Alaska Air Group said today it would buy Virgin America for $2.6 billion to compete more effectively with larger airlines and become the top carrier on the US West Coast.
Shares in Virgin America have soared over 41% on Wall Street today, while Alaska Air lost nearly 5%.
Today's deal appears to end what Alaska Air chief executive Brad Tilden called a "hard-fought competition" to purchase Virgin America.
JetBlue Airways had also made an offer for the company.
The deal would create the fifth-largest US airline in the latest in a series of mergers in the past decade that have shrunk the industry to a handful of companies.
The top four control more than 80% of the US travel market.
Alaska Air said it might continue to use the Virgin America brand in some form.
The offshoot of billionaire Richard Branson's London-based Virgin Group has become famous for its mood lighting and media-rich entertainment on flights.
Alaska Air said it was buying the California-based competitor to expand in Los Angeles and San Francisco and offer more connections to international airline partners.
It would also benefit from Virgin America's corporate contracts and cult-like status among travelers that work for technology companies. The combined company would retain Alaska Air's Seattle headquarters.
Alaska Air said in a statement that the deal would generate $225m in annual synergies once the companies are fully merged.
It expects one-time integration costs of $300-$350m.
The company would pay $57 per share in cash, about 86% above Virgin America's stock price before reports in March that the airline was considering a sale.
The companies said they expected the deal to receive the necessary approvals from Virgin America shareholders and US regulators by January 1.
