Alaska Air Group (ALK) - Get Report is poised to win the bidding war for Virgin America (VA) with an offer that values the target at more than $2 billion including debt, industry sources said late Saturday.

Burlingame, Calif.-based Virgin America began exploring options earlier this year after an unsolicited approach, one source said, and received interest from both Alaska and JetBlue Airways (JBLU) - Get Report as well as a handful of domestic and foreign investors. One source said that though the deal wasn't finalized, Alaska and Virgin America are close enough that a transaction could be announced before markets open Monday.

A combination of Seattle-based Alaska and Virgin America would vault past JetBlue as the nation's fifth largest carrier, and provide scale for two previously niche operators to become more of a national competitor. Alaska and Virgin America have little overlap -- less than 15% of their available seat miles are in competition -- meaning regulators are more likely to look favorably on this combination than they would a deal involving one of the four industry titans that currently combine to control about 80% of the U.S. market.

Virgin America to date has been more of a success with customers than it has with investors, winning plaudits and loyalty for its focus on in-flight experience. But that level of service came at a cost to margins, and Virgin America is also saddled with a relatively high-cost fleet and concerns that it was overly reliant on transcontinental service and a few airports.

Shares of Virgin America, which only went public in 2014, were trading near all-time lows in February before deal talk becoming public.

Industry watchers pointed to New York-based JetBlue as a more likely acquirer due to the airlines shared focus on service, transcontinental routes and similar fleets. Both JetBlue and Virgin America operate Airbus A320 aircraft, unlike Alaska's Boeing fleet, meaning JetBlue and Virgin America could enjoy more economies of scale in the event of a combination.

But Alaska has a stronger balance sheet than JetBlue, with nearly $1 billion more in cash on the books, and ample reason to want to do a deal. Alaska has historically operated as a free agent outside of the U.S. alliances, partnering with various carriers to feed traffic to its predominantly west coast route network, but that status of late has come under threat.

Alaska is increasingly facing pressure f om Delta Air Lines (DAL) - Get Report , traditionally one of its partners, aggressively building a hub in Seattle. Though Alaska so far has held up well against the new competition a growing threat from Delta, coupled with fears of an energy-induced slowdown in travel to its namesake state, could make the company vulnerable without the added scale and diversification buying Virgin America could provide.

A combined JetBlue/Virgin America, with a more national footprint and larger customer base, would have been a further threat to Alaska, giving the airline extra motivation to work out a deal.

Alaska has a reputation has a strong operator that can likely bring greater cost discipline to Virgin America, but the deal is not without risks. Integration will likely mean moving Virgin America pilots and other workers to much higher wage rates, further pressuring margins, and Alaska will face difficult choices over whether to keep Virgin America's popular branding and in-flight experience.

Sources said that Alaska could attempt to monetize certain Virgin America assets, including its coveted orders for next-generation A320s and potentially landing rights in Dallas, New York and Washington, to help pay down the acquisition costs. Partner-turned-rival Delta would likely pay a premium for any Virgin America slots Alaska made available at Dallas's Love Field, where Delta has been battling with Southwest Airlines (LUV) - Get Report to provide service.

Southwest in its 2011 purchase of AirTran Airways proved that adding new fleet types in a merger doesn't have to be a stumbling block, quickly reaching a deal to transfer AirTran's Boeing 717 aircraft to Delta. With most of Virgin America's fleet leased, many at rates believed to be above current market prices, Alaska could be motivated to phase out the Airbus and could even receive incentives from Boeing (BA) - Get Report to remain an all-Boeing operator.

British entrepreneur Richard Branson announced his intention to form Virgin America in 2004, but the effort initially ran into heavy criticism from rivals including Continental Airlines Inc. and, ironically, Alaska Air over claims that Branson was attempting to side-step foreign ownership rules. The airline took flight in 2007 backed by $177.3 million in funding from Black Canyon Capital LLC and Cyrus Capital Partners LP, with Branson's Virgin Group Ltd. owning 25%.

An Alaska/Virgin America tie up would leave little left for JetBlue to acquire, with most of the remaining independent discounters more focused on ultra-low costs and secondary markets outside of JetBlue's traditional focus.

JetBlue could try to acquire private equity-owned Frontier Airlines, which is considering an initial public offering and has a strong presence in Denver, but Frontier previously struggled when trying to operate a JetBlue-like premium cabin and has only found success emulating extreme discounter Spirit Airlines (SAVE) - Get Report .

Many in the industry assume that Frontier and Spirit will eventually come together. The two companies share a similar business model and both were influenced by private equity firm Indigo Partners LLC, Frontier's current owner.