By Rajesh Kumar Singh, Akanksha Khushi and Anirban Sen
(Reuters) -Alaska Air Group Inc said on Sunday it would acquire Hawaiian Holdings (NASDAQ:HA) Inc for $1.9 billion, including debt, placing a bet on a troubled airline with lucrative routes as U.S. antitrust regulators fight consolidation in the sector.
Alaska Air (NYSE:ALK) said it would pay $18 per share in cash, close to four times Hawaiian's closing price on Friday. The whopping premium reflected how battered Hawaiian's shares were. The Maui wildfires, high fuel costs and jet engine recall issues at some of Hawaiian's Airbus SE (OTC:EADSY) planes contributed to heavy losses and a 65% share price drop in the last 12 months.
The deal is bound to attract antitrust scrutiny as U.S. regulators challenge JetBlue Airways (NASDAQ:JBLU) Corp's proposed $3.8 billion acquisition of Spirit Airlines (NYSE:SAVE) Inc in court.
Antitrust enforcers have been suspicious of mergers between small airlines despite 80% of the U.S. aviation sector controlled by four players: United Airlines, American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL) and Southwest Airlines (NYSE:LUV). They were successful in getting JetBlue in July to abandon a three-year-old alliance with American Airlines.
The tie-up with Hawaiian would give Alaska Air, valued at $5.1 billion, control of more than 50% of the market for Hawaii flights, to one of the world's most popular tourist destinations.
"This is where people want to come spend time and vacation and have weddings and anniversaries. This is something that we believe that will remain strong for years to come," Alaska Air CEO Ben Minicucci said in an interview.
He expressed confidence that regulators would approve the deal by the end of 2024 because the two airlines overlap in just 12 of the 1,400 flights they collectively operate.
Alaska Air also defended its 270% premium offer as a bargain, noting that the deal values Hawaiian at 0.7 times its annual revenue, far below the industry average of 1.7 times. It added it expected a minimum of $235 million in annual savings.
Alaska Air approached Hawaiian to discuss a potential tie-up over the summer, people familiar with the matter said.
Hawaiian posted a net loss of $159.3 million in the first nine months of 2023, smaller than the $189.9 million in the year-ago period. The Maui wildfires led to lower air traffic, a 4% spike in jet fuel costs is weighing on its losses, and issues with engines made by RTX Corp's Pratt & Whitney grounded some of its Airbus A321neo fleet.
In an investor presentation, Alaska Air noted Hawaiian's long history of profitability prior to those issues, with operating margins fluctuating in mid-teen percentages between 2010 and 2019.
The deal is expected to generate high single-digit earnings gains for Alaska Airlines within the first two years with no material impact on long-term balance sheet metrics, the company said.
After retiring the Airbus planes it inherited with its acquisition of Virgin America in 2016, Alaska Air has been only flying Boeing (NYSE:BA) Co's 737 planes since end-September this year.
The combined company will operate a mixed fleet for now, Minicucci said, without ruling out future rationalization. It will be based in Seattle under his leadership, and Honolulu will become a key Alaska Airlines hub.
The International Association of Machinists and Aerospace Workers (IAM), a trade union representing 600,000 manufacturing and aerospace employees, said it will take all steps to protect the rights of members at both carriers.