Delta Courts Virgin Atlantic to Boost SkyTeam’s Transatlantic Traffic

It has emerged this week that Delta Air Lines is reportedly interested in acquiring Singapore Airlines’ 49 per cent stake in UK carrier Virgin Atlantic, a deal that could see the carrier’s founder Sir Richard Branson relinquish full control of the airline he founded in the 1980s. Although both Delta and Virgin Atlantic have declined to confirm the reports, Virgin Atlantic's long-term future has been uncertain since it appointed Deutsche Bank in 2010 to explore future strategy options.

In the last few months Virgin Atlantic has confirmed it will finally take a place in one of the global airline alliances after the takeover of bmi British Midland International by British Airways’ parent International Consolidated Airlines Group (IAG) further diluted its market potential. This deal had been a significant blow for Star Alliance, not only losing a member airline but also feed into its flights from the UK’s main international gateway, London Heathrow. It is sure to be involved in discussions over the future standing of Virgin Atlantic, but for now it appears that rival SkyTeam may be in the strongest position.

The group has the smallest presence of the three alliances at London Heathrow with just a 6.4 per cent share of the total seat capacity at the airport at the height of this summer (August 2012). This compares with the 19.7 per cent share of Star and the dominating 54.6 per cent share of oneworld, thanks mainly to the hub operation of British Airways. The remaining 19.3 per cent capacity share, approximately 180,000 seats, is split between unaligned carriers.

Singapore Airlines has confirmed that it is in discussions over the sale of its 49 per cent share in Virgin Atlantic, but where will this leave Sir Richard Branson? Well, the suggestions are that if Delta does acquire the stake, fellow SkyTeam member Air France-KLM could seek to acquire the controlling 51 per cent interest and add London Heathrow to its existing European hubs at Amsterdam Schiphol and Paris CDG, strengthening its posiyion in the transatlantic market and to a lesser extent into Asia. However, even if Virgin Atlantic joined SkyTeam it would remain the smallest of the three global alliances at Heathrow with just an 11.8 per cent capacity share.

Virgin Atlantic is currently the biggest non-alliance airline operating at Heathrow with around 5.5 per cent of seat capacity and in the table at the end of the article we highlight its largest network points from the UK hub airport by seat capacity this year. Delta has just a 1.6 per cent share offering on average nine daily flights spread across five of its US hubs; Atlanta, Boston, Detroit, New York JFK and Minneapolis/St Paul. Of these destinations Virgin Atlantic also serves Boston and New York JFK so there is in fact little overlap of network.

Delta is currently the fifth largest carrier in the transatlantic market from London Heathrow with a 7.5 per cent capacity share, behind British Airways (41.1 per cent), Virgin Atlantic (19.8 per cent), American Airlines (15.0 per cent) and United Airlines (12.7 per cent). Combining Virgin and Delta's seat capacities would result in them holding a 27 per cent share of the current London - US market, still significantly smaller than British Airways' share.

It is currently a challenging period in Virgin Atlantic’s history, which probably most closely mirrors its early days when it fought the ‘Dirty Tricks’ war with British Airways. Its catchy ‘four-engines for long-haul’ marketing campaign highlighting its operation of only four-engined jet aircraft (Airbus A340s and Boeing 747s) has come back to haunt it over the last decade as the high cost of fuel has hit its bottom line and pre-tax losses of £80 million for the year ending March 2012.

The arrival of ten twin-engined A330-300s has enhanced its competitiveness but is it too late for the carrier and with long-time Chief Executive Officer Steve Ridgway stepping down from the helm in March 2013 and the launch of domestic UK flights; 2013 is set to be a key year for the pioneering UK carrier.

In the table below we highlight Virgin Atlantic’s capacity from London Heathrow this year and compare this with the previous year. With the arrival of new aircraft supporting network and frequency growth as well as fleet renewal, capacity was up 6.2 per cent this year with notable capacity rises across its network.