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.
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.
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.
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.
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]