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.
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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.