What Deutsche Bank Thinks About Virgin America’s Potential Merger With JetBlue/Alaska

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Deutsche Bank said that recent headlines regarding airline M&A and shareholder activism as potential non-fundamental, upside catalysts for the stocks in 2016.

Analyst Michael Linenberg commented in a Bloomberg report that said Virgin America Inc (NASDAQ: VA) has received takeover offers from Alaska Air Group, Inc. (NYSE: ALK) and JetBlue Airways Corporation (NASDAQ: JBLU).

In a note to clients, Linenberg said, “To put some context around the participants, Virgin represents approximately 1.5 percent of domestic capacity compared to JetBlue’s 6 percent share and Alaska’s (including its Horizon subsidiary) 5 percent share.”

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Weighing Options

He continued, “The combination of any of the two of those airlines results in a domestic share no greater than 11 percent, which is much less than the 18 percent – 23 percent domestic shares of American Airlines Group Inc (NASDAQ: AAL), Delta Air Lines, Inc. (NYSE: DAL), Southwest Airlines Co (NYSE: LUV) and United Continental Holdings Inc (NYSE: UAL) (including their regional partners).”

There is very little overlap between Alaska/JetBlue and Virgin America (six and eight airport pairs, respectively), and more importantly, none of the airport-pairs drop to a single carrier following a potential merger, Linenberg noted.

The analyst said regulators have typically looked at markets on a city-pair basis, rather than on an airport-pair basis; however, although slot-constrained airports have resulted in special considerations over the past years for several transactions.

“In that regard, one could argue that in the case of the SFO Bay Area, regulators should also examine service out of Oakland or San Jose when assessing the overall competitiveness of a market,” Linenberg added.

“As such, we think a robust analysis needs to consider the impact of Southwest at Oakland (and San Jose) when examining the potential reduction of competitors in a SFO Bay Area market.”

Separately, UBS’s Darryl Genovesi has said a JetBlue or Alaska Air merger with Virgin is 15 percent accretive, but he feels such a deal could lead to a modest slowdown broadly speaking, specifically in the overall industry supply growth.

Shares of Virgin America, backed by U.K. billionaire Richard Branson, has jumped about 14 percent in the last five days on the M&A chatter. The stock closed Friday at $38.90, up 0.88 percent on the day.

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