In a wager on a problematic but profitable airline, Alaska Air Group Inc. announced on Sunday that it would buy Hawaiian Holdings Inc. For $1.9 billion, involving debt, as US antitrust authorities oppose consolidation in the airline industry.
Alaska Air announced that it would pay $18 in cash per share, which is nearly four times what Hawaiian Airlines closed at on Friday. The enormous premium was a reflection of how damaged Hawaiian's stock was. In the past year, Hawaiian Airlines has seen significant losses and a 65% decline in share price due to the Maui wildfires, elevated fuel expenses, and jet engine recalls on some of its Airbus SE planes.
Antitrust authorities will undoubtedly scrutinize the deal as they contest in court JetBlue Airways Corp.'s planned $3.8 billion purchase of Spirit Airlines Inc.
Despite the fact that United Airlines, American Airlines, Delta Air Lines, and Southwest Airlines control 80% of the US aviation market, antitrust authorities have been suspicious about mergers among smaller airlines. They had been successful in pushing JetBlue to terminate ties with American Airlines after three years of cooperation in July.
With this partnership, Alaska Air, which is estimated to be worth $5.1 billion, will be able to control over 50% of the market for flights to Hawaii, one of the top tourist destinations worldwide.
In an interview, CEO of Alaska Air Ben Minicucci said that Hawaii is the place where people desire to vacation, spend time together, get married, and celebrate milestones, and he believes it will continue to be strong for years to come.
Given that the two airlines overlap on only 12 of the 1,400 flights they run together, he was optimistic that regulators would approve the acquisition by the end of 2024.
Additionally, Alaska Air justified its 270% premium offering as a good deal, pointing out that Hawaiian is valued at 0.7 times its yearly revenue in the contract — much less than the 1.7 times industry average. It further stated that it anticipated yearly savings of at least $235 million.
According to those with knowledge of the situation, Alaska Air reached out to Hawaiian to explore a possible partnership during the summer.
Hawaiian reported a net loss of $159.3 million for the first nine months of 2023, which is less than the $189.9 million it lost during the same period last year. The Maui wildfires resulted in lower flight traffic; its losses are also being driven up by a 4% increase in jet fuel prices; and problems with Pratt & Whitney engines manufactured by RTX Corp. grounded a portion of its Airbus A321neo fleet.
Hawaiian had a lengthy history of profitability before those problems, with operating margins varying in the mid-teen percentage range between 2010 and 2019, according to a presentation given by Alaska Air to investors.
Within the first two years, Alaska Airlines is likely to see high single-digit profit increases from the purchase, the firm said, with no discernible effect on long-term balance sheet metrics.
Following the retirement of the Airbus aircraft it inherited when it acquired Virgin America in 2016, Alaska Air has solely operated Boeing Co.'s 737 aircraft since the end of September of this year.
Minicucci stated that the combined business will initially run a mixed fleet while leaving open the possibility of future rationalization. Under his direction, it will be headquartered in Seattle, with Honolulu developing into a major hub for Alaska Airlines.
Representing 600,000 workers in manufacturing and aerospace, the International Association of Machinists and Aerospace Workers declared that it will take all necessary measures to safeguard its members' rights at both airlines.