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Is the Virgin America name worth keeping?

Wednesday, April 6, 2016 - 06:51

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As Alaska Air Group Inc executives took a victory lap after sealing the deal to buy Virgin America Inc, one thing was clear: The familiar Eskimo on the tails of their planes was there to stay.

[DALLAS] As Alaska Air Group Inc executives took a victory lap after sealing the deal to buy Virgin America Inc, one thing was clear: The familiar Eskimo on the tails of their planes was there to stay.

What's unclear though is the fate of the arguably better known Virgin America brand. Globally, Richard Branson's urbane splash of red has helped sell a diverse array of businesses, from water and wine to mobile phones, health clubs and even banking services. 

Does Virgin have a home within an 84-year-old airline that boasts a strong, if regional, brand identity of its own?  "We believe it's driving a big revenue premium for Virgin," Alaska Air Chief Executive Officer Brad Tilden told analysts Monday.

"We just want to learn more about it. So, there is a chance that we could use the Virgin America brand in some form down the road."

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One reason Alaska Air executives might keep the brand alive, at least for a time, would be if they consider it critical to retaining the carrier's loyalists in California, a huge market and key reason Alaska agreed to pay US$2.6 billion in cash. Combined, the new company will have US$7 billion in annual sales.

For Virgin, keeping its flag flying in as many American cities as possible is of foremost concern.

Mr Branson said this week that he was sad about Virgin America's sale (as a foreign investor, there wasn't anything he could do about it), and one can understand why: While Virgin flies its international Virgin Atlantic airline from some US cities, and has a branded hotel in Chicago with others planned, Virgin America is the company's most prominent brand in America.

"Brad Tilden, Chief Executive of Alaska Airlines, has already talked about the strength of the Virgin brand and I look forward to discussing with him how we can keep that culture and the brand flying for years to come," Mr Branson said in a separate statement.

But using the Virgin name isn't free. Virgin America began paying Virgin Group Ltd a higher fee this year for use of the name, 0.7 per cent of the airline's roughly US$1.5 billion in annual revenue, up from 0.5 per cent. The carrier has paid US$22.2 million in license fees over the past three years.

The good news for Mr Branson is that Alaska Air doesn't seem to think paying to keep the brand would be too expensive.

The payment to Virgin "is not huge in the grand scheme of things," Brandon Pedersen, Alaska's chief financial officer, said Monday. If Alaska decides not to retain the Virgin brand, it's unclear how Virgin Group might use it. A company spokeswoman declined to comment on that matter.

In January, Alaska Air introduced a new brand of its own and aircraft livery aimed at "smoothing and modernizing the Eskimo for the digital ageand adding invigorating pops of color around his ruff."

The company said it was the biggest change to its brand in 25 years. Alaska Air's Eskimo livery dates to 1972, and has made the Inuit figure an unmistakable symbol of the carrier, and indeed of the 49th state, ever since. (It also made a short film to explore the disputed question of who the man actually is.)

Given the expense of maintaining two brands, and Alaska Air's own recent brand update, several analysts predicted that it's more likely the Virgin America logo will be dropped altogether.

"Alaska is as likely to keep the Virgin America name long- term as it is to order a bunch of Airbus A380s," Henry Harteveldt, a travel analyst with Atmosphere Research Group, said.

"Operating a dual-brand airline would be an extremely expensive proposition." Recent US airline merger history also suggests that Virgin America may disappear, given the decisions by Delta, United and American to retire, respectively, the Northwest, Continental and US Airways brands once those deals closed.

Mr Harteveldt noted that the last US airline holding company to fly distinct mainline brands was Texas Air in the 1980s, which operated Continental Airlines and Eastern Airlines. 

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