Seattle-based Alaska agreed to acquire Virgin in April in a deal that valued the San Francisco-based discounter's equity at $2.6 billion. The two carriers in June agreed not to close the deal before Sept. 30 to allow regulators time for a review, and agreed to an extension of that deadline late last week.
Alaska has promoted the deal as a chance for two undersized airlines to combine and take on the industry titans created during a round of consolidation that began in 2008 when Delta(DAL) - Get Report bought Northwest. United Continental(UAL) - Get Report , Southwest(LUV) - Get Report and American(AAL) - Get Report all followed with deals of their own, creating a "Big Four" that currently controls more than 80% of domestic capacity.
A combined Alaska/Virgin would be the nation's fifth largest carrier and give it a significant presence on the U.S. West Coast with hubs in Seattle, San Francisco, Los Angeles, Anchorage and Portland, Ore.
But regulators more recently have shown signs of regret over allowing those prior transactions to proceed, with the DOJ and Department of Transportation launching multiple inquiries into airline pricing and pushing back on smaller deals between airlines to swap assets and gain scale in key markets.
Alaska currently controls about 18% of seats on West Coast domestic flights, according to Raymond James, a number that would rise to 22% should the deal be allowed to close. By comparison Southwest has about 26% of seats and United Continental's share is 17%.
The merger partners in a statement announcing the extension said they "are confident they will address any concerns and obtain regulatory approval to complete their pro-competition, pro-consumer transaction."
Analysts remain confident the deal will not fall apart, though concessions seem likely. The DOJ could force Alaska to sell Virgin America's slots at capacity-restrained Love Field in Dallas, where Southwest and Delta are currently locked in a court fight over access. Virgin America acquired its landing rights there thanks to divestitures required as part of the 2014 merger between American Airlines and US Airways Group Inc.
The combined company's presence in California and in particular Los Angeles is also a likely source of government concern. LAX is one of the most fragmented markets in the country, and Alaska with Virgin would be a major gate holder there. Regulators could ask Alaska to commit to using some of its expanded presence to provide competitive service on key markets.
The merged airline would also be the second largest carrier at San Francisco, which is a major United hub.