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Will Hawaiian Airlines be in Trouble After Virgin-Alaska Merger?

Putting to rest all speculations, Seattle, WA-based Alaska Air Group ALK has finally agreed to acquire California-based low-cost carrier Virgin America VA at a value of $57 per share in cash. The total deal value is approximately $4 billion, inclusive of debt and capitalized aircraft operating leases. The deal, cleared by the boards of both the companies, is expected to be completed by the first day of 2017.

Alaska Air Group’s presence in the West Coast would improve significantly following the completion of the deal. The carrier will gain access to key markets like New York, Los Angeles, Las Vegas, Chicago, Boston, San Diego, Denver and Washington D.C dislodging JetBlue Airways JBLU from its fifth-largest position among the U.S. carriers in terms of traffic. Incidentally, Alaska Air Group outbid JetBlue to settle the Virgin America deal in its favor.

Naturally, the massive expansion of Alaska Air Group‘s West Coast operations, in the event of the deal materializing, will intensify competition for carriers like Hawaiian Holdings HA that has a significant presence in the area, connecting multiple cities with Hawaii. In Feb 2016, Virgin America had announced its decision to launch non-stop flights connecting Los Angeles and Hawaii. The flights will be operational from May 2016.

With both carriers vying for market share in the West Coast, there is the possibility of a price war. In this price war, Hawaiian Holdings may emerge second best given the combined entity’s improved marketing muscle and network, thanks to the creation of a powerhouse in the aviation space following the merger. The transaction is expected to boost the carrier’s revenues by 27% to over $7 billion on an annual basis. Consequently, increased pricing power for Alaska Air Group may put an upward pressure on airfares in the region.

However, some market watchers believe that since Alaska Air Group and Virgin America already operate flights connecting Hawaii and the West Coast cities, the creation of a bigger and stronger Alaska Air Group, post-merger, won’t affect Hawaiian Holdings significantly. Whatever be the final outcome, we expect investors to remain focused on West Coast operations in the event of the deal materializing.

Zacks Rank

Hawaiian Holdings, like Alaska Air Group and Virgin America, carries a Zacks Rank#3 (Hold). Investors interested in the airline space may consider China Eastern Airlines Corp. Ltd. CEA, which sports a Zacks Rank #1 (Strong Buy).

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JETBLUE AIRWAYS (JBLU): Free Stock Analysis Report
 
HAWAIIAN HLDGS (HA): Free Stock Analysis Report
 
CHINA EASTN-ADR (CEA): Free Stock Analysis Report
 
ALASKA AIR GRP (ALK): Free Stock Analysis Report
 
VIRGIN AMERICA (VA): Free Stock Analysis Report
 
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