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Conditions to the Alaska Air Group-Virgin America Deal

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Limitations on code-share agreement

There were no asset divestiture conditions as part of the Department of Justice agreeing to the Alaska Air-Virgin America deal. However, Alaska Air Group (ALK) will have to make changes to its code-share agreement with American Airlines (AAL). There will be no changes to the loyalty agreements between the two airlines. Also, there won’t be implications on Alaska Air Group’s other airline partnerships including the one with Delta Air Lines (DAL).

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Impact

Due to changes in the code share agreement, Alaska Air Group will lose revenue in 45 markets. Alaska Air Group’s codeshare revenue fell significantly—only 6% in 2016 compared to 9% in 2015.

The company expects to lose ~$60 million due to these changes. However, Alaska Air Group also expects to recover 70% of the revenue of ~$40 million–$45 million through its own customer additions.

The net loss from these changes to the code-share agreement with American Airlines will only be $15 million–$20 million.

Synergies received

The combined entity will boast revenue of more than $7 billion—27% higher than Alaska Air Group’s 2015 revenue of $5.6 billion. The company also expects an additional $175 million from revenue synergies.

An additional $50 million will be achieved through cost synergies. After full integration, the airline will see annual cost savings of $225 million. The one-time integration costs for the deal would be ~$350 million. Alaska expects Virgin America to start adding to its earnings in the first year—excluding integration costs.

Alaska Air Group accounts for 2.2% of the Industrials/Producer Durables AlphaDEX ETF’s (FXR) holdings. FXR also holds 2.3% in both Spirit Airlines (SAVE) and United Continental (UAL).

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