Like finding out that your daughter was engaged to the boy you thought she would never date, the December 11 announcement of a joint venture (JV)/strategic investment between Delta (NYSE:DAL) and Virgin Atlantic came as a complete surprise to most. Delta will purchase Singapore Airlines' 49% stake in Virgin Atlantic for $360 million, according to CNN. That is a $600 million loss for Singapore Airlines that purchased the stake for $960 million in 2000. Why would Delta want a stake in an airline that operates primarily outside of the United States? There is a reason for this odd couple arrangement, and it is big.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

It Is a Lucrative Route
Delta is the second largest airline in the U.S. With that in mind, it would make sense that a carrier of that size would offer as many flights from New York to London as possible - especially when a look at the airline industry shows that this is one of the most lucrative routes for business travelers.

Presently, however, Delta only offers three flights from New York to London each day. The partnership between British Airways and American Airlines results in 14 daily flights from New York to Heathrow, a dominant 60% market share.

Providing the JV manages to jump through all the appropriate regulatory hoops by the beginning of 2014, Delta will have access to nine flights from New York to London daily. Some transportation analysts believe that the team up could result in a 38% market share of the route. That is up from the current 10% share they have now.

Why Not Just Schedule More Flights?
They would if it were that easy. London's Heathrow Airport is operating at capacity. With the failed attempt to gain approval to expand Heathrow, airlines do not have the luxury of adding to their routes. This is what makes the Delta - Virgin JV so attractive. Virgin would be giving Delta even more options moving forward. It's definitely something to consider for those analyzing this acquisition announcement closely.

There Are Other Benefits
In the U.S., Delta will be the carrier of choice for flights inbound to New York and other airports servicing the London market. On the United Kingdom side, Delta benefits from having more flights to Heathrow, which opens up other markets throughout Europe and Asia. In 2008, Delta purchased rival Northwest Airlines. Delta did this to gain access to Northwest's extensive Asian network. This, along with its partnership with Air France, gives it many more future options for expanding internationally.

Virgin is a much smaller airline than Delta. Rising fuel costs and the eurozone crisis have hit the airline hard, resulting in a loss of $129 million in the past fiscal year. The JV with Delta gives it access to more American travelers and will likely increase capacity for the airline.

Why Didn't Delta Buy Virgin As They Did Northwest?
First, because global airline laws generally prohibit an airline from taking more than a 50% stake in an airline operating outside of their headquartered country. Second, Virgin's 51% stakeholder, Sir Richard Branson has indicated that he has no plans to exit the airline business. He stated that he sees the team up as a way for the two airlines to add even more flights throughout the world. Analysts say that the event will largely equate to business as usual for Virgin.

The Bottom line
JVs resulting in consolidation in the airline industry have swept throughout the world as airlines struggle to cope with the rising costs of fuel and other associated charges. This partnership will give Delta access to one of the most lucrative business travel routes and that, in turn, will allow the airline to service more customers on both sides of the Atlantic. If you're interested in investing in travel and tourism, dig deeper into this deal.

At the time of writing, Tim Parker did not own any shares in any company mentioned in this article.

Related Articles
  1. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  2. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  3. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  4. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  5. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  6. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  7. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  8. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  9. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  10. Stock Analysis

    Are the Brands Millennials Love a Good Buy?

    Millennials make up a very big — and thus important —c onsumer generation. So if they love a brand, its stock is likely to outperform, right?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center