×

Did Alaska Air lose its mojo when it bought Virgin America?

  • Less than a year ago, Alaska Airlines bought Virgin America, but was it a smart move?
  • "The execution [of the merger] has been sloppy, [and] there's been bad cost control," says Wolfe Research airline analyst Hunter Keay.
  • Last quarter, revenue per available seat mile (RASM) on Virgin America routes fell 8 percent, while RASM was flat on Alaska's routes.
An Alaska Airlines jet passes the air traffic control tower at Los Angles International Airport (LAX) during take-off in Los Angeles, California.
Getty Images
An Alaska Airlines jet passes the air traffic control tower at Los Angles International Airport (LAX) during take-off in Los Angeles, California.

Less than a year after buying Virgin America, Alaska Air is facing a question few could have imagined when the deal was done.

Did Alaska Air lose its mojo when it bought Virgin America?

"I know mergers are hard, but it does feel like what's been happening here is not really what people are used to with you guys," Wolfe Research airline analyst Hunter Keay said during the Alaska Air earning call. "The execution has been sloppy, there's been bad cost control. It feels like the old Alaska narrative is increasingly irrelevant to investors right now."

Alaska Air CEO Brad Tilden didn't dodge the blunt assessment.

"Mergers are hard. We've sort of been focused on this thing for a year and half now, and honestly, we've got another six or eight months to run hard," Tilden said. "What we're trying to do organizationally is to say, look, this thing is done the middle of next year and we're back to running an airline."

Last quarter, Tilden and his team failed to meet earnings and revenue expectations. A number of factors challenged Alaska in the quarter, including a shortage of pilots causing flight cancellations at its subsidiary Horizon Air.

Still, integrating Virgin America into the Alaska network has been tough. Last quarter, revenue per available seat mile (RASM) on Virgin America routes fell 8 percent while RASM was flat on Alaska's routes.

One Alaska executive on the earnings call summed up the challenge of incorporating Virgin America saying, "We are more frustrated than you."

Shares of Alaska Air closed down more than 10 percent Wednesday, at $68.92. The stock is down more than 22 percent so far this year.

Tilden admits his team is still getting its arms around the Virgin network, and Alaska could change some of the routes Virgin America has flown for years. "You'll see some adjustments to the part of the network we inherited from Virgin America," he said.

In addition, Alaska Air still needs to rebrand all of the Virgin America planes, change their interiors and bring the two airlines' loyalty programs together.

Alaska Air is not the first carrier to struggle while folding an existing airline into its fleet. Years after United Airlines bought Continental it was not uncommon to hear stories about inconsistent operations. To this day, it's not hard to find Continental customers who lament the death of the airline.

Virgin Group founder Richard Branson doesn't hide his disappointment over the impending demise of Virgin America. "It's a great airline and people love it," Branson told CNBC. "I think it is very foolish to absorb it."

WATCH: Branson on Virgin America sale