Delta Air Lines and Virgin Atlantic Airways have reached an agreement for a new joint venture on transatlantic flights between the UK and US that will see the US major invest $360 million to acquire the 49 per cent shareholding in the UK carrier currently owned by Singapore Airlines (SIA). The Asian carrier purchased the stake for £600 million in March 2000 but is known to have been looking to offload its shares for a number of years.
SIA said in a statement this week that it has been “evaluating strategic options for the stake for some time” as the investment has “not performed to expectations and the synergies the parties originally hoped for have not materialised”. The agreement is subject to regulatory approvals being obtained in Europe and the US States and is expected to close in the fourth quarter of the 2013 calendar year, according to SIA officials.
The proposed new partnership between Virgin Atlantic and Delta will enable it to better compete with oneworld members British Airways and American Airlines in the Transatlantic market, although it will stop short of Virgin Atlantic becoming a member of the SkyTeam alliance. This, according to the partners, is something that may be considered in the future. Sources close to Delta said negotiations between the two carriers had taken more than two years to conclude.
The partnership will allow both carriers to offer a greatly expanded network at Heathrow and to overcome slot constraints, which have limited the growth and the competitive capability of both airlines. The two carriers will operate a total of 31 peak-day round-trip flights between the UK and North America, 23 of which operate at London-Heathrow. According to the carriers, the enlarged network will benefit customers of both carriers by providing greater access to a broader network, improved connectivity and convenient booking options.
Despite widespread media speculation of the future ownership of Virgin Atlantic, Virgin Group and Sir Richard Branson will retain its majority 51 per cent stake in the carrier and it will retain its brand and operating certificate. In response to the rumours over the loss of its dentity, Sir Richard Branson had offered a bet to IAG chief Willie Walsh that he would pay British Airways staff £1 million if the Virgin Atlantic brand disappeared in the next five years. Willie Walsh is understood to have accepted the bid as long as the wager was “a knee in the groin”, rather than the million pounds.
The senior management team at Delta has also quashed speculation that the carrier’s decision to pursue a joint venture with Virgin Atlantic would lead to the phasing out of the UK carrier’s distinctive brand. Speaking at a press conference in New York to announce the strategic tie up, Delta’s Chief Executive Officer, Richard Anderson said: “Virgin is an icon brand, the whole purpose is to join the networks and brands together, Sir Richard Branson’s individuality and leadership is the centrepiece of this investment.”
The airlines will file an application with the U.S. Department of Transportation for antitrust immunity, which will allow a closer relationship and coordination on schedules and operations. The transaction also will be reviewed by the US Department of Justice and the European Union’s competition regulator and other relevant authorities.
Richard Anderson said he was confident that approval will be granted as these parties previously approved the British Airways – American Airlines partnership which covered around 60 per cent of the transatlantic market between the UK and US. An initial codeshare agreement is set to be introduced within the next three to four months and anti-trust clearance for the joint venture is expected by the end of 2013.
“Our new partnership with Virgin Atlantic will strengthen both airlines and provide a more effective competitor between North America and the UK, particularly on the New York-London route, which is the largest airline route between the US and Europe,” said Delta CEO Richard Anderson. “This unique joint venture will deliver much more effective competition at Heathrow,” added Steve Ridgway, Chief Executive Officer, Virgin Atlantic.
Although this partnership is not necessarily a pre-requisite to SkyTeam alliance membership it will certainly boost the global grouping’s presence in the Transatlantic market through Delta’s membership. As The HUB reported last week, 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.
Virgin Atlantic is currently the biggest non-alliance airline operating at Heathrow with around 5.5 per cent of seat capacity. 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.
(additional reporting by Oliver Clark, Editor – Routes News)
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