JetBlue: Paying $4 Billion for Virgin America Would've Been Idiotic

As I explained in one of my previous articles, acquiring Virgin America (VA) would have provided a big boost to JetBlue (JBLU). Both the carriers had similar fleet and the acquisition would have boosted JetBlue’s presence on the West coast and reduced its extreme reliance on the East coast.

The acquisition would have made perfect sense, however Alaska Airlines’ (ALK) bid for Virgin America dwarfed JetBlue’s, which I warned could happen due to Alaska’s stronger balance sheet.
While I think buying Virgin America would have been the easier way for JetBlue to strengthen its struggling West coast business, I think the company made the right decision by bowing out of the race.

I believe that Alaska Airlines has grossly overpaid for Virgin America. Although the acquisition will help Alaska strengthen its West coast business, the acquisition is overpriced and it will take Alaska a long time to benefit from it. Alaska Airlines’ bid $2.6 billion for Virgin America and the total deal ended up costing $4 billion when including debt.

I can’t comprehend how it is possible for Alaska Airlines to recover the $4 billion even in the long-run. Given the razor thin margins of the aviation industry, the troublesome process of integration and merger costs, I just don’t see Alaska Airlines making back the $4 billion. Alaska paid about 40% of its market cap and a 47% premium for the deal, which I find insane and shows desperation.

While acquiring Virgin would have given JetBlue the easy way out, Virgin is not worth anywhere near $4 billion. JetBlue can put the money to a lot better use and can grow organically by buying more airplanes or looking for other potential acquisition candidates like Hawaiian Holdings (HA). Safe to say, JetBlue walked out of a very bad deal.

JetBlue’s stock retracted on the news that it has lost out to Alaska, but I think the pullback should be used to initiate a long position. As I have previously said, JetBlue can continue growing its profits by rolling out its high-margin Mint services across various mature routes and can also expand its business by entering new markets.

As much as I would have liked for JetBlue to acquire Virgin America, I think the carrier did the smart thing by walking out of the deal. I don’t see how Alaska Airlines can make its money back on this deal. Given the recent pullback in JetBlue’s shares, I think investors should buy the stock.
Published on Apr 6, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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