(Bloomberg) -- Alaska Air Group Inc. and Virgin America Inc. pleaded their case for their $2.6 billion merger to top Justice Department officials last week, according to people familiar with the matter, an indication that negotiations are in their final stages over whether the government allows the deal to proceed.
The airlines met with antitrust division chief Renata Hesse and other officials conducting the review to address government concerns that the combination could hurt competition, said one of the people. Such top-level meetings usually signal that the antitrust division has worries about a merger that could lead to a lawsuit to block it.
Time is running short for the government to act. The airlines have agreed not to close until Sept. 30, effectively setting a deadline for the Justice Department to give a nod to the deal or seek to block it.
The spread between the offer price for Virgin America and its share price rose to $3.80, the highest level since the deal was announced, showing that investors Wednesday became more worried about the deal’s prospects.
Virgin America fell the most in seven months Thursday, the biggest decline since before the carrier agreed to be acquired by Alaska. Shares dropped 4.4 percent to $53.20 at the close of trading in New York.
It was unclear whether the companies have offered to sell assets to resolve the department’s concerns or whether they may agree to extend their deadline. The airlines argue that by combining they will be a more effective competitor to the biggest carriers in the U.S., one of the people said.
"We still expect the merger to close in the fourth quarter, as we always have,” said Dave Arnold, a spokesman for Virgin America. Spokespeople for Alaska and the Justice Department declined to comment.
Alaska’s agreement to buy Virgin America, announced in April, would extend a round of consolidation that has shrunk the number of carriers in the U.S. airline industry since 2005, leaving the top four operators controlling 80 percent of the market. This is the first substantial airline merger since the Justice Department sued to block US Airways Group’s takeover of American Airlines in 2013, a case that ultimately settled after the carriers agreed to sell airport assets to low-fare competitors. The government’s decision on this tie-up will be closely watched for its view on the current state of competition in the airline industry.
Bill Baer, who preceded Hesse as chief of the antitrust division and who still oversees it as the Justice Department’s No. 3 official, is keeping a close eye on concentration in the airline industry. He started an investigation last year into possible improper collusion between carriers over seating capacity, a crucial factor in determining fares. He also sued United Continental Holdings Inc., seeking to block its acquisition of takeoff-and-landing rights from Delta Air Lines Inc. at New Jersey’s Newark Liberty International Airport, saying the deal threatened to raise fares. United dropped its plan to buy the slots.
Alaska Air argues the Virgin America takeover is largely complementary and would expand its route network out of Washington, Oregon and Alaska by adding important business centers of Los Angeles and San Francisco as well as rights to operate at New York’s LaGuardia and Kennedy, New Jersey’s Newark Liberty and Washington’s Reagan National airports.
Cross-country routes between New York and California are among the most lucrative in the domestic industry. With the merger, Alaska hopes to become the carrier of choice in California, where it faces stiff competition from Southwest Airlines Co. and United Continental Holdings Inc.
Antitrust regulators may try to ensure two gates acquired by Virgin America at Dallas Love Field to help clear the way for the US Airways-American tie-up remain in the hands of a low-cost carrier after the merger.
In May 2014, Virgin America beat out larger rival Southwest to secure the right to sublease the gates at Love Field, a small airport close to downtown Dallas that’s favored by some business travelers.
Virgin America shifted its flights to Love Field from Dallas-Fort Worth International, where it competed against American Airlines. Love Field is dominated by Southwest, which currently is embroiled in a legal battle with Delta Air Lines Inc. over access to gate space at the airport.
Virgin America Chief Executive Officer David Cush said Monday at an aviation conference that the federal review of the merger is “going according to plan” and the two airlines still expect to complete it in the fourth quarter.
“There have been no bumps in the road,” he said.