For Delta, Virgin Atlantic deal is competitive coup

By Kate Rice
Delta Air Lines’ plans for a joint venture with Virgin Atlantic Airways are about more than bumping up the two carriers’ revenues on the lucrative New York-London route.

While improving their top lines is clearly a key goal, analysts suggested last week that the deal also represents a competitive coup for Delta and a savvy strategic maneuver for its CEO, Richard Anderson.

Taking advantage of opportune timing, they said, Anderson is moving to expand Delta’s global reach while his two major competitors, United Airlines and American Airlines, are still distracted by challenges that Delta no longer faces.

United is still merging routes and multiple layers of computer systems as part of the United-Continental merger, and American is focused on emerging from bankruptcy, which Delta put behind itself five years ago.

As a result, Anderson has been able to pursue aggressive strategies for growing Delta’s business and expanding its reach years before United or American can hope to do so.

The Virgin Atlantic joint venture caps partnerships that Delta recently forged in other regions of the world, including with Gol in South America and Virgin Australia in the South Pacific.

And those deals expanded on the airline’s existing strength in Asia as a result of its 2008 merger with Northwest Airlines and its joint venture in Europe with Air France-KLM.

“It shows their focus on meeting the expectations of a global client,” said Brent Eisenach, director of CWT Solutions Group, the Americas, a division of Carlson Wagonlit Travel.

The deal, which includes Delta investing $360 million to acquire a 49% stake in Virgin Atlantic, has been in the works for some time, but it’s really the result of groundwork that Anderson began as soon as he took the helm in 2007, as Delta was emerging from bankruptcy.

Darryl Jenkins, aviation analyst with the Aviation Consulting Group, pointed out that because Delta had been codesharing with Northwest Airlines before their 2008 merger, the two airlines had already coordinated their route systems. The merger gave Delta an instant, much-needed presence in Japan and Asia.

It also led to the joint venture with Air France-KLM, which positioned Delta well in two strategic European hubs, Paris and Amsterdam.

Under Anderson, Delta also bought an oil refinery as a hedge against future spikes in fuel prices.

Richard AndersonMoreover, as Anderson took care to point out at the Dec. 11 press conference announcing the joint venture, Delta has been beefing up its presence in New York, exchanging slots at Washington’s Reagan National for US Airways’ slots and facilities at LaGuardia, where Delta is building a $200 million terminal.

This spring, it will complete a $1.4 billion expansion at Kennedy’s Terminal 4, where Virgin Atlantic is also housed.

Under Anderson, Delta is methodically going through a strategic checklist, and with the Virgin Atlantic deal it crosses off one major to-do item: London.

Succeeding as a global player requires a major presence in London, especially at Heathrow. Anderson pointed out during the press conference that eight of the world’s 10 largest city pairs include London Heathrow. Of those, the largest is New York-London, a nearly $200 billion-a-year route and three times the size of the next biggest route, Anderson said.

Until now, Delta was a minor player at Heathrow, with just a 10% market share on the New York-Heathrow route. Adding Virgin Atlantic increases that share to 38%, JP Morgan analyst Jamie Baker wrote in a Dec. 11 note to clients.

What that means, Baker wrote, is that Delta and Virgin will now have enough to make British Airways and American nervous.

American currently operates what Jenkins calls “a shuttle” to London from New York, which gives the BA-AA partnership a 49% market share. Star Alliance is third on the route, with an 11% market share, almost all of it United flights.

Jenkins predicted that the joint venture would position Delta and Virgin Atlantic to take customers away from American and BA.

As for the SkyTeam alliance, of which Delta is a dominant member, Virgin Atlantic’s chief commercial officer, Julie Southern, said the airline would consider joining the alliance if it’s “the right thing” to do for the business.

She said that getting to the point of announcing the joint venture was the “first step in forming a really strong transatlantic partnership.”

Anderson said that its other European partner, Air France-KLM, supports the joint venture with Virgin and that the airlines will work to coordinate routes and feeds with both joint ventures.

Jenkins said there was no question the deal was driven by the pursuit of revenue.

“If all else is kept constant and revenue goes up,” it’s a nice addition to the bottom line, he said, adding that “the total pie will be larger than what the two, uncombined, share right now.”

Delta and Virgin said they intend to work immediately on codesharing and frequent flyer reciprocity. Reciprocal “earn and burn” is a priority, Southern said. The deal also means shared access to Delta Sky Club and Virgin Atlantic Clubhouse airport lounges for elite passengers.

Jenkins described Virgin as “the” brand in the travel industry, and he asserted that having an established brand name enables a carrier to charge more. He added that Virgin has “the most loyal customers on the North Atlantic.”

Southern offered up numbers to support that assertion, saying that while Virgin has just 3% of the slots at Heathrow, it has 10% of the long-haul routes and 24% of the customers on the routes it flies out of Heathrow.

The two airlines still have to clear regulatory hurdles for their joint venture. They must file with the U.S. Department of Transportation for antitrust immunity, and the deal must also pass review by the U.S. Department of Justice, the European Union’s (E.U.) competition regulator and other relevant authorities.

The equity purchase and the joint venture are expected to be implemented by the end of 2013. Anderson said he was confident that the two airlines would get the approvals they need from authorities in the U.S. and the E.U.

He said the fact that AA and BA got antitrust clearance with a far larger market share bodes well for the Delta-Virgin Atlantic venture.

Follow Kate Rice on Twitter @krtravelweekly.
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