Will the Alaska Air Group, Inc. and Virgin America Inc. Merger Hurt Bombardier, Inc.?

Alaska Air Group, Inc. (NYSE:ALK) purchased Virgin America Inc. (NASDAQ:VA) for $2.6 billion. How can this hurt Bombardier, Inc. (TSX:BBD.B)?

| More on:
The Motley Fool

On April 4, Alaska Air Group, Inc. (NYSE:ALK) purchased Virgin America Inc. (NASDAQ:VA) for $2.6 billion, creating the largest airline carrier on the West Coast. One of the biggest reasons for the buyout is to combine terminal spaces and landing rights, consolidating the western market while expanding access to eastern hubs. The combined company will also share aircraft, posing a potential hurdle for Bombardier, Inc. (TSX:BBD.B).

The issue

Alaska Air flies primarily Boeing Co (NYSE:BA) aircraft, while Virgin mainly flies Airbus Group SE. Alaska Air also operates smaller Bombardier planes that service a minority of its routes. It owns 51 Bombardier Q400s and several Bombardier CRJ-700s. After the buyout is completed, the combined company will operate an onerous variety of planes, including aircraft from Boeing, Airbus, Embraer, and Bombardier.

It’s highly likely it will begin shedding non-Boeing jets and consolidate about one or two manufacturers. The cost savings of operating a streamlined fleet are too big to ignore.

A perfect case study is Southwest Airlines Co (NYSE:LUV). Most airline fleets fly 10 or more types of aircraft, but Southwest uses just one, the Boeing 737. Southwest’s vice president of Ground Operations explained the cost savings that comes with this strategy:

We only need to train our mechanics on one type of airplane. We only need extra parts inventory for that one type of airplane. If we have to swap a plane out at the last minute for maintenance, the fleet is totally interchangeable—all our on-board crews and ground crews are already familiar with it. And there are no challenges in how and where we can park our planes on the ground, since they’re all the same shape and size.

The impact

Now entering its 40th consecutive year of profitability, Southwest has created a strategy worth emulating. That could be bad news for smaller, niche manufacturers like Bombardier. According to Howard Rubel, an analyst at Jefferies, airlines prefer fewer models in their fleets, making cockpits more familiar to pilots. “Commonality works,” he said.

Bombardier may already be feeling to effects. For example, Horizon Airlines, the regional arm of Alaska Airlines, recently ordered 30 Embraer E175 aircraft, a direct competitor to Bombardier’s CSeries jet. Earlier this year, United Airlines agreed to buy 40 small planes from Boeing, a $3.2 billion deal that Bombardier had been vying for.

Further industry consolidation, like the Alaska/Virgin deal, will only exacerbate endings like this. While most of the biggest carriers have already combined, there could be another wave of consolidation within regional airlines, which operate roughly half of all departures by major airlines.

Long-term trends like industry consolidation will only provide more headwinds to Bombardier’s struggling CSeries line.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Investing

A worker uses a double monitor computer screen in an office.
Dividend Stocks

2 of the Best Canadian Stocks That Pay Out Monthly

These two Canadian dividend stocks are some of the best to buy, offering yields upwards of 5.4% and returning cash…

Read more »

Oil pumps against sunset
Energy Stocks

Suncor Stock: How Low Could it Go in 2023?

Suncor (TSX:SU) is up on the back of a bounce in oil prices but remains out of favour. Can new…

Read more »

clock time
Dividend Stocks

How Investors Can Build a $1 Million Portfolio in 12 Years

If you can handle it, you can certainly create a million-dollar portfolio in just 12 years, especially considering this dividend…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Passive-Income Seekers: 4 Safe Dividend Stocks to Own Beyond 2033

Dividend stocks are great, but only if they continue to perform after downturns as well. In the case of these…

Read more »

stock analysis
Tech Stocks

Investing in AI: 1 Cheap Tech Stock Poised for Growth

Docebo is a little-known Canadian tech firm that's unlocking the power of next-generation AI technologies.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

4 Big Dividend-Paying Stocks for 2023

These four stocks all earn strong cash flow and offer attractive dividend yields, making them some of the best to…

Read more »

A airplane sits on a runway.

1 Growth Stock Down 40% to Buy Right Now

This Canadian stock has years of growth potential, and considering the significant discount it trades at now, it's a top…

Read more »

grow dividends
Dividend Stocks

This 7.5 Percent Dividend Stock Pays Cash Every Month

If you need cash now, this dividend stock is certainly one I would consider that could double in share price…

Read more »