Reporting by Graham Dunn, Max Kingsley-Jones and Dominic Perry in London and Edward Russell in Washington DC
It may be a few weeks early, but Delta Air Lines has splashed out and bought itself a Christmas present in the form of the 49% shareholding in Virgin Atlantic Airways formerly held by Singapore Airlines (SIA).
Delta will pay $360 million for the stake - purchased by SIA for around $960 million in 2000 - and plans to form a broad transatlantic agreement with Virgin, including the formation of a metal neutral joint venture with the carriers sharing costs and revenues.
But as Peter Morris, chief economist at Flightglobal Ascend points out, now comes the tough part. "Having got over the excitement of buying [the stake in] Virgin, Delta has got to work out what to do with it," he says.
There are also doubts as to what Delta gets for its money. As Morris points out, London Heathrow slots have a certain worth, "but they are only valuable if they are operating them to destinations that make sense and make money", he says.
"Those generally aren't to the west of London," he says. "You can make a bit of money on transatlantic routes, but capacity has been flat for 10 years - there is no sense of transatlantic resurgence."
Delta and Virgin Atlantic are mum on any potential route or schedule changes. "We need to get through the steps of the regulatory process first and attain anti-trust approval before we make those [route and schedule] announcements," says Richard Anderson, chief executive of Delta, during a press conference in New York on 11 December.
Delta and Virgin Atlantic combined UK-US routes, December 2012
Innovata FlightMaps Analytics
"[The deal] improves Delta's overall competitive position in international markets and further helps the carrier strengthen its position in the important New York and London markets, the two biggest business markets in the world," says Ray Neidl, an airline sector analyst at Maxim Group.
New York-London
The proposed partnership would immediately make Delta and Virgin number two in the lucrative market between New York and London. American Airlines and British Airways (BA) offer 347 flights between London Heathrow and New York's John F. Kennedy (JFK) and Delta and Virgin combined offer 211 flights in December, according to Innovata FlightMaps Analytics.
Including Newark, Delta and Virgin remain second with 271 flights after American and BA with 416 flights during the month, according to Innovata. United Airlines has 127 flights between Newark and Heathrow over the period.
This puts both air carriers on a firmer footing in the New York to London market as compared to the current four-way split between American/BA, Delta, Virgin and United. Delta stands to benefit the most as it moves from fourth to second when combined with Virgin.
Anderson says that the partnership fits with its strategic focus on New York. The airline operates a domestic hub from the city's LaGuardia airport and a mixed domestic and international hub from JFK.
Heathrow strength
The deal strengthens both carriers' offerings from London Heathrow, especially Virgin. The airline had been under pressure to seek a partner on transatlantic routes, as ventures created by rivals - especially Oneworld Alliance partners American and BA's immunised joint venture between the USA and UK - threatened to eclipse it.
Approval of antitrust immunity on the transatlantic routes for the Oneworld partners was a game-changer given the carriers' strength at Heathrow. American and BA - which together with Virgin and United were the only carriers with the authority to operate flights between Heathrow and the USA prior to EU-US open skies - together have more than 60% of the market share, according to Innovata schedules for December. Combining Virgin's transatlantic activities with Delta, a relatively recent entrant to the Heathrow-US market, would give the pair a share of a little over a quarter of the seats offered on a weekly frequencies basis.
Innovata
Anderson says that both airlines anticipate little difficulty receiving anti-trust immunity in the USA-UK market, as a Delta-Virgin Atlantic partnership will have a smaller market share than the existing joint venture between American and BA. Delta and Virgin target approval of the joint venture by the end of 2013.
SkyTeam impact
What this move does for Delta's existing relationship with Air France-KLM is also open to question. "Delta would not have done this unless it made sense to the rest of SkyTeam," says Morris. "But what's the killer business strategy that Delta and SkyTeam are going to employ with Virgin that they couldn't without them?"
Anderson says that its existing joint venture partners Air France-KLM and Alitalia are very "supportive" of the deal that will be very "positive and accretive" for them. However, he specifically indicates that Delta plans to have two immunised partnerships over the north Atlantic.
Julie Southern, chief operating officer at Virgin Atlantic, says that the carrier will evaluate membership in SkyTeam and make a decision in the next "few months" and look at whether it can bring additional benefits to the existing joint venture by flying to Amsterdam, Paris and Rome in the future.
"We will look at an alliance membership if it's the right thing to do in the future," she says. "We see this as a first step."
Airport logistics
Seamless connections between Delta and Virgin could pose challenges. The airlines both operate from terminal 4 at JFK but in London the Delta operates from terminal 4 and Virgin from terminal 3, which are only connected by a bus.
"At JFK it will work quite nicely," says Craig Jenks, head of Airline/Aviation Projects, referring to the New York airport. "At Heathrow it will be the opposite, it will be very bad in fact."
He says that with Virgin adding short-haul feed in London - to be operated on a wet-lease basis by Aer Lingus from terminal 2 at Heathrow - seamless operations are likely to get more difficult. "There is a slight paradox that where the short-haul feed is growing, passengers will find it quite difficult to connect," adds Jenks.
Southern puts some of these concerns to rest: "We hope to co-locate together at some point in time at terminal 3. [But] that's not something that we're going to be able to achieve immediately due to physical constraints at Heathrow."
Short-haul
A Delta and Virgin tie-up does little to boost the UK carrier's planned domestic flights to Aberdeen, Edinburgh and Manchester from Heathrow. The transit logistics in London will make connections from the USA less convenient than those offered by American and BA or even United Airlines, which offers nonstops to a number of smaller UK cities from its Newark hub.
American and BA are split between terminals at Heathrow as well but most connections are contained within terminal 5 where the majority of the partners' flights operate. United flies to Belfast, Birmingham, Edinburgh, Glasgow and Manchester from the USA, allowing travellers to avoid connections at Heathrow.
"United has the legacy Continental 757 operation into the UK regional points," says Jenks. "They do that much better than anyone else."
Virgin's commitment to operating its proposed short-haul routes is also in question. "They may just give it over to Aer Lingus as they bid anyway and may make a better fist of it than Virgin," says Morris.
Virgin Atlantic made a pre-tax operating loss of more than £80 million ($125 million) for its full year, which ended on 29 February.
Source: Air Transport Intelligence news
