Delta’s JV With Virgin Atlantic Will Lift International Growth

Delta (NYSE:DAL) has agreed to purchase Singapore Airline’s 49% stake in Virgin Atlantic Airways for $360 million. ^[1] The deal which is pending regulatory approval will provide Delta greater access to slots at London’s Healthrow international airport, which is one of the busiest airports in the world. The joint venture (JV) will help Delta gain further share of the lucrative travel market between the U.S. and London Heathrow.

The JV will initially concentrate on the trans-Atlantic market between North America and the U.K. It features a reciprocal frequent flier mile and lounge service program, which will further add to revenue growth for both Delta and Virgin Atlantic.

We currently have a stock price estimate of $10.72 for Delta, approximately in-line with its current market price.

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The travel market between the U.S. and London Heathrow is highly lucrative

The current market size of air travel between the U.S. and London Heathrow is around $2 billion a year, which is nearly three times the size of next non-stop travel market between the U.S. and a European city. ^[2] After the required antitrust review, the JV between Virgin Atlantic and Delta will constitute around 24% market share of the air travel market between the U.S. and the U.K. ^[2] This alliance will thus occupy the second position behind the alliance between British Airways and American Airlines in the U.S.-U.K. air travel market.

Further, accessibility of slots at Heathrow is a highly prized commodity as the airport functions near its full capacity. In 2007, Continental Airlines (now merged with United) had to pay $209 million to gain rights to four pairs of daily slots at Heathrow. Virgin Atlantic controls enough slots to operate around 300 flights a week out of Heathrow. Thus, access to slots at Heathrow and the share of the lucrative U.S.-U.K. market will increase Delta’s international presence and add to its top-line.

Reciprocal frequent flier mile and airport lounge service program to add to revenue growth

Both Delta and Virgin Atlantic passengers will have the option to earn and burn miles on either airline, and this will help both airlines to retain traffic on their flights beyond the routes operated by the JV and add to their revenue growth. Additionally, through the reciprocal airport lounge service program, Delta’s premium-class passengers will be able to access Virgin’s state-of-the-art lounge services at Heathrow airport.

Delta on its part has experience of such alliances. It has trans-Atlantic alliances with Air France-KLM and Alitalia. Its alliance with Air France occupies the largest share of the air travel market between the U.S. and Paris – the second-largest travel market behind U.S.-London among the trans-Atlantic markets. With this new alliance though, Delta will likely have to work on ensuring coordination among its trans-Atlantic alliances.

The deal is pending grant of antitrust approval

The JV will allow Delta and Virgin Atlantic to jointly set prices, schedules and other aspects of their operation and, to safeguard customer interests from a potential dominant position, approval from concerned regulatory authorities is mandatory. The U.S. Department of Transportation, the U.S. Department of Justice, and the European Union’s competition regulator will vet the application for the JV and the alliance will only take effect after that.

However, the alliance is likely to be approved as there have been precedents of airlines getting approvals even with a much larger share of a market compared to Delta-Virgin’s share of U.S.-U.K. travel. For instance, British Airways and American Airlines, which together controlled more than 50% of the U.S.-U.K. air travel market, received their approval from regulators. ((Richard Anderson, CEO, Delta Air Lines’ address during the news conference discussing the Delta-Virgin Atlantic JV, December 11 2012, www.delta.com))

Additionally, Singapore Airlines has been trying to sell its stake in Virgin Atlantic over the past few years in order to focus on the fast-growing Asia-Pacific market. It had purchased its 49% stake in 1999 for approximately $962 million. ^[3]

All in all, this JV with Virgin Atlantic will increase Delta’s international presence and aid its expansion.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. DELTA AND VIRGIN ATLANTIC TO FORM STRATEGIC ALLIANCE, December 11 2012, www.delta.com [↩]
2. Richard Anderson, CEO, Delta Air Lines’ address during the news conference discussing the Delta-Virgin Atlantic JV, December 11 2012, www.delta.com [↩] [↩]
3. Reports: Delta Air Lines In Talks To Buy Stake In Virgin Atlantic, December 3 2012, www.nasdaq.com [↩]