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]

49 Responses to Delta Looks to Virgin Atlantic to Bolster London

  1. Jared says:

    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.

    • CF says:

      Jared – I would say the chances of Virgin Atlantic joining SkyTeam are good, but I’m not completely convinced it’s needed. The European airlines can provide very little feed for Virgin and vice versa. Virgin Atlantic, like Virgin Australia, might be best off just partnering individually to fill needs.

  2. Matt Weber says:

    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 relationship with Virgin Atlantic (out in the cold I suspect, unless Delta plans on buying a major share in Virgin America as well. However it would have to be at a ‘fire sale’ price to be attractive to Delta).

    • CF says:

      Matt – I don’t see why Delta would ever buy a share in Virgin America. There is very little to be gained unless the goal is to simply shut it down and get rid of its capacity. I don’t think Branson’s ego would allow that.

      • Ron says:

        Unless Delta wants to grow LAX … again

        • CF says:

          Ron – This doesn’t grow LAX in a meaningful way. Delta already flies to SFO, JFK, and Orlando on its own. It flies to Seattle and Portland with Alaska. Delta tried Philly and ran away quickly. I believe it also tried and walked away from Dulles, Boston, and Ft Lauderdale. That leaves Chicago, Dallas, and Cancun, markets nobody wants outside of the incumbents. Of course, if Delta wanted those routes it could start them today with its own airplanes anyway.

    • 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 says:

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

      • Christophe says:

        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 says:

        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 says:

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

  3. 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.

  4. 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.

  5. SEAN says:

    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.

  6. David says:

    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 says:

      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 somehow, but even Branson sees the benefits of VS/DL far outweigh the stagnant Virgin America.

    • CF says:

      David – Yes they get a bunch of slots for free but they have to use them to fly to Scotland. The people who actually want to fly from Scotland to London already have a ton of options into several airports on many airlines. The big money on that route is flying to London City already.

      So Virgin Atlantic is going to operate a brand new aircraft type (complexity equals higher costs) just for a handful of short routes simply for the ability to connect people on to longer flights? It doesn’t make sense to me.

      • Sean S. says:

        Aren’t they wet-leasing the planes from Aer Lingus? In that case the added complexity is irrelevant since they won’t be the one’s responsible for taking care of them or, in fact, even operating them. Seems a win-win to me, especially since feed is necessary to maintain Virgin Atlantic’s rather small, long and ultra long haul routes.

      • Sean S. says:

        My understanding is the flights to Scotland are wet-leased from Aer Lingus. So there is no real risk capital wise for Virgin Atlantic, and they get access to a broader short-haul feeder network.

        Virgin Atlantic has the rub of being an independent with a very small route network that is comprised mostly of risky long-haul and ultra-long haul routes. It increasingly needs feed in order for those routes to make sense.

        • CF says:

          Sean – I hadn’t seen the Aer Lingus deal. Thanks for mentioning. But while that avoids big up front expenses, it just means the service itself ends up being more costly on a variable basis. It’s going to be hard to make a profit.

          I agree that it needs feed, but it shouldn’t be taking on risk to do it. It’s getting feed from Delta with this and that should help tremendously. But creating a new short haul network specifically for feed purposes won’t work very well.

          • Ron says:

            Virgin Trains just got their West Coast Main Line franchise extended through 2014. Find a way to connect that to Heathrow, and there’s your feed. Of course, they’ve had the franchise for 15 years and haven’t managed to connect to Heathrow in that time, so…

  7. Alan says:

    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?

    • CF says:

      Alan – Why would Delta want Virgin America to succeed? I have a hard time understanding how this would make sense for Delta. I know some have argued that it would give Delta a bigger presence in San Francisco, but does Delta really want a money-losing presence there?

      • SEAN says:

        Lets not lose sight of the fact that LAX – JFK is one of the most flown routes along with SFO – JFK. Having Vergin America on these longhall routes wich includes nearly every domestic airline but Southwest & US Airways, makes it challenging to make money. Even some international airlines fly these city pairs to feed there overseas flights such as El Al & Quantas.

        • Ron says:

          El Al?! Their LAX–TLV flight is nonstop; their 1-stop service via JFK is on a codeshare operated by American.

          • CF says:

            I assume Sean is talking about way back in the day when North American was El Al’s domestic arm and flew JFK-LA. It’s been a very long time, but that did happen.

          • SEAN says:

            Yes, that was what I was refering to. At one time the El Al flight from LAX would stop in either JFK, EWR, ORD or YYZ before continuing on to TLV depending on what day of the week it was. Now as already stated, that flight is nonstop.

          • Ron says:

            Yeah, El-Al used to have these collector runs — I was once on a JFK–TLV flight that stopped to pick up passengers in Montréal, and on a TLV–LHR flight that continued to Newark. I don’t know if they had local traffic on these tag-on segments (not that London-Newark is very local). But surely they wouldn’t be allowed to carry local traffic on domestic segments, right? I don’t believe Qantas does on their LAX–JFK tag. At least Qantas can fill the tag flight with passengers from multiple destinations in Australia. Are they allowed to also put other international connections on board?

          • CF says:

            Ron – Foreign airlines are not allowed to carry locals. So that Qantas airplane is only full of people who are connecting from Australia on Qantas. (And other airline employees, who are allowed to do it!) They can’t connect anyone from other airlines, as far as I know.

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

  8. 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.

  9. Scott says:

    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.

  10. Karen says:

    @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.

  11. Nathaniel says:

    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..

  12. Jim says:

    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?

    • CF says:

      Jim – Great question. I’m sure it’s because Virgin forced Delta’s hand. Singapore wanted to sell, and Virgin wanted more feed. This helps get Singapore out of there – Virgin could force the issue in order for Delta to get what it wanted.

  13. Don says:

    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 would help Virgin America out. Especially when DL has made some investments to compete with them on most of their routes. I believe this is an investment that DL made which is a long term investment; be it cash or other things.

  14. sjcuser says:

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

    • CF says:

      sjcuser – It wouldn’t shock me if Virgin Atlantic started Atlanta, but there are probably better uses for their airplanes. After all, Delta already owns the Atlanta market. The only reason I would imagine Virgin would start Atlanta is primarily if Delta wants to use its own airplanes to do something else.

  15. nacho says:

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

  16. samo says:

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

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