Delta Air Lines is buying a 49 percent stake in the airline owned by British celebrity magnate Richard Branson, but starpower is not the draw.
Atlanta-based Delta hopes that by joining forces with Branson’s Virgin Atlantic Airways it can fix a glaring weak spot in its international network - too few flights at London’s Heathrow Airport.
Delta on Tuesday said it will spend $360 million to buy the Virgin Atlantic stake and plans a joint venture that will effectively marry its limited operations at Heathrow, a key hub for business travelers who supply most airline profits, with Virgin Atlantic’s.
The deal is the latest of its kind among global airlines. Experts say such “virtual mergers” can lead to more stable airlines and bring service benefits to business fliers, though they also diminish competition and can mean higher fares.
The Virgin Atlantic venture won’t likely mean much in the short term for Delta’s service between Atlanta and London or the rest of Europe. But it is a big strategic move for one of Georgia’s biggest private employers. It is aimed at strengthening Delta’s hand against archrivals American, British Airways and United in the hugely important New York-London market.
“If you look at traffic flows in the world, there’s no more important market than the U.S. to London Heathrow,” said Delta chief executive Richard Anderson, adding that the market generates nearly $2 billion a year in revenue.
Despite decades of international growth since its first trans-Atlantic flights in 1978, Delta has been hamstrung by the limited availability of flying rights — called slots — at Heathrow.
Delta will have 9 daily departures from Heathrow next summer, vs. 15 for American, which already has a similar deal with powerhouse British Airways.
Combined, Delta and Virgin Atlantic expect to be No. 2 in the overall U.S.-U.K. market. Delta alone is fourth.
The two carriers will seek antitrust immunity for their joint venture. That would allow for coordination of pricing and schedules and revenue-sharing. Without that the two carriers could jointly market seats and offer reciprocal perks but not cooperate on route planning or fares.
New York-based airline consultant Robert W. Mann said Delta is trying to match what American and British Airways and United Continental and its partners can already do.
“They’re just looking to mimic that and get their share of the Heathrow market,” he said.
American got approval in 2010 for a joint venture with British Airways, Heathrow’s dominant carrier.
The international partnerships are changing the way U.S. airlines expand across the world to take advantage of lucrative international travel, while bypassing some of the regulatory and financial hurdles to spreading their own route networks across the globe.
Delta and Virgin Atlantic will remain separate companies and Branson will still control his carrier, which started as a cheeky maverick in the trans-Atlantic market but has since expanded around the world.
Delta already has joint ventures with Air France-KLM and Alitalia and with Virgin Australia, as well as partners through its SkyTeam global alliance and agreements with more than 20 airlines to sell each other’s flights. Delta has also purchased small stakes of Aeromexico and Brazilian carrier Gol in the past couple of years.
Mann said joint ventures with antitrust immunity can be better for business travelers, because they allow airlines to schedule their flights for the most convenient itineraries and joint services.
But, he added, such close partnerships raise some issues. “Since the antitrust alliances have been in prominence in the North Atlantic, we’re starting to see four-digit air fares in the summer, which we’ve never before seen,” Mann said.
Airlines cite high fuel prices, but Mann said reduced flying and increased pricing power as a result of consolidation also factor in.
“It’s definitely not good for leisure customers,” Mann said.
Delta CEO Anderson, by contrast, said the deal will be “great for consumers.”
He said the only immunized alliance between the United States and the U.K. — American Airlines-British Airways — has a 60 percent market share. With a Delta-Virgin Atlantic joint venture, “now you’re going to have a real competitor in the marketplace,” he said.
The stake Delta is buying was previously owned by Singapore Airlines, whose plans for coordinating with Virgin Atlantic didn’t pan out. The stake allows Delta to not only cement a partnership but also prevent any rivals from jumping in.
Anderson also said Delta will likely explore long-term opportunities to move some Virgin Atlantic operations, such as maintenance, to Atlanta.
The joint venture will also be reviewed by the U.S. departments of Transportation and Justice and the European Union. If approved, it would effect in late 2013.
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