By Mike Stone and Diane Bartz
WASHINGTON (Reuters) - Alaska Air Group Inc <ALK.N> pressed on with talks with the U.S. Justice Department to reach a deal for approval to buy Virgin America Inc <VA.O>, two people close to the matter said Monday as a deadline for the government to complete the merger review passed.
The late-stage discussions included the possibility of Alaska jettisoning part of one or more code-sharing agreements it has with larger U.S. carriers as a concession for winning antitrust approval, one of the people said. Alaska Air and Virgin America had agreed not to close their merger until Oct. 17 so the Justice Department could finish its review.
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The sources asked not to be named to protect business relationships.
In code-sharing agreements, an airline that does not fly a particular route sells tickets on behalf of another carrier that does. Both airlines place their identifying codes on the flight, and travelers can earn frequent flyer miles under either carrier's loyalty program.
The U.S. Transportation Department must approve code-shares involving U.S. airlines to ensure they do not restrict competition.
Alaska has code-share arrangements with larger U.S. rivals American Airlines Group Inc <AAL.O> and Delta Air Lines Inc <DAL.N>. The merger would open the possibility of the airlines agreeing to share codes on flights currently operated by Virgin America, which might alter competition at a time when the top four carriers control more than 80 percent of the U.S. market.
The Justice Department declined comment. Alaska did not immediately respond to a request for comment.
"The most problematic requirement would be that Alaska drop its domestic codeshares with American and Delta. We estimate these relationships drive close to an estimated $350 million of annual revenue to Alaska," JPMorgan analyst Jamie Baker said in a research note last week.
Removing only certain routes from the agreements, such as from Dallas, would be "less onerous," Baker said.
Alaska said on Friday that it was making "good progress" in talks with the Justice Department on the $2.6 billion deal, which was announced in April.
One of the two sources said that Alaska had expected that it would be able to work out a deal with the government before Monday but pressed on after the deadline.
The merger would make Alaska the top carrier on the U.S. West Coast and the fifth largest U.S. carrier after American, Delta, United Continental Holdings Inc <UAL.N> and Southwest Airlines Co <LUV.N>.
(Reporting by Mike Stone and Diane Bartz in Washington; Additional reporting by Jeffrey Dastin in New York; Editing by Soyoung Kim and Leslie Adler)