance and pilot costs. The two brands would need separate marketing campaigns. And Virgin America has to pay licensing fees for the Virgin brand totaling 0.7% of its revenue.
On the revenue side, allowing customers to access the combined route network could spark confusion as flights would offer different amenities depending on whether they were "Alaska Airlines" or "Virgin America" flights.
Finally, Tilden's comparison to European airlines doesn't make sense. The airlines that have maintained separate identities are typically national flag carriers. Addressing national pride is the key reason for keeping separate brands: not differences in service. Also, North American airlines are expected to earn three times as much profit as European airlines this year. Thus, Alaska Air (one of the most successful U.S. airlines) shouldn't emulate its European peers.
A slow transition would make sense
In the long run, the best way for Alaska Air to maximize its profitability will be to have a single brand and operate a single fleet type. This would mean getting rid of Virgin America's A320-family planes in favor of more 737s.
However, executing this transition will take time. First, 737 availability is fairly minimal over the next five years. Second, most of Virgin America's fleet is leased and these leases don't start expiring until around 2020.
Based on this timeline, Alaska Air can afford to fold Virgin America into its operations slowly. Southwest Airlines took more than four years to retire the AirTran brand from the time that merger was announced in 2010, and Alaska Air may want to move at an even more deliberate pace.
Leases for more than a third of Virgin America's fleet will expire between 2020 and 2022. This would be an ideal time to phase out the Virgin America brand for good, giving Alaska Air about five years to woo Virgin America customers. To accomplish that task, Alaska should try to incorporate some of Virgin America's distinctive amenities into the Alaska Airlines brand over the next few years.
Some of Virgin America's signature features, such as mood lighting, would be very easy to add to Alaska Airlines planes. Others, like personal seatback TVs, would cost more but might be a worthwhile investment if they ensure the loyalty of Virgin America fans.
Finally, some Virgin America features -- like its gigantic first-class seats -- may not be feasible to roll out across the whole Alaska Airlines fleet. But they could still be deployed on select routes that generate a lot of high-fare traffic, as long as Alaska can clearly distinguish that product from the standard first-class seats it uses today.
By introducing key elements of the Virgin America experience to the Alaska Airlines brand in the coming years, Alaska will have an opportunity to win over Virgin America loyalists long before phasing out the latter brand. It may lose a few customers, but a slow integration is likely to deliver much better long-term results than keeping the Virgin America brand forever.