Delta Air Lines’ decision last week to pay $360 million for Singapore Airlines’ 49% stake in Richard Branson’s Virgin Atlantic Airways appeared to please investors, judging by the subsequent jump in Delta’s stock price.
As for the effect on customers and competing carriers in the transatlantic market, the jury’s still out.
By paving the way for its proposed joint venture with Virgin, Delta’s investment will enable it to vastly increase its presence in the U.S.-London market and particularly the New York-London route, which is considered especially lucrative.
A Delta-Virgin Atlantic team will likely eat into the market share of the New York-London route held by American Airlines/British Airways’ Oneworld alliance, estimated by JPMorgan analyst Jamie Baker at 49% (United controls about 11%).
In a Dec. 11 note to investors, Baker said, “All airlines operating transatlantic routes out of Heathrow should benefit from the fact that, post-regulatory approval, the market will be controlled by three airline groups, which should result in more rational pricing. For British Airways/American Airlines, this should make up for any share loss.”
One challenge will be combining a smaller carrier that’s received high marks for its customer service with a larger airline that is not known for its personal touch.
“Singapore and Virgin never did mix well,” said Scott Hamilton, managing director at aerospace industry consultant Leeham Co. “But Delta’s mediocre service ... will clearly be quite the comedown for Virgin passengers connecting to Delta.”
Shareholders of Delta, whose $35.1 billion in 2011 revenue is about eight times that of Virgin, favored the agreement, as Delta’s stock rose 5.1% to its highest closing price in almost five months on Dec. 11, the day the agreement was announced.
Baker estimated that Virgin Atlantic’s 44 long-haul routes are worth between $660 million and $880 million, so the price tag, while not a bargain, was appropriate.
As for Virgin Atlantic, it gets access to a far larger swath of U.S. travelers because it has not had a U.S. codeshare partner to help generate connecting traffic.
Granted, there are investment risks. Delta is putting all of its eggs in one basket, as Virgin Atlantic’s flight network beyond London is “of little relevance” because of Delta’s existing routes through the SkyTeam alliance, according to Baker.
Additionally, for the year ended Feb. 29 Virgin Atlantic took a pretax operating loss of 80.2 million pounds ($129.4 million), as fuel prices jumped 32% from a year earlier.
Then there is the issue of a classic legacy airline like Delta partnering with an iconoclast like Branson, who is known more as a flamboyant brand-builder than as a hard-headed businessperson.
“Virgin has, in our view, at times been managed more for the sake of its brand than for pure profit,” Baker wrote. “Delta’s insistence of a board presence at Virgin can hopefully influence future strategy.”
Still, steady New York-London demand will make the investment a good one, Hamilton said.
“For the small investment Delta is putting up, this is almost a no-lose proposition,” said Leeham Co.’s Hamilton. “It shouldn’t take too long for Delta to recoup its investment.”