Friday, March 24, 2017

FRIDAY FRUMP: Alaska decision deeply disappointing

Alaska Air Group’s decision to kill the Virgin America brand, announced March 22, is deeply disappointing, and the stated rationale for the decision seems at least somewhat disingenuous.

Shortly after Alaska Air Group (NYSE:ALK) announced in April 2016 that it would acquire Virgin America (NYSE:VA) in a deal then valued at $4bn, CEO Brad Tilden commented that the carrier was considering maintaining Virgin America as a separate brand. That was a move many of Virgin’s fans – including me – would have been pleased to see.

The business landscape has several examples of acquisitions that have been handled in each of the two ways, and each has brought lessons that seem to have been ignored by Tilden, et al.

When Delta Air Lines (NYSE:DAL) acquired KLM Royal Dutch Airlines, it chose to keep KLM as a separate and distinct brand, though the two benefit from code-shares and centralized systems. Those carriers derive consistency and efficiency from their common platform, shared services, and other facets of a joint operation. Alaska did not explain why it would not reap similar benefits, instead choosing to fall back on the oft-cited goals of consistency and efficiency as among of the reasons for killing off the Virgin America brand.

In the retail space, there are several examples that underscore the wisdom of keeping separate brands and point out the folly of combining. Here is an example of each.

When Cincinnati-based grocery chain Kroger acquires new properties, as it did Fred Meyer and QFC in the Pacific Northwest, Fry's in the Southwest, Ralph's in southern California, it maintains them as separate brands. Certainly, there are efficiencies to be gained through their common ownership but, in the main, the stores retain their unique identities.

By contrast, when Macy’s acquires brands -- as it did Meier & Frank in Portland and Marshall Field’s in Chicago – it reflags them as Macy’s and the facets of the prior outlets’ operations that made them special and engendered customer loyalty are lost forever.

So it appears it will be with Virgin America.

In its announcement that it would be retiring the Virgin America brand, Alaska said it had “[S]pent the last 10 months conducting extensive research,” then listed nine “enhancements” to come, which it said were “What fliers on the West Coast want most.”.

I find it impossible to accept the purported results at face value.

While the fliers they interviewed may not have cared what name the carrier goes by, I cannot accept that they named things like blue mood lighting and designer uniforms as important enhancements but didn’t mention more concrete changes like “more legroom,” which is nowhere on the list.

A more likely scenario is that they responded that Alaska should, "Keep the Virgin America culture." Admittedly, maintaining a culture -- especially one that you've inherited -- is a much more difficult thing to get one's arms around and actually accomplish, but to reduce "Keep the culture" to "blue mood lighting" and "designer uniforms" is more than oversimplification; it misses the point rather dramatically. It's the culture, not the external trappings, that passengers value and find important.

Further, many of the items on the carrier’s list of enhancements were in the process of being implemented well before the acquisition was announced, so presenting them as outgrowths of the merger research is stretching the truth. In other cases, the changes will benefit the airlines’ top tier frequent fliers while the majority of its passengers – those who pay the full fare -- will be left with the crumbs that fall from the table.

One of the specific enhancements, the addition of more premium seats, has nothing to do with the acquisition. The carrier announced the addition of Premium Economy seating in its Boeing (NYSE:BA) 737 aircraft in December 2015, a full four months before the Virgin America acquisition was announced.

Adding more First Class and Premium Economy seats, which it will do across the Airbus aircraft that currently sport the Virgin America livery, will primarily benefit top-tier frequent fliers who use accrued miles to upgrade. Passengers who pay full fare won’t likely have any greater opportunity to purchase an upgrade than they have today. Further, adding more First Class and Premium Economy seats to the existing Airbus fleet will actually mean less room than passengers have now in those aircraft, as pitch in both sections will be reduced to accommodate the additional seats.

Refreshing and expanding its airport lounges is another area that caters to the top-tier fliers while doing nothing for the majority of its customers. Annual membership to Alaska’s Boardroom is as much as $450 (less for the top tier), while day passes are $45 per person. The average Joe riding in standard economy likely won’t ever see the inside of an Alaska lounge.

Other alleged enhancements cited include “The country's top-ranked frequent flier program.” Alaska’s Mileage Plan existed and was well-regarded years before the acquisition. Folding Virgin America “Elevate” members into Alaska’s Mileage Plan may be beneficial to them, but it is at most a tangential outgrowth of the acquisition.

Satellite-based Wi-Fi connectivity, free movies, free Chat™ and West Coast-inspired food and beverage are all “nice-to-haves,” but I would argue that those are more likely indications of the market’s on-going evolution than enhancements tied to the acquisition.

Low fares?

In Virgin America’s brand obituary, Tilden cited low fares as part of the carrier’s goal of “Creating an airline people love.” On that score, the airline has a long way to go.

Recently, I booked a round-trip flight for my wife to travel to California to visit kids and grandkids. Her standard economy ticket on Alaska: $412.40, which will end up costing $462.40 because of checked baggage fees. By comparison, Delta Air Lines (NYSE:DAL), which had an identical departing flight time but would have required an earlier return, would have cost $347.40 for Comfort+. For $427.40, she could have flown First Class, which would have included her checked bags.

When you strip away the flimsy rationale and marketing spin, the only “enhancement” that might actually be considered a nod to Virgin’s slightly roguish rock-n-roll approach is the reference to a “Modern, warm and welcoming vibe.” On that score, the airline lists things that are easy to quantify: music from new artists, redesigned cabins with new amenities, new uniforms for its personnel and, oh yeah, blue mood lighting. All fine, but the attitudes of the customer-facing employees can make a bigger difference – for good or ill – than all of the other enhancements combined.

Whether the combined carrier is able to incorporate a portion of Virgin America's swagger and just plain fun approach to flying or will remain the conservative, slightly staid airline it is today, only time will tell.

Visit my main page at TheTravelPro.us for more news, reviews, and personal observations on the world of upmarket travel.



Photos by Carl Dombek
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