The last decade of consolidation in the US airline industry has created some of the world's largest airlines but the most recent move, the purchase of Virgin America by Alaska Air Group, makes a smaller splash from a jet fuel buying perspective.
The $2.6 billion price tag will give Alaska more of a foothold on the East Coast and help solidify its role on the US West Coast by giving it a larger share of the California market with Virgin America's slots in San Francisco and Los Angeles. The move has the added benefit of keeping JetBlue, which Alaska says it has now surpassed, from buying Virgin America and adding to its West Coast portfolio.
But even as Alaska says that it is poised to become the fifth largest US airline, it still has a ways to go before it starts to rival the big four, American, Delta, Southwest and United — at least in terms of jet fuel buying.
In terms of fuel consumption and management, the addition of Virgin America's fleet and routes represents 21% of Alaska's total fuel usage. In 2015, Alaska used 508 million gallons of jet fuel, paying $1.88/gal, according to the company's financial reports. Virgin America, on the other hand, used 169 million gal and paid $2.07/gal. Independently, Alaska had been increasing its own fuel consumption, adding 8.3% to its annual fuel buying in 2015.
Despite the addition of Virgin America, Alaska's fuel consumption still tracks slightly behind JetBlue and significantly behind the other major US carriers. Even if the buyout results in further growth and not slight consolidation of routes, there is a wide gulf between fourth and fifth place. Southwest Airlines was the fourth largest airline in terms of fuel use in 2015, consuming 1.901 billion gallons, according to its financial reports. In total, US carriers used 16.73 billion gallons of jet fuel in 2015 for scheduled service, according to the Bureau of Transportation Statistics.
|Rank||Airline||2015 Fuel Consumption (gal)||Average Cost ($/gal)||% of Expenses|
|9||Virgin America||169 million||$2.07||25.7%|
International routes obviously help the top four airlines with their extra billions of gallons of fuel consumption. Alaska's international routes currently only include Canada, Mexico and, as of last year, Costa Rica.
Of course, airline mergers can take a significant amount of time to impact trends. It was only last October that US Airways flew its last route, nearly two years after the merger first occurred. Virgin America reportedly already issued a tender for its 2016-17 jet fuel supply. Considering the often-lengthy process of airline mergers and acquisitions, market sources believed that each company's respective fuel management policy would continue for now, likely delaying any potential and significant changes to the airline's fuel buying and management strategy.
"So far they [Virgin America] will stick with their own process of bidding alone," one industry source said. "[They will need] time for the merger to be validated and so on. We have time."
While Virgin America issues tenders to supply fuel, it outsources its fuel management to World Fuel Services. Alaska manages its fuel in-house, according to market sources.
"Tough to tell which way management goes," a trader said.
Despite consolidation and some overlap in routes, some in the jet fuel market did not think that there would be a large change in overall industry jet fuel consumption because of the merger.
"Overall the aviation market is growing anyway despite of merging," added the industry source who said Virgin America is sticking to its bidding process. "I don't really see real impact here."