Alaska Air Group Acquires Hawaiian Holdings Amid Sector Consolidation

Alaska Air Group Inc announced on Sunday its plans to purchase Hawaiian Holdings Inc for $1.9 billion, including debt. This move is seen as a gamble on an airline that, despite its struggles, has profitable routes. The decision comes at a time when U.S. antitrust regulators are opposing consolidation in the sector. 


Alaska Air plans to pay $18 per share in cash, nearly quadruple Hawaiian's closing price on Friday. This significant premium reflects the extent to which Hawaiian's shares have been devalued. Factors such as the Maui wildfires, high fuel costs, and jet engine recall issues with some of Hawaiian's Airbus SE planes have led to substantial losses and a 65% drop in share price over the past year. The transaction is likely to draw the attention of antitrust regulators, who are currently challenging JetBlue Airways Corp's proposed $3.8 billion acquisition of Spirit Airlines Inc. in court. 

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Despite four major players (United Airlines, American Airlines, Delta Air Lines, and Southwest Airlines) controlling 80% of the U.S. aviation sector, antitrust enforcers have been wary of mergers between smaller airlines. They successfully persuaded JetBlue in July to dissolve a three-year-old alliance with American Airlines. The merger with Hawaiian would give Alaska Air, valued at $5.1 billion, control of over half the market for flights to Hawaii, one of the world's top tourist destinations. Alaska Air CEO Ben Minicucci expressed his belief in an interview that this market will remain strong for years to come, as people continue to choose Hawaii for vacations, weddings, and anniversaries. 


He also expressed confidence that regulators would approve the deal by the end of 2024, given that the two airlines only overlap on 12 of the 1,400 flights they operate collectively. Alaska Air defended its 270% premium offer as a good deal, pointing out that the transaction values Hawaiian at 0.7 times its annual revenue, significantly below the industry average of 1.7 times. The company also expects to save at least $235 million annually. Over the summer, Alaska Air approached Hawaiian to discuss a potential merger, according to sources familiar with the matter. Hawaiian reported a net loss of $159.3 million in the first nine months of 2023, which is less than the $189.9 million loss in the same period the previous year. Factors such as the Maui wildfires leading to decreased air traffic, a 4% increase in jet fuel costs, and issues with engines made by RTX Corp's Pratt & Whitney grounding some of its Airbus A321neo fleet have contributed to its losses. In an investor presentation, Alaska Air highlighted Hawaiian's history of profitability prior to these issues, with operating margins fluctuating in the mid-teens percentage between 2010 and 2019. The company expects the deal to result in high single-digit earnings gains for Alaska Airlines within the first two years, with no significant impact on long-term balance sheet metrics. After retiring the Airbus planes it acquired with its purchase of Virgin America in 2016, Alaska Air has been exclusively flying Boeing Co's 737 planes since the end of September this year. The merged company will operate a mixed fleet for the time being, according to Minicucci, who did not rule out future rationalization. The company will be headquartered in Seattle under Minicucci's leadership, with Honolulu becoming a key Alaska Airlines hub. The International Association of Machinists and Aerospace Workers (IAM), a trade union representing 600,000 manufacturing and aerospace workers, pledged to take all necessary steps to protect the rights of members at both airlines.

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