Delta Looks to Virgin Atlantic to Bolster London

So the rumors were true. Delta has decided to buy Singapore’s 49 percent stake in Virgin Atlantic, and I’m a bit surprised. I was expecting something a little more (somehow involving Air France/KLM) for Delta to bother getting involved here, but I was wrong. That doesn’t mean it’s a terrible idea, but it does leave some questions. Delta clearly wants to plug a hole here. I just wonder if it will work.

The deal goes down like this. Delta is buying 49 percent of Virgin Atlantic for a mere $360 million. Singapore Airlines originally bought that stake in 1999 for north of $900 million. Ouch. Singapore’s vision for Virgin Atlantic never materialized, and it wanted out. Delta provided that out.

Virgin Atlantic Delta Puzzle

So what is Delta going to do with a non-controlling stake in this airline? Right off the bat, it is putting together a joint venture between the US/Canada/Mexico and the UK. There will be reciprocal frequent flier benefits and reciprocal lounge access. Delta and Virgin Atlantic will also co-locate where they can. In London, Delta will eventually move to Terminal 3 to be near Virgin Atlantic. You can see how little benefit Delta must be getting from its SkyTeam partners there if it’s going to leave SkyTeam Terminal 4. At JFK, this problem will be solved when Delta moves into Terminal 4 there. Virgin Atlantic is already in that terminal.

The Benefits
For Virgin Atlantic, this is huge. Singapore didn’t provide much in the way of feed for the rest of the Virgin Atlantic network. However, bmi did provide a ton of feed until it was snapped up by British Airways. Virgin needed a network, and Delta can provide that from the US. This should help fill up those US-bound airplanes with Americans instead of Europeans, and Virgin desperately needs that. If there is an eventually inclusion into SkyTeam (certainly expected, but not part of today’s announcement), then that will help further.

For Delta, this is another niche player that it can scoop up to help fill a void in its network. And this void is a really important one. Despite every bone-headed effort by the UK to make London a less important world air travel hub, it is still a major financial capital. And if Delta truly wants to be a global airline, it needs to have better service than it has today.

It’s About New York
Of course, British Airways and American have the strongest position in London by far. Delta would have been hard-pressed to grow a position itself considering the slot restrictions at the airport along with the already ample capacity on these routes. With this deal, Delta becomes more relevant in London, but more importantly, it becomes more relevant in places like New York, from where London is one of the most important business destinations. This simple chart showing daily flights each way from all New York airports should make it very clear.

Routes

AA/BA

Delta

Delta
+ Virgin

New York-Heathrow

15

3

9

I told you it was a simple one. Today, Delta is an afterthought. If its schedule fits a loyal traveler’s needs, then people will take it. But more often than not, that probably won’t happen. Combined with Virgin Atlantic, however, there is a very respectable schedule that now also covers the other side of the Hudson in Newark. Delta becomes relevant.

While New York is the big prize, there certainly is more than that as well. This gives Delta a way of serving all of its big city US-based travelers who need to get to London without stopping. For example, it gives Delta a presence from LA to London, a market that it once thought was important enough for Air France to try to fly. (It failed miserably.) But with the Virgin Atlantic operation, it lets Delta get into the game with an established player.

Fixing Virgin
This doesn’t mean all is rosy in this deal. Virgin Atlantic is losing money. Between the US and UK, you can see a clear path here that allows Delta to get its customers on Virgin Atlantic airplanes and that’s good for Virgin Atlantic’s bottom line. But there is still the rest of the network to contend with. Virgin Atlantic flies some not-so-smart routes, like the kangaroo route bloodbath down to Sydney. With Delta owning 49 percent, you would hope it would hold enough sway to get Virgin to make some changes, but it doesn’t have absolute control. I would think we would see more Virgin Atlantic airplanes focused on the US market and less going elsewhere but I suppose we’ll find out.

And then there’s this whole silly business about Virgin Atlantic flying narrowbodies up to Scotland. That is apparently still going to happen and Delta will codeshare on it. This is about Virgin getting extra slots at Heathrow, but this seems like a lot of effort for little gain.

Not a New Delta Strategy
Ultimately, this is just another piece in Delta’s world domination puzzle. It’s one of those really annoying pieces that you can’t find and assume you’ve lost. But then you see someone selling that exact piece on eBay for a pretty good price and you jump on it. This isn’t a new strategy. Delta bought much smaller stakes in both Gol in Brazil and Aeromexico in Mexico to fill holes in Latin America. Delta also set up a joint venture with Virgin Australia to strengthen its offerings down under. When it sees a hole, Delta finds a way to plug it, and SkyTeam isn’t necessarily involved.

London is clearly the biggest hole it has tried to plug, and it’s doing it for a song. For Delta, $360 million is nothing. It’s not even four days worth of revenue. But the risk is that Delta doesn’t have control of Virgin Atlantic. I would hope that it got some real assurances that Virgin Atlantic is going to make changes, but I suppose we’ll see if that actually holds true. After all, Sir Richard does have a rebellious streak in him.

[Original map puzzle photo via Shutterstock]

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49 Comments on "Delta Looks to Virgin Atlantic to Bolster London"

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Jared Hanner
Member

What are the chances that Virgin Atlantic will join SkyTeam? And if they did do you think Virgin Australia would follow suit?

It seems like the Dleta deal is a good move for Virgin as well, since they have always wanted to get back at BA/AA and this gives them more power.

matt weber
Member
I’d characterize Delta as opportunistic. They have trouble passing on almost any really ‘good deal’. Some of those deals have worked out better than others, but that is true of just about every deal. Clearly they got a good deal on Virgin Atlantic, what we don’t know is how the transaction has been structured, which means we really don’t know how much control Delta will be able to exercise over Virgin Atlantic, and how well this deal turns out for Delta will obviously hinge on that question. One of the more interesting questions is exactly where this leaves Virgin America’s… Read more »
Nick Barnard
Member

AFAIK once there is a Joint Venture in place DL will be doing the pricing for that operation, so they’ll have quite a bit of control there.

Doesn’t DL have a transatlantic JV already with KLM/Air France? Or does that not include LON?

Ryan
Guest

That’s my question, too. How does this impact the metal-neutral JV w/ KLM & AF?

christophe.bottega
Member

First, it’s AF/KL/AZ/DL.
Used to include only hub flights in the beginning and it has now been extended to all Europe North America (including Mexico) flights (+ a few odd ones like India Amsterdam and Tahiti North America).

christophe.bottega
Member

First, its AF/KL/AZ/DL.
Used to include only hub flights, and is now extended to all Europe North America (including Mexico) flights, + a few odd ones (India Amsterdam and Tahiti North America).

Trent880
Guest

Virgin Australia doesn’t even see a point in Virgin America, and has a JV with DL instead

DesertGhost
Guest

On balance I like this move. Delta has been one of the few airlines who’ve shown some chutzpa and taken some risks. At some point, someone has to do it.

Delta’s participation in the LGA / DCA slot swap was predicated on “winning” New York. This 49% stake in Virgin Atlantic is part of that same strategy.

One thing you can say is that Delta isn’t taking half hearted steps. The oil refinery and this transaction show that Delta is willing to behave entrepreneurially.

In mature industries, an entrepreneurial spirit is often the difference between profitability and bankruptcy.

David SF eastbay
Member

The true test will be passenger reactions to things like codesharing. Will current VS flyers be pleased when they find out the VS flight is actuall flown by DL where the service will not be the same?

Do people still feel young and hip flying Virgin and now will be flying on old dumpy Delta?

DL can already take people to where VS flys beyond London so it’s only for the added London codeshares that DL really wants.

SEAN
Guest

Can anyone find the humor in this line regarding Delta?

London is clearly the biggest hole it has tried to plug, and it?s doing it for a song.

David
Guest

Perhaps you could add in the words ‘go’ and ‘easy’ as well ? :-)

David
Guest

I’m puzzled why you think Virgin to Scotland is such a bad idea. For Virgin they get a bunch of slots for free – unlike Continental who paid tens of millions of US$ per slot pair. Furthermore, it partly repairs some of the feed they lost when BA bought bmi – it’s just not remotely sensible for Virgin to rely on BA providing domestic feed into Virgin long haul.
Right now, if you live in Scotland, the only way to fly long haul is BA, KLM or Lufthansa – Virgin just doesn’t get a look in

Sanjeev M
Guest
Virgin to Scotland is good for Virgin. In the case of DL they would just rather send people over AMS to regional UK. In terms of service gap, it seems that DL really needs to work on the lounges at least in NYC to be remotely close to VS. In terms of onboard DL may not be flashy but the product is certainly decent, and much better than UA transatlantic. NYC-LON is only a 7/8 hour flight anyhow, so it should be fine, especially once the 767 mods are done. I was hoping Virgin America would be tied into this… Read more »
Alan
Guest

Do you think that Virgin America will somehow get tied into this as well? They’re hurting financially and maybe could succeed with support of Delta?

Nick Barnard
Member

I doubt Delta wants Virgin America to succeed. DL would be quite happy if VX filed Chapter 7 and was done with their floundering.

Bill from DC
Guest

At the very least this makes DL a real player on NYLON for the first time ever and it provides additional feed from VS flights to its JFK spoke flights.

Seems like a great move for DL at that price point. Of course, it’s not just the bargain purchase price that should be considered; DL now owns 49% of any future VS losses as well.

Scott
Guest

Cranky – I believe Delta currently has 3 flights between JFK and LHR. The new JV will have 9 total daily flights – although they are going to have to readjust the schedules as some of the flights overlap. I am sure they will want to space them out throughout the day.

Karen
Guest

@Alan I believe Virgin is going in Newark to expand and @Bill from DC I agree. Seems like a good deal for DL at that price. I guess we will find out Cranky and see if it holds true. Thanks for the post.

Nathaniel
Member

I wonder if the larger presence at Heathrow will make Delta want to throw a souped up VA/Delta Plane or two on the LCY-SNN-JFK Business route to go after BA..

Jim
Guest

Interesting analysis, Brett. I’m just wondering why Delta needed to buy a stake in Virgin Atlantic. Does that make it more likely that the joint venture will get approved?

Don
Guest
My two cents is that DL got a piece of Virgin for a cheap rate while helping (releasing) Singapore from the shares they owned. So, maybe DL could have a gentleman’s agreement with Singapore. Now DL can make some money off Virgin Atlantic (when they are able to do so) or sell it at a profit when the time is right. DL could also make some barter with Virgin with some international gates and slots they may want which could help them out in the long run. I think this deal benefits DL mostly. And no; don’t see why DL… Read more »
sjcuser
Guest

Will VS start flying ATL – LHR? If they want DL’s feed, wouldn’t they want to go to DL’s main base?

nacho
Guest

Virgin flies to Havana, I wonder if it will keep this route after Delta acquiring a minority stake!

Nick Barnard
Member

Hrm, didn’t find them on VA’s site.. Perhaps they’re charters?

David SF eastbay
Member

They fly a couple of times a week (or so depending on time of year) LGW-HAV using 744.

wowlimo
Member

Any ideas of plans of adding 380’s or similar to any in US routes or south america ones?

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