No DOJ rubber stamp of Alaska-Virgin America merger

What to make of Alaska Air Group and Virgin America agreeing to give the US Department of Justice (DOJ) more time to review their $4 billion merger?

For starters, this means there won’t be a clean DOJ rubber stamping of the merger. If DOJ had no issues with the merger, antitrust clearance would probably have come by the end of this week and Alaska-Virgin America would have closed the merger at the start of the fourth quarter, which begins Oct. 1. Integration would already be underway by next week. But Alaska and Virgin America agreeing not to close the deal until Oct. 17 means they feared a DOJ lawsuit to block the merger if they had moved forward to closing in the coming days.

DOJ is likely seeking concessions as a price for clearing the merger. Alaska and Virgin America said in a joint statement that they are “confident they will address any concerns” DOJ has. Addressing concerns in this context usually means negotiating with DOJ over giving up certain assets, such as airport gates, to allow the merger to clear.

Shortly after the announcement of Alaska’s intention to buy Virgin America, I wrote that there would likely to be voices at DOJ wanting to block the merger because of misgivings about the recent round of airline consolidation. I think it will be hard—though not impossible—for those voices to convince DOJ to move to block the merger outright. But DOJ will want to announce that it has forced concessions when it formally clears the deal. Look for some Alaska and/or Virgin America assets to be pushed toward ultra low-cost carriers such as Frontier Airlines or Spirit Airlines.

When deciding how much to give, Alaska executives will have to weigh the consequences of going head-to-head in federal court with DOJ. Alaska would likely have a good case to present, and a pretty good chance of winning in court. But lawsuits are messy and time consuming, and winning in court would come with its own cost—for one, a significant delay to the start of integrating the carriers. So unless DOJ is adamant that it will oppose this merger, in which case Alaska would have no choice but to go to court, giving up a few assets (Dallas Love Field gates perhaps) to get up-front antitrust approval would be the smart play.