Alaska Airlines raised approximately $2 billion of bank debt to fund its takeover of Virgin America last year. Now, for the first time, the carrier’s treasury team has spoken about the deal and the airline’s future financial strategy.

When Alaska Airlines closed its takeover of Virgin America in December, it became the fifth-largest airline in the USA.

To fund the deal, the airline’s treasury team arranged a vast range of bank loans: around $2 billion of both fixed- and floating-rate debt, spread across 19 different transactions, secured against a collateral pool of 56 single-aisle aircraft.

The average cost of financing was 2.37%.

The longest transaction was a 12-year deal that also contained a 20% balloon payment. The shortest deal was around five years, secured by aircraft with vintages as old as 2006. The weighted average life across the whole 19 loans was just short of five years.

The team notes that it borrowed from a large range of banks, but stresses that Citibank, BNP Paribas and Bank of America Merrill Lynch acted as advisors or arrangers for those loans involving the newer lenders to the airline. Holland & Knight acted as legal advisor.

Mark Eliasen, vice president of finance and treasurer, says that Alaska Airlines chose bank debt because it provided lower upfront fees and greater flexibility to customise deals to fit the collateral pool.

“We evaluated bank debt, capital markets transactions, private placement debt, and ultimately decided that bank debt provided us with the lowest margin, the lowest upfront fee,” he says.

He adds: “We were able to get a better deal by syndicating our own bank debt transactions rather than pooling it all into one large EETC.”

Although the airline had been deleveraging its balance sheet since 2010 and had not accessed the bank market substantially “for quite some time”, he says, Alaska had still been cultivating its banking relationships so that it was well-placed to raise debt when it had to.

“Once we got the merger approved and went in to seek financing, we had still over that time been cultivating relationships, there was high demand for Alaska Airlines debt because we were not exposed to the market, and had some great credit – so, putting those things together, we were pretty well set up to go and seek financing.”

Global lenders

“There was global appetite for this,” says Steve Rock, director of treasury and finance and assistant treasurer at Alaska Airlines.

“We went into this thinking it would be more European-centred, because they’ve been the traditional banks that have lent in this space, and what we found was that 44% of the money came from the US banks, and 30% came from Asia-Pacific, and only 26% came from Europe. So even though Europe is still a strong player, the rest of the world wants to do these deals as well,” he adds.

Eliasen notes that the strong presence of US banks on the deal is bucking a recent trend.

“In the past you just didn’t see the US banks participating as much in bank debt. But over the years the industry has been a lot stronger, the banks have become more educated about the airlines, specifically Alaska Airlines, and so they were just by nature a larger part of this than they would have been historically,” he says.

Not only was the deal oversubscribed, says Eliasen, but some of the lenders had never completed a deal with the airline before.

“There was more than a handful, probably go up to 10 institutions that did not make the list. We’ve been talking to a lot of banks and other institutions over the last seven or eight years even though we didn’t need money, and many had provided unsolicited term sheets to us, so we had a pretty good idea of the market going into this,” he states.

2017’s financing demands

“Our preference is that we like to pay cash for airplanes,” says Eliasen.

He notes that Alaska Airlines has 12 Boeing 737s and 13 Embraer E175s scheduled for delivery in 2017. The carrier’s most recent forecast suggests the airline will need to borrow up to $200 million to finance those 25 aircraft.

Eliasen says that if the airline chooses to raise more debt, it will probably approach banks in the second half of this year.

He says: “Virtually everyone who participated said, ‘We’re not done, call us back and we would be happy to do more.’ So we’ve got incumbents that we’re already working with, plus the people that didn’t make it who are eager to do something with us. So it seems there’s still quite a bit of demand out there.”

Merging the two airlines

When it comes to merging the two airlines’ balance sheets, notes Steve Rock, the most distinct difference between the companies is Virgin America’s tendency to lease aircraft versus Alaska Airline’s preference to pay with cash.

Just 10 of Virgin America’s fleet were owned, he notes. According to Airfinance Journal Fleet Tracker the carrier’s fleet stands at more than 60 A320-family aircraft.

“Although Virgin America’s ability to raise debt wasn’t quite as strong as Alaska’s,” Rock says, “ are priced fairly well, given that the overall interest rate environment is low, and the market for securing debt is fairly attractive as well. So those deals are probably not as good as what Alaska could have sourced, but the overall debt portfolio that they carry is decent.”

He adds: “Ideally as a company we don’t prefer to enter into new leases versus purchased aircraft. But we do have those leased aircraft that we did acquire with VA on contract, which are typically difficult to break mid-stream, and we have not yet made a company decision on the future of the fleet type.

Mark Eliasen adds: “It gives us a chance to try out that new fleet type. We’re getting to know the Airbus product now. We don’t dislike leasing, we just haven’t found the economics to be as interesting to us. We tend to buy good airplanes and fly them for 20 or 25 years. One of the advantages of leasing, of course, is that the residual value risk is transferred to the lessor, but if you’re going to fly them basically throughout their full useful life you don’t care as much about residual . So for our business plan we haven’t seen it to be an advantage.”