Alaska Air to buy Hawaiian Airlines for $1.9 billion

New York (CNN) — Alaska Air (ALK) on Sunday announced it will buy rival Hawaiian Airlines (HA) for $1.9 billion.

The acquisition was the culmination of “several months” of negotiations, according to Alaska Airlines CEO Ben Minicucci. It will include $900 million in Hawaiian Airlines debt.

“This is a fantastic deal that bring two airlines that have amazing loyalties in our regions together,” said Minicucci in a news conference, adding that the merger will give customers in both states expanded domestic and international choices.

The deal, which is forecast to take between nine and 18 months, will see both companies keep their brands, a unique decision Minicucci and Hawaiian Airlines CEO and President Peter Ingram say was made out of respect for the nearly 100-year legacy of the two airlines and the communities they serve.

Both states are “uniquely reliant upon air travel,” Alaska Airlines said in a news release Sunday. The airline currently serves 19 cities, many of which are not connected by roads.

Alaska will pay $18 a share in cash for each share of Hawaiian Airlines under the terms of the deal, a 270% premium over Friday’s closing price. Hawaiian shares, which had been down more than 50% so far this year, soared more than 180% in midday trading, while shares of Alaska Air fell about 15% in trading.

Antitrust approval needed to close deal

The deal would need to be approved by federal antitrust regulators before it could be complete. Most airline mergers in recent decades have been approved with little trouble, which has allowed a series of mergers that took the 11 largest US airlines down to only four major carriers that control 80% of the nation’s air traffic.

But the Biden administration has taken a much harder line on antitrust issues, particularly on airline mergers, arguing that they result in higher fares by reducing choices for passengers. It has already won the end of an alliance between American Airlines and JetBlue in the Northeast United States, and it is challenging a proposed merger between JetBlue and Spirit Airlines. Closing arguments in a federal court case in that merger are due to begin on Tuesday.

But Minicucci said that while he has not spoken to regulators about his proposed deal, he said this merger would be different between other airline combinations in which the two airlines serve many of the same routes.

“When you combine these complementary networks, we’ll have about 1,400 flights a day,” said Minicucci on a call with investors Sunday. “On those 1,400 flights, we only have 12 overlap markets. So from a competitive standpoint, I think that lands really, really well.”

But data from Cirium, an aviation analytics firm, shows that Hawaiian airlines has 24% of the available seats on flights between the mainland United States and Hawaii, and Alaska already has 15%, the fourth most behind Hawaiian, United and Southwest, so combining the two would give a single carrier nearly 40% of the capacity on those flights.

CIrium’s data also shows the two airlines’ average fares between the mainland and Hawaii at just over $290 one-way, very close to one another, and more than 8% below the industrywide average. So allowing the two to merge would remove one of the lower cost carriers from the market, even if Southwest remains.

Those facts could set off concerns among regulators.

Financial problems for Hawaiian

Hawaiian Airlines has been struggling financially, and appeared to be in the need of a partner. While major US airlines have all returned to profitability with the help of strong demand for travel and high airfares, Hawaiian has been facing increased competition in its home market from the entry of Southwest Airlines into the market in 2019.

The increased competition has driven down the average revenue from passengers for every available seat Hawaiian Airlines flies, a key measure of airfares. That fare measure is lower compared both to a year ago, and to the same period before the pandemic. It has only reported one profitable quarter since the start of the pandemic, and losses have increased in the latest quarter as well as year-to-date, despite lower fuel costs.

Part of the financial strain comes from rising labor costs. At the start of the year it reached a deal with its pilots union that will increase wages 32% over the four years of the contract, including an immediate 16% pay hike. While pay increases of that magnitude have become common across the airline industry, the new contracts have helped to raise labor costs at the airline by 18% so far this year.

The merger would also shape Honolulu into the company’s second-largest hub, “enabling greater international connectivity for West Coast travelers throughout the Asia-Pacific region with one-stop service through Hawaii,” according to the news release.

Alaska Airlines’ fleet will expand from about 300 to 365 planes, and serve a total of 138 destinations, including “non-stop service to 29 top international destinations in the Americas, Asia, Australia and the South Pacific,” the company said in the release.

Given Alaska’s membership in the Oneworld international airline alliance, Hawaiian Airlines loyalty customers will have access to improved benefits such as lounge access, an enhanced credit card loyalty program and the ability to earn and redeem more miles.

“In Alaska Airlines, we are joining an airline that has long served Hawaii, and has a complementary network and a shared culture of service,” said Ingram. “With the additional scale and resources that this transaction with Alaska Airlines brings, we will be able to accelerate investments in our guest experience and technology, while maintaining the Hawaiian Airlines brand.”

Minicucci, who will become the CEO of both airlines, heralded the move as “pro-consumer” and would allow for the nation’s fifth-largest airline to compete more robustly with United, Delta, Southwest and American Airlines, which currently own 80% of the domestic market share.

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This story has been updated with –additional information.