Virgin America

Ben and David deviate entirely from the stated purpose of the show, tackling this non-technology acquisition that is so recent, we have no idea if it went well yet. But, the April 2016 acquisition of Virgin America by Alaska Airlines was so fascinating, we had to do it! Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Items mentioned in the show: Louis C. K. - Everything is Amazing and Nobody is Happy https://www.youtube.com/watch?v=q8LaT5Iiwo4Alaska Acquires Virgin America Investor Deck http://phx.corporate-ir.net/External. File?t=1&item=VHlwZT0yfFBhcmVudElEPTUyMjI1MjV8Q2hpbGRJRD02MjgzODc=“Measuring The Moat” Paper - Michael J. Mauboussin http://csinvesting.org/wp-content/uploads/2013/07/Measuring_the_Moat_July2013.pdfBusiness Adventures - Twelve Classic Tales from the World of Wall Street http://amzn.to/1T9IrpyCarve Out: Michael Mauboussin: "The Success Equation:Untangling Skill and Luck" | Talks at Google https://www.youtube.com/watch?v=1JLfqBsX5Lc

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  I should see what episode this is gonna be.

• 0:02David Rosenthal?

  10.

• 0:02Speaker 00

  10. Easy.

• 0:22Speaker 00

  Welcome to episode 10 of Acquired, the podcast where we talk about technology acquisitions that actually went well. I am Ben Gilbert.

• 0:30David Rosenthal?

  I'm David Rosenthal.

• 0:31Speaker 00

  And we are your hosts. Today, we come to you with an acquisition that is actually not a technology acquisition, but something that David and I were

• 0:44Speaker 00

  inclined to talk about anyway, because we both sort of have a little romantic fascination with anything involving airplanes. And this is particularly interesting. Today, we're going to be talking about Alaska Airlines acquiring Virgin America, right here in our own backyard in Seattle. Before we get into the acquisition history and facts, wanted to remind you that you can sign up now at Acquired FM to get our episodes delivered via email. We also would really, really, really appreciate it if you could rate us on iTunes. It'll help us grow the show and expand what we can do with it from productions to new topics and guests.

• 1:21Ben Gilbert?

  All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF. Then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 1:40David Rosenthal?

  Yep, your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 2:01Ben Gilbert?

  Right, and that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 2:23David Rosenthal?

  In half? Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 2:41Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. Now with that out of the way, David, you want to dive into acquisition history and facts?

• 3:13David Rosenthal?

  Indeed. Yeah, this will be a fun one. Listeners, let us know what you think. We're, don't worry, we're not changing the topic of the show, but we thought we'd have some fun and analyze a very different industry than technology.

• 3:29Ben Gilbert?

  Yeah. And not to mention the fact that, you know, it's not a tech acquisition. There is technology involved, but the, the way we're kind of breaking the mold on this one too, is this just happened last month. It's not like this month, actually.

• 3:41David Rosenthal?

  Yeah, a couple of weeks ago.

• 3:43Ben Gilbert?

  Yeah. So this is, this is something where it's going to be highly speculative, but I think it's going to be a fun ride.

• 3:49David Rosenthal?

  All right. With that, so Virgin America was actually founded in 2004 by Richard Branson and then had to go through a whole series of machinations to end up finally launching their, their airline service in the US, not until 2007. And over those three years, a whole bunch of things happened. So one, it turns out that due to some crazy laws, US domestic airlines cannot be owned, cannot have foreign ownership greater than 25% of the company.

• 4:28Ben Gilbert?

  Crazy.

• 4:29David Rosenthal?

  Crazy. So, so Branson and Virgin had to, had to basically sell off 75% of the company before they could even have a hope of operating.

• 4:41Speaker 00

  It's wild. And I think at that point when they were first starting, it was Virgin USA even. And then they, they rebranded a little bit.

• 4:45David Rosenthal?

  It was later that they rebranded to Virgin America. So Branson sells 75% of the company to a couple hedge funds.

• 4:53Speaker 00

  And, and licenses the Virgin brand to Virgin America. So that Virgin America doesn't even own Virgin that's painted on their own airplanes.

• 5:01David Rosenthal?

  Yep. And there was talk at various points in time about ditching Virgin, the name, would that help get regulatory approval earlier? Faster craziness. Anyway, they finally clear all the regulatory hurdles. They buy some aircraft. They start operations in San Francisco with SFO as their hub. They launch in 2007. Things go fairly well. They, they don't die at least, like a lot of startup airlines. And, and they actually have some, some major kind of technology related innovations. So in 2009, Virgin actually becomes the first airline to offer go-go in-flight wireless, in-flight wifi.

• 5:46David Rosenthal?

  Which is, and it's hard to imagine now, you know, taking it.

• 5:50Speaker 00

  As, as Louis CK says, is magic and is the newest thing I know that exists.

• 5:58David Rosenthal?

  I still, I hate it when I, now the random, you know, rare times when you end up on a plane without wifi.

• 6:05Speaker 00

  Sorry.

• 6:06David Rosenthal?

  They also are the first airline to, I believe, to install in-flight, seat back, interactive touchscreens for everybody all throughout the whole plane.

• 6:21Speaker 00

  Not to mention purple afterglow lighting.

• 6:23David Rosenthal?

  Not to mention nightclub inspired mood lighting.

• 6:28David Rosenthal?

  For our, for our listeners who haven't flown Virgin America, they're probably going to have no idea what we're talking about, but.

• 6:33Speaker 00

  Yeah, I guess it's a pretty west coast. I think anybody listening to Bay Area has definitely flown it since they're held out of SFO.

• 6:38David Rosenthal?

  So the Virgin actually ends up going public, having an IPO in November 2014. And then not that long later, we're about, we're about 18 months since then. A bidding war erupts for the company between Alaska, which ended up buying them. And, and had been interested, rumored to be interested in the company in Virgin for, for a long time, and JetBlue. And then Monday morning, April 4th, Alaska announces that they have agreed to acquire Virgin for $2.6 billion, which was a 47% premium to the stocks closing, the Virgin

• 7:20David Rosenthal?

  stocks closing price the previous Friday, and about an 80% premium to where the stock was before rumors came out that a bidding war was happening.

• 7:29Speaker 00

  Yeah, and this is the first red flag for me. I mean, I think that...

• 7:35David Rosenthal?

  Basically, a massive premium.

• 7:36Speaker 00

  Yeah, yeah. Anytime you see a spike like that, you start to dig into why. And I think we'll, we'll talk a little bit more about kind of the way the industry has shifted. But with all the consolidation, the only way that, you know, an airline can really compete with the big guys is to be big themselves. And the big guys being United, Delta, American, and Southwest. And so, you know...

• 8:03David Rosenthal?

  Which itself started as a little guy.

• 8:05Speaker 00

  Very true. I think that's, that's like the typical low end disruption case study. And they're, they're really, that's, that's a great business and a really interesting story on its own. But, I mean, that clearly Alaska in, in trying to compete, there's, there's a limited number of airlines that it could buy. And JetBlue clearly identified the same opportunity and the result is this very, very inflated purchase.

• 8:28David Rosenthal?

  Yep. So when the dust clears and all is said and done, the basically the total enterprise value of the deal ends up being about $4 billion if you include the debt and the aircraft leases that Virgin had.

• 8:42Speaker 00

  Which is fascinating because normally when we talk about these acquisitions, we would say, "Oh, $2.6 billion purchase, you know, in cash and stock, or maybe an all-stock deal." This was an all cash, $2.6 billion purchase, plus taking on that $1.4 billion of leases on airplanes and debt. And what a ridiculous, capital-intensive, high fixed cost industry air travel is.

• 9:04David Rosenthal?

  That's four Instagrams, Ben.

• 9:08Speaker 00

  Wild.

• 9:08David Rosenthal?

  And then perhaps the craziest part about this deal is again relative to the technology sector. So it was announced a couple of weeks ago on April 4th, 2016, not expected to close until early 2017 at the latest. Huge amount of regulatory review that has to, still has to happen here.

• 9:28Speaker 00

  And we've actually seen precedent, I think in the American Airlines-US era merger, where there was regulatory troubles and it almost didn't go through.

• 9:37David Rosenthal?

  And the government extracted huge concessions from, from those two airlines when they merged.

• 9:44Speaker 00

  So we may be doing a follow-up at some point in the future if, if by 2017, we don't see a joined airline here.

• 9:51David Rosenthal?

  And our listeners don't revolt against us for talking about airlines.

• 9:54Speaker 00

  It's true. Well, the other, the other really interesting thing here is in just talking about the deal price, Alaska Airlines does not have $2.6 billion in cash to make this purchase. They, if I, if I have my numbers right, as of November of 2015, according to their, their earnings, they had $88 million in cash and 1.1 billion in marketable securities.

• 10:17David Rosenthal?

  Yep.

• 10:17Speaker 00

  So I believe what happened here is in the bidding war with JetBlue, Alaska has, has incredibly clean books. They have, they're one of the few airlines that actually is investment.

• 10:29David Rosenthal?

  Very low debt load. And they actually have investment grade debt, which for listeners who aren't in the, come from the investment banking world, basically means that the amount of debt that Alaska has is small enough relative to its earnings power that people think it's very, very unlikely they'll go bankrupt, especially for an airline. No other airline has, is rated as highly, basically, which means that people who lend to them think there's a good chance they'll go bankrupt.

• 10:57Speaker 00

  Yeah. So is there a chance then that, that the way I sort of understand it is, is JetBlue sort of had to cry uncle because they didn't have the amount of debt available

• 11:06David Rosenthal?

  Didn't have the borrowing power to be able to.

• 11:06Speaker 00

  to them. Make the purchase.

• 11:09David Rosenthal?

  Yep. Reach this, this price. But now this is going to totally transform Alaska. Like they're going to take out another billion and a half, perhaps plus of debt.

• 11:20Speaker 00

  To, to make the, well, yeah, I mean, to make the purchase and then to, to take on the debt and leases that, that.

• 11:28David Rosenthal?

  And Virgin was also a fairly low debt load airline as far as airlines go. But still, it's changing the capital structure of the company, combined company, pretty significantly.

• 11:38Speaker 00

  Yeah.

• 11:41David Rosenthal?

  Great. Should we move on to acquisition category?

• 11:44Speaker 00

  Yeah, that sounds good to me.

• 11:48Speaker 00

  Why don't I start with that?

• 11:52Speaker 00

  Moving on to the acquisition category. This, to me, doesn't fit our mold necessarily of people, technology, product, business line, or other. I guess if everything fits in other. In some ways, it's a business line. They picked up a brand that people have tremendous affinity for and access different customers with.

• 12:13David Rosenthal?

  That's assuming they keep the brand.

• 12:15Speaker 00

  Well, yeah, and that's something we should talk about. Ultimately, though, what I think they're acquiring here is capacity. They identified the opportunity that they wanted to be the West Coast airline. And right now, they don't have a meaningful presence in California. They're hubbed out of Seattle. They have very little San Francisco and even less LAX presence. And this gives them major, major capacity to kind of be the West Coast airline.

• 12:38David Rosenthal?

  Yeah, basically, you know, if you look at, if you think about kind of airline route maps that, you know, you see on the back of the cards and the back.

• 12:47Speaker 00

  Makes your head spin.

• 12:48David Rosenthal?

  Makes your head spins, but it's usually, you know, it's like the spider web that emanates from a few major cities. You know, the Alaska hub is Seattle and there's a huge spider web coming out of Seattle to every country in America and every city in America and several international destinations. And then, and then very few route pairs from other cities. And Virgin is the same thing, but just from SFO.

• 13:15Speaker 00

  So, in your opinion, then, well, before we get into that, how would you categorize the?

• 13:20David Rosenthal?

  So, yeah, I was actually, I, we hadn't discussed this beforehand, but I was going to go down the same path you are. And say, in our framework, this would fit closest to a business line, kind of like, you know, buying the local San Francisco airline and you're the Seattle, you know, the local Seattle airline, but. But I actually think the best categorization is this is industry consolidation, which is, you know, in a super mature, old-school industry like the airline industry, very different from technology, you get these periods of consolidation where, where, where players merge with each other because they feel like they need greater scale to, to compete. And, and I, I think that's what we're seeing happen here.

• 14:04Speaker 00

  Yeah. And this is an interesting time to, to go into how Alaska makes the case to their investors for this. There's this great investor deck that they have on their website where they talk about why their investors should feel comfortable with this purchase. And they say that we're bullish on the industry. From 77 to 2009, the industry lost $52 billion.

• 14:27David Rosenthal?

  And the airline industry is notorious for,

• 14:30Speaker 00

  Oh, yeah.

• 14:30David Rosenthal?

  I mean, we should talk about, there's a great, great, I almost included this as my carve-out for the week, but I'm going to do something else because I knew we'd talk about it on the episode. There's a great paper that was written by Michael Malbison and, and his team, who's a great investor. He was, he was head of Legg Mason, which is a large mutual fund, and at Credit Suisse for a long time. And I believe he's now back at Credit Suisse. He's written a number of great books. He's also a professor at Columbia Business School, I believe. And he wrote this great paper called "Measuring the Moat", and it's all about the concept of the moat, you know, as an investor is, is, is sort of the most important thing. You know, Warren Buffett emphasized, and Berkshire Hathaway and Charlie Munger, you know, emphasized the moat as sort of the most important thing

• 15:13David Rosenthal?

  they look for. And he uses the airline industry as an example of a terrible industry that has destroyed so much economic value and has no moat.

• 15:23Speaker 00

  Yeah. And this, this is, I'm not sure if this, I think this is still true. It was at least true a couple of years ago. If you look at the airline industry since its inception, and you look at basically a profit and loss statement for an aggregate of, of every single airline.

• 15:39Speaker 00

  It's lost value. Like it's actually been, it's actually not been profitable if you look at

• 15:44David Rosenthal?

  The entire industry.

• 15:47David Rosenthal?

  And not just lost value, but lost a huge amount of, a huge amount of capital has been destroyed in this industry.

• 15:54Speaker 00

  So when, you know, when they say that 77 to 2009, you know, they've lost $52 billion as an industry, it is interesting that people continue to invest in it. Yet from 2010 to 2015, over the last six years, it's, it's a, it's.

• 16:08David Rosenthal?

  It's been good times in the airline industry.

• 16:09Speaker 00

  Yes, $45 billion of value. And so that, some of the things they cite are, Alaska cites to their investors are a fundamentally changed industry structure. And that I think is largely, I mean, when you look at the consolidation that's going on, they're basically saying, okay, the fragmentation's gone. And right now, the, the industry structure is that there's four relatively perfect substitutes in these, these big ones that are all, you know, you're going to get treated sort of like cattle when you're in, in.

• 16:39David Rosenthal?

  And you've seen in the past few years, I believe the first was United and Continental merged. You've seen all the major legacy domestic airlines consolidate and merge. And then, and then US Air and American merged. And so you've got this, this consolidating power structure of the industry that actually represents, you know, between the top four airlines, 80% of all US domestic airline traffic.

• 17:04Speaker 00

  Yeah. So it's interesting. I went and grabbed all their market caps today. Highest right now, Southwest is a $30 billion company. Delta's, I'm sorry, Delta's higher at $36 billion, Southwest at 30, American at 25, United at 21. And then if you look at Alaska's is $10 billion without Virgin, Virgin's two and a half, and JetBlue at seven. So if you just look at the, those players, $132 billion effectively market cap for the industry. And when you think about like Apple as a 500, $590 billion market cap company, you start to understand like, wow, the whole industry here is, is, you know, if we were looking at this, any given airline and comparing it against one of these mega technology companies

• 17:47Speaker 00

  that we usually talk about on the show, like airline companies just. Don't create that much value.

• 17:54David Rosenthal?

  Yeah.

• 17:54Speaker 00

  Or maybe more accurately, they don't capture that much value.

• 17:58David Rosenthal?

  Yeah, and it's super interesting. I'm sure we'll get into throughout the show, the supply chain of the airline industry is fascinating. You know, you've got basically a duopoly that are direct suppliers to the airlines in Boeing and Airbus that make the big passenger jets. And they have a huge amount of power over the airlines because, you know, while there is two of them, you could go from one to the other. It's not like you can say, it's not like the airlines can be like a, you know, like a Google and be like, you know, oh, we're gonna like, you know, become a full stack company and we're just gonna obsolete you and we're gonna make our own cloud or whatever. Like, the airlines can't make their own airplanes.

• 18:39Speaker 00

  Yeah, getting good at servers is different than getting good at airplanes.

• 18:42David Rosenthal?

  Yeah.

• 18:43Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 18:57David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 19:11Ben Gilbert?

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• 19:20David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 19:38Ben Gilbert?

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• 19:54David Rosenthal?

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• 20:11Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 20:20David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 20:31Speaker 00

  Getting back to the Alaska, reasons they're bullish on the industry, the industry structure is consolidated. This is sort of a BS bullet point, I think, but returns-focused leadership teams, that's sort of like tooting your own horn and claiming competency. Constrained airport real estate, this one's sort of interesting. I guess they're sort of saying like, we've reached a saturation point right now where we're not building more airports, the airports aren't getting bigger, and over the last, you know, since 1960, that's been the case. And now it's all about sort of vying for space at the existing airports that we have. And then the capacity acquisition starts to make a lot of sense.

• 21:07David Rosenthal?

  Yep, there are only so many gates.

• 21:08Speaker 00

  Right, right, right. Growth in leisure travel, which is interesting to sort of pick apart and think about why that might be. And then new revenue sources. And I think we can all gripe about how we are well aware of all the revenue sources that airlines can

• 21:23David Rosenthal?

  um Charging for bags.

• 21:25Speaker 00

  Food and entertainment.

• 21:27David Rosenthal?

  Some of these are new services they've added and Virgin and Alaska have both been kind of the bleeding edge here of doing flight wifi and entertainment and movies and snacks that are actually edible.

• 21:41Speaker 00

  And co-branded with Tom Douglas. So it's always so funny to see, to get on those planes and see how far, for those of you not from Seattle, he's sort of like the big restaurateur in town, to see how far he's leveraged that brand now that I opened a little snack pamphlet on American Airlines and there's Tom smiling at me on the front of it.

• 22:03David Rosenthal?

  Love it.

• 22:03Speaker 00

  So artisanal. So, yeah, from a category perspective, you know, I think absolutely I would chalk it up to capacity.

• 22:13David Rosenthal?

  Yep. And the other, the other point I want to, I want to explore here a little bit is

• 22:21David Rosenthal?

  There's a really interesting context for this deal that people in Seattle might be aware of, but I doubt anyone not here is, and that's that Delta actually has been putting a huge amount of pressure on Alaska here in Seattle, in their hub. Delta has been growing over the last few years, their presence in Seattle, a lot. And for a long time, I think Alaska was probably concerned, either concerned or expecting that Delta was going to make an offer to buy them. And they haven't.

• 23:03David Rosenthal?

  Instead, they've just organically grown and taken more and more gates here in Seattle. And it's really interesting. I was talking to somebody who is far more of an airline industry expert than we are. And he was making the point that the frame of reference is really different for these two companies, Delta and Alaska. You know, Alaska is a domestic carrier and it's a west coast focused carrier. Delta is an international carrier. And Delta coming into Seattle was part about competing with Alaska domestically because Alaska's built a really nice business here. But also, an even bigger part probably for Delta is using Seattle as a gateway for international

• 23:48David Rosenthal?

  flights to Asia. Because gate real estate, as you were saying, Ben, is so scarce and at the other big cities on the west coast, at SFO and at LAX, is so competitive and impossible to get more real estate there. I think Delta really viewed Seattle as kind of their gateway so that they could send people from all over the US on flights to Seattle and then hop over to Japan, to Korea, to China, to what have you.

• 24:23Speaker 00

  Makes sense.

• 24:24David Rosenthal?

  Whereas for Alaska, you know, that's not even an accessible market to them right now.

• 24:29Speaker 00

  Right, right, right. In looking at this acquisition category and the kind of the way we've both defined it...

• 24:39Speaker 00

  In a $2.6 billion sale, that it seems inflated for two reasons. One, kind of the bidding war because it was scarcity of good airlines to buy that would complement JetBlue or Alaska well. But two, a lot of the value, the kind of intrinsic value that was given to Virgin even before rumors of a sale was brand value. I mean, they have tremendous customer affinity. They do things a little bit differently.

• 25:08David Rosenthal?

  People who love Virgin, love Virgin.

• 25:10Speaker 00

  I always have a better experience.

• 25:11David Rosenthal?

  And people who love Alaska, love Alaska too.

• 25:13Speaker 00

  It's true. But actually, those are two of my favorite airlines to fly. But Virgin is notoriously different and better and feels premium and that had to be factored into their, you know, market cap. And when you think about what they are going to be used for, I mean, Alaska announced that by 2018, they hope to be fully rebranded as Alaska. Hopefully, they can learn some things from Virgin and they've been watching them very carefully. But if they obliterate that brand, you know, what was the point of paying a markup on a markup for capacity?

• 25:51David Rosenthal?

  Yep. It's a great point. The Alaska brand, again, it was very good, especially in the airline industry on its own. I think, you know, really was kind of like very professional. They had either the best in the industry or the best on the West Coast on time percentage. Lots of great, you know, very, very business commuter friendly. And Virgin was like, you know, like we joked earlier, like a nightclub on a plane. Lots of, it was the favored airline of all, me and all my classmates when we were in business school. We can leave it at that.

• 26:32Speaker 00

  So then, one other thing that I want to bring up in that realm is payback period. So they cite in, or Alaska cites that they'll have $225 million of total net synergies at full integration. So what we can pull from that is that there will be $225 million of cost savings after they're fully integrated. So let's call that, you know, 2018-ish. And that means that there's probably other value that they can create on top of that, like ability to create more revenue because they have these economies of scale, new things

• 27:12Speaker 00

  just on top of that. But that means that they have on this, if we look at the $4 billion as the figure, that's a 17-year payback period on this acquisition, just on the synergies. And, you know, do we think that?

• 27:27David Rosenthal?

  Now, Virgin had earnings as well that would contribute to that, but two points I want to make, but go ahead.

• 27:34Speaker 00

  Yeah. No, no, go for it. I've pretty much made the point that like, it seems like it's going to take a while to

• 27:41David Rosenthal?

  Yeah, any way you slice it, it's going to take a while. And I think there are two really head scratching things about this merger that are really important that some, certainly industry experts are questioning, but, you know, Alaska hasn't talked a lot about. One, the primary reason for the sort of economic renaissance of airlines in the last couple of years has been falling fuel prices.

• 28:14Speaker 00

  Yeah, which are only nominally passed on to consumers and everyone's getting a little

• 28:18David Rosenthal?

  Right. And so airlines as a whole, across the whole industry have gone from, you know, call it spending X on fuel, which was a huge amount of their, of their operating budget and kept their margins, you know, low to negative, to spending like X divided by two on fuel. And, and thus they are enjoying, as an industry,

• 28:40David Rosenthal?

  Much greater profits than they used to. Now, the question is like, is that a new normal? Or like, is our oil prices going to go back up at some point? And, you know, we could do another show on the oil and gas industry. And this is a major existential question for that whole industry. But if you were to take the viewpoint that like, this is a temporary thing and prices will go back up, which historically they have, you know, fluctuated throughout history.

• 29:06David Rosenthal?

  You know, gosh, it seems like you're buying at the top of the market here where, where profits are artificially inflated. So that's one. Two, you know, synergies, as you rightly mentioned, Ben, are, you know, often about the combined revenue potential and real, you know, and, and being able to extract more money from consumers and routes and whatnot, but they're, they're also really about cost savings.

• 29:29Speaker 00

  Yeah.

• 29:30David Rosenthal?

  And

• 29:30Speaker 00

  Consolidating the back office.

• 29:31David Rosenthal?

  And consolidating and economies of scale and all that front. But there's, there's kind of a problem here with this acquisition. And that's that Alaska flies Boeing planes and Virgin flies Airbus planes.

• 29:44Speaker 00

  Exclusively Airbus. Their entire fleet.

• 29:47David Rosenthal?

  Alaska only flies Boeing and Virgin only flies Airbus. And you might say as a naive consumer, as I did before I started looking into this, like, no big deal. I mean, like, they look like it's a plane. A plane is a plane, right? Like, I get on it, it looks the same. Well, it turns out that actually they have completely different control systems. And pilots who fly Boeing planes can't fly Airbus planes. And pilots who fly Airbus planes can't fly Boeing planes.

• 30:17Speaker 00

  So it's not like they're going to be able to share pilots at all between these fleets?

• 30:21David Rosenthal?

  Not going to be able to share pilots. And of course, all the maintenance and all the parts are completely different. Now, there are, the other major airlines do use a mixed fleet of both.

• 30:33Speaker 00

  Except for Southwest.

• 30:34David Rosenthal?

  Except for Southwest, yes.

• 30:37David Rosenthal?

  But

• 30:38Speaker 00

  So Southwest is entirely Boeing 737s because they realized that in a part of their business model was going to be staying as lean as possible and, and keeping everything totally interchangeable and swappable.

• 30:51David Rosenthal?

  And that's actually been a big part of their story to Wall Street and investors, you know, about why they're a great company. That's been kind of a pillar of it and Alaska had the same playbook. And now, all of a sudden, they're like a 50 50 shop of, you know, Airbus and Boeing.

• 31:07Speaker 00

  Yeah, and, and you know, from a heartstrings perspective too, how dare a Seattle company buy a company that's entirely Airbus planes? That's just not patriotic.

• 31:17David Rosenthal?

  Much, much sordid and painful history on Seattle and Boeing and perhaps for another show.

• 31:25Speaker 00

  Yeah.

• 31:27David Rosenthal?

  So, so yeah, and I think that kind of actually segues into what usually is a short segment for us, and I think we'll also probably be short here of what would have happened otherwise. And here clearly the other, I mean, Virgin was going to be acquired and, and the otherwise was JetBlue had acquired them. Now, JetBlue is also an Airbus company. So, would have been a lot easier for them to realize cost synergies.

• 31:55Speaker 00

  Yeah. And there's two, two points I want to make here. One, Virgin is sort of only recently profitable. I think that, so they launched in 2007, took them three years to have their first profitable quarter. They're struggling as pitching themselves as both a low-cost airline and an airline that has a really premium service.

• 32:15David Rosenthal?

  Yep.

• 32:15Speaker 00

  And I think that they were better at adhering to the premium service than they were to the low cost, but that's a tough story to, to, to sell to consumers. And I think they, they, they were struggling with, you know, how, how to be both because you can't both be a Volvo and a Cadillac and have that, that story be, you know, sustainable and enduring. And so I think that, you know, Virgin didn't necessarily need to sell. They were in definitely, definitely in the right place, right time where they had a exactly what.

• 32:47David Rosenthal?

  They got an 80% premium to their

• 32:50Speaker 00

  Yeah.

• 32:50David Rosenthal?

  pre-acquisition share price. That's, that's pretty good.

• 32:54Speaker 00

  Yeah, yeah. Good, good on them for their M and A positioning, but. You know, that that seems like a little bit of a precarious position. And as, as you know, at Pioneer Square Labs, a lot when we're thinking about starting these companies, I think I would get a lot of crazy looks if I was like, well, we're going to be a low cost premium company.

• 33:11David Rosenthal?

  It reminds me of, I've been reading another, could have potentially been my carve out, but won't be. I've been listening on audiobook to a great book called Business Adventures. It's a classic. It's from, I believe it was written in either the, in the seventies, perhaps. It was recommended to me by a good friend and I've been listening to it and it's just, it's 10 vignettes of like more and more aptly titled business misadventures. The first one is about a stock market crash in the sixties. But the second one that I'm listening to now is about the Edsel, the, the car that Ford launched that's like widely considered like the worst product launch in history. And one of the key lessons from it is that like Ford

• 33:55David Rosenthal?

  wanted the Edsel to be everything to everyone. Like they say, like, you know, daringly adventurous with a dash of conservatism, you know? And it's like, what? Are you kidding me? Like, you know, you're, or, you know, Ford, the, it's elegant, you know, luxury for the aspiring, you know, young executive, you know, and affordable for like the middle market. And it's like, what?

• 34:23David Rosenthal?

  And it failed spectacularly.

• 34:25Speaker 00

  Yeah, yeah. I, you know, I'm not over here preaching that, that, that was going to be Virgin's path, but that was always sort of a head scratcher to me about that company. Now, the question that I want to pose to you is, what would have happened to Alaska in, with, with all the consolidation in the market going on and

• 34:43David Rosenthal?

  And the pressure from Delta.

• 34:44Speaker 00

  Four major players, the pressure from Delta on the home front, you know, what if they don't expand?

• 34:50David Rosenthal?

  Yep. And I think this, you know, to give some credit to To Alaska, I feel like we've been sort of taking potshots at this deal. They were in a tough position, I think, you know, doing well in the moment, but facing this pressure from Delta, this consolidation across the whole industry. And they had developed a really, really nice niche here in Seattle as the, you know, by far the best routes and customer service for people who live in Seattle and fly in and out of Sea-Tac, but great business routes. But they kind of had nowhere to go. They were getting pressure from Delta here. Super hard for them. What are they going to do? Expand internationally?

• 35:32David Rosenthal?

  Are they gonna go to other cities? And that's what they did with this. They said, we, we kind of need to, we need to grow. It's going to be super hard to do organically. Here's an opportunity, we have a great balance sheet and for an airline, a lot of cash. We know we're relative to the industry, pretty well run. Here's an opportunity to buy Virgin and basically double our size and run the same playbook again. Or they could have just stayed in sort of steady state where they are.

• 36:02Speaker 00

  Well, it's funny, you, you would hope that they double their market size because the, the acquisition is so expensive. But when you look at the numbers of what Alaska's doing and what, what Virgin's doing, Alaska has 32 million total passengers a year. Virgin has seven. Alaska has 1,000 departures a day. Virgin has 200. There's 112 destinations served by Alaska. Virgin has 24. Pre-tax profit from Alaska, $1.3 billion. Virgin, $200 million. So like, that is an expensive purchase for a much, much smaller operation.

• 36:38David Rosenthal?

  Yep. And a much smaller operation with no room to grow in San Francisco.

• 36:46Speaker 00

  Yeah.

• 36:46David Rosenthal?

  I mean, all, you know, not just SFO, but the other airports in, in the Bay Area too, Oakland and, and San Jose, which are, which are, they're really commuter, you know, commuter airports, although pro tip for Seattle to Bay Area commuters, commuters, never fly to SFO. You always got to do Oakland or San Jose. Because if you do at SFO, there's so much fog and fog delays and they always delay the Seattle flights because they want the cross-country flights to land on time.

• 37:12Speaker 00

  Hmm.

• 37:13David Rosenthal?

  Got to do Oakland or San Jose.

• 37:15Speaker 00

  Pro tip.

• 37:16David Rosenthal?

  Pro tip. Anyway, but there's no room to expand at any of these airports.

• 37:19Speaker 00

  Yeah.

• 37:21Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 37:34David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 37:50Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 38:06David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 38:29Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 38:48David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 39:19Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you.

• 39:43Speaker 00

  All right, let's move on to our next section. What tech themes does this illustrate for you?

• 39:49David Rosenthal?

  Yeah, this is a really interesting one. I debated a lot of ideas here. And it's ironic because this is not a technology acquisition. Actually, I'm going to go with niche marketing. And again, even though we've been taking potshots against this deal, both Virgin and Alaska before the merger really succeeded at this. Like in a crowded marketplace with lots of big platform players and the big national carriers, they found a niche. Alaska here in Seattle and with business travelers and Virgin in San Francisco with, you know, sort of

• 40:29David Rosenthal?

  quality of service and, and sort of style minded customers. And they served it really, really well. And they grew very big businesses out of that. I mean, you know, combined, you know, the, obviously the price for Virgin at $2.6 billion. And I can't remember, what was Alaska's market cap before?

• 40:53Speaker 00

  Oh, it's, oh, boof. So their stock actually went down on announcing the acquisition. It's about $10 billion now.

• 40:59David Rosenthal?

  About $10 billion. You know, these are great businesses. And I think that same principle totally applies in technology. And people, especially startups, often overlook it. Like they try and go after, you know, the Delta or the United or the Southwest on day one. They try and go after, you know, Google on day one. You're not going to beat Google on day one. The way you're going to beat Google down the road is you start with a small audience, a small niche of people who love you passionately. And then you grow from there. And then you knock, you know, then you can knock down, you know, in crossing the chasm speak, the next bowling pin and the next bowling pin and the next bowling pin. And that's much easier to do in technology than it is in airlines. But the great thing about it is that, you know,

• 41:43David Rosenthal?

  you're probably not going to become the next Facebook or Google. But if you knock down a couple bowling pins along the way, you're still going to become a really great and valuable company. And then maybe you get a chance to knock them all down and you will become the next, you know, you will be Snapchat and become the next Facebook, calling it here.

• 42:01Speaker 00

  There you go. That's a good point.

• 42:04David Rosenthal?

  Does that analogy also kind of apply to the, the brand loyalty aspect of airlines?

• 42:13David Rosenthal?

  Which they've, you know, huge innovation.

• 42:19Speaker 00

  The invented loyalty.

• 42:20David Rosenthal?

  In the inventing, you know, the loyalty and the airline miles and status.

• 42:27Speaker 00

  Hmm. Yeah. So you're postulating that they're in order to capitalize on loyalty.

• 42:34David Rosenthal?

  Technology companies that have, probably not enough, there should be more, but that have taken that sort of loyalty aspect where like the more I use a platform, the deeper I get locked in because the more, you know, airline miles I have on it, for lack of a better word.

• 42:51Speaker 00

  Hmm. Yeah, I mean, totally. I think that everybody that has, has like done well at loyalty in the last 50 years has taken it from airlines. The question is like, do you need to?

• 43:05David Rosenthal?

  OpenTable definitely did.

• 43:07Speaker 00

  Yeah.

• 43:07David Rosenthal?

  Uh, quite successfully.

• 43:10Speaker 00

  Yeah. Well, I guess I'm wondering, do you need to?

• 43:13David Rosenthal?

  That would be a great acquisition to cover at some point.

• 43:16Speaker 00

  OpenTable?

• 43:16David Rosenthal?

  Yeah.

• 43:17Speaker 00

  Yeah. Add it to the list. We, um, yeah, I'm trying to think about like, is it necessary? Has something changed in the world where it's necessary to consolidate to keep loyalty? Because like, does something exist now that didn't exist before where people only ever want to use one airline? Or?

• 43:39David Rosenthal?

  I mean, that's definitely the case in technology. Like I think about, um, you know, the power law and the power of network effects, like HipChat, right? Like two years ago, a bunch of our portfolio companies used HipChat and some of them used Slack and some of them used HipChat. And there would, you know, I'd talk to people using HipChat and be like, you should really check out Slack. And they'd be like, ah, you know, we use HipChat. It's good enough. But then like, as their friends at other companies got on Slack and then Slack channels started popping up for, you know, industry groups and whatnot. And then it was like, well, we should really think about moving to Slack. And like, then, you know, this power law takes over and being on, even if, you know, I think Slack has done a lot of great product innovations, but even if they hadn't.

• 44:22David Rosenthal?

  You would be pushed to move towards it even if you're on HipChat because the rest of the world is on it.

• 44:28Speaker 00

  Yeah, and with Slack, I think that the like network effect was because people were starting intercompany Slacks. So you would end up with like, I'm in this Slack that's like a social thing or an industry thing. And then it was like, I'm not going to keep using two separate applications. So like, does that apply here where, oh, I'm not going to maintain points at two separate loyalty programs? Because that was always super annoying. I mean, there was a few startups that I was trying out that were trying to aggregate my loyalty programs for me, or at least help me keep track. That was, that was a kind of total pain. Oh, but to segue off of aggregator onto another technology trend. Let's see if this, let me think through this and see if this logic kind of follows.

• 45:11Speaker 00

  So sites like Kayak and Hitmonk and all these, you know, Travelocity, Priceline, travel aggregators pop up.

• 45:18David Rosenthal?

  Yep.

• 45:18Speaker 00

  And that's 15, 20 years ago. And that effectively commoditizes airlines and compresses their margins because people's loyalty,

• 45:30Speaker 00

  people's loyalty to those airlines is shaken because they have an easy way to find cheaper prices.

• 45:36David Rosenthal?

  The price.

• 45:36Speaker 00

  And so therefore margins are driven down because airlines get more commoditized. And when they're more commoditized and there's less profit to be had, even though they weren't making a lot of profit before, they need to consolidate to create a cheaper back office to, you know, take advantage of economies of scale. And now if you're a smaller airline, the inefficiencies from you having a smaller operation could kill you. And so if you follow it all the way back to the, the online travel aggregators, does, does that sort of create the environment in which you need to have a bidding war for this acquisition? So that you can be a more major player in a consolidated market?

• 46:20David Rosenthal?

  Interesting. It feels a little bit, it's different because it hasn't fully become a digitized industry, but it's reminiscent of Ben Thompson's aggregation theory. Right where

• 46:37David Rosenthal?

  where aggregating the consumer endpoint and experience, he argues in, you know, the digital 21st century, you know, post internet world is where all the value is. And then you can aggregate all the, all the difficult, you know, content creation behind that, content creation, but in this case, you know, airlines like point to point travel and own that relationship with the customer at the front end. And then you commoditize everything on the backend and that's completely happened. And interesting, Southwest, you know, has refused to participate in the aggregators

• 47:20David Rosenthal?

  to let themselves be aggregated and probably has some of the most, you know, loyal customers, you know, I mean, their ticker symbol is love, L U V, right? And they always talk about how much, you know, everybody loves each other at Southwest. Yeah, they've fought that actively and they've probably had the most success on the branding front.

• 47:40Speaker 00

  Yeah.

• 47:42Speaker 00

  Yeah.

• 47:44Speaker 00

  Why don't we move on to rendering our conclusions?

• 47:46David Rosenthal?

  I think that's, I think it's that time.

• 47:48Speaker 00

  Yeah. And I think we, you know, we've kind of expressed our, our opinions laced in a bunch of comments throughout this. For me,

• 47:57Speaker 00

  you know, I think the value is inflated, both by the bidding war and by the fact that they bought something that had brand built into the market cap when they're not necessarily going to leverage and in fact have announced they're not going to leverage that brand.

• 48:11Speaker 00

  But I think they needed to, and I don't think they had a lot of options. And I think they both picked the time right when this, this, you know, was an available purchase. And they put themselves in a really good position to make that purchase by, you know,

• 48:28Speaker 00

  I'm probably the wrong person to talk about this, but by putting their books in a great position over the last five years and being really intentional about having or being an investment grade or having investment grade credit. And, you know, I think that JetBlue didn't prioritize that as much and neither did any of the other smaller airlines. And in a world where they, they, you know, need to consolidate, they put themselves in a position where they're able to do so. So, um, I'll give it a B minus.

• 49:01David Rosenthal?

  Yep. I mean, it's hard to, it's hard to separate out, uh, just at least for me, the sort of coming from the tech industry, this sort of, uh, shock at looking at the terrible economics of the airline industry as a whole and dynamics, um, uh, versus the actual, um, quality of decision-making in this acquisition. So I think a lot of what you said, I agree with, um, but I'm going to go lower. I'm going to go C minus because, um, what you said is right, but they paid so much money. They paid so much money.

• 49:42David Rosenthal?

  I mean, I, I don't think it's public and I don't know that anybody except the executives involved know what, what, um, Alaska's initial bid for Virgin was, but like it got bid up so many times until like, ooh, that's a large price for something that your pilots can't fly.

• 50:02Speaker 00

  Can an airline make a good purchase?

• 50:03David Rosenthal?

  Yeah. Good point. Good point.

• 50:06Speaker 00

  Yeah.

• 50:07David Rosenthal?

  All right. Should we move on to the carve out?

• 50:09Speaker 00

  Yeah. So this is wild. Like I, I was like stopping myself from laughing and my jaw dropped and I think it almost ruined David's train of thought earlier when he started talking about how it wasn't going to be his carve out, but it was a paper that, uh, Michael, is it Mambo, Mambo?

• 50:26David Rosenthal?

  Malbison.

• 50:27Speaker 00

  Malbison, that Michael Malbison wrote about this. I picked my carve out as a Michael Malpasson talk that he gave at Google.

• 50:36David Rosenthal?

  Oh, this is so good. Everybody, everybody should watch this talk. It's really good.

• 50:40Speaker 00

  Like, and this, David, this is so weird. I haven't watched this in probably two years. And it was something that I've recommended to friends very often. And so I was sitting here before the episode thinking, you know, I didn't see anything particularly interesting this week that I wanted to recommend, but how about an oldie but goodie? It is absolutely wild that.

• 50:57David Rosenthal?

  This talk is great. And it's, it's based on a book that I've read the book too, which is worth reading too, called Untangling Luck and Skill.

• 51:04Speaker 00

  Yep. Yep. Untangling Skill and Luck, The Success Equation. And it is so, so fascinating. He gives so many great examples that will make you both like follow it logically and nod your head and sort of scared that about how much of your own success has been out of your control or how much the world is out of our control. So how much of your own success cannot be attributed to you and how much of your own failure cannot be attributed to you? And trying to figure out what are things that you have.

• 51:35David Rosenthal?

  Attributed to your own skill.

• 51:36Speaker 00

  Yes, yes. And, and what are things that, you know, you actually should be focusing on? And what are things that you should know that there's going to be randomness in the world?

• 51:46David Rosenthal?

  It's this, the, the talk, if you only have an hour, listen to the talk. If you really want to go deep on this, get the book. It's so good. I will restrain myself. I could go in so many directions. But one, one real quick vignette I want to throw out is one of my favorite themes from this talk in book is the paradox of skill, which is such a cool thing that like in a, a given activity, the whole, the whole premise of the talk in the book is that any activity, the results of which are, are going to be based somewhat on the skill of the participants in the activity and somewhat on luck. And there's a spectrum and some things go more towards the luck end and some towards the skill end. The paradox of skill is that even in things that are highly skill-based,

• 52:29David Rosenthal?

  as the level of play gets higher, so imagine the example Malpassan uses is basketball. As basketball, which is very skill-based, as the level of play gets higher and higher and the parity of skill amongst the players gets more and more uniform, then luck plays an increasing amount, a role in the outcome, even though it's a skill-based game.

• 52:51Speaker 00

  Particularly due to globalization, because the only people who are even considered for this are the best in the world. So then it's, it's like, well, among the people that are all the best that look very similar to each other in skill level.

• 53:02David Rosenthal?

  The variation in skill gets so minute.

• 53:04Speaker 00

  That luck is magnified.

• 53:06David Rosenthal?

  Luck is magnified, yeah. Super. And the exact same dynamic holds true in investing, in startups, in, in lots of things.

• 53:14Speaker 00

  When the world is the pool, you always have the cream of the crop. And then it's, it's all about all the crazy dynamics that play out from there. So can't recommend it enough. It's on YouTube. We'll link it in the show notes. Definitely check out The Success Equation: Untangling Skill and Luck.

• 53:28David Rosenthal?

  I, I've taken enough time. I'm going to save mine for another time. It wasn't, wasn't super interesting anyway. I'm going to doubly recommend this. It's so good.

• 53:38Speaker 00

  All right. Well, there you have it.

• 53:40David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 53:47Speaker 00

  Yes. There is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 53:57David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 54:18Speaker 00

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system. So teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 54:30David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 54:41Speaker 00

  Thanks for listening today. Again, if

• 54:45Speaker 00

  If you have the time, please, please, please leave us a review on iTunes. Can't say enough how much it's important to the success of the show, and we love your feedback.

• 54:56David Rosenthal?

  And if you want to receive episodes by email going forward, just sign up on acquired.fm and we will, we're also now going to start publishing the show by email updates as well, if you prefer that channel.

• 55:09Speaker 00

  It's true, and you can give us feedback on the website or [email protected]. See you later, everyone.