This Is What Delta Needs

It's pretty difficult to get excited about any airline stock. The best investment one can make in the airline business is a neck pillow. As of this week, though, one major American carrier is in talks to pick up a rare and valuable piece of the international travel pie -- landing space at London's Heathrow airport. While the deal is far from complete, and it may even be a stretch to label it a "deal" at this point, the potential move could unlock plenty of value for the airliner, rewarding the company, its shareholders, and, for once, travelers.

Hot ticket
One of the keys to viability in the airline industry is getting landing slots in the right airports. Even though, as you stroll through the terminals, it looks as though half the waiting areas are nearly empty (excluding the inevitable floor-sleeper who has been there for two weeks), it turns out those spots are pretty hard to come by if you're on the other end of the jetway. This is particularly a challenge at Heathrow -- the main travel hub for the area (and the only one, if you've ever done the commute from Gatwick). Heathrow is the Ritz Carlton of airports -- attracting high volume, high revenue, and high premium revenue for its participating airlines.

For Delta (NYSE: DAL  ) , it has been a longtime dream to get a hold of some more real estate at Heathrow, which is dominated by, if you can imagine, British Airways, and Richard Branson's Virgin Atlantic. Delta is partnered with Air France-KLM as part of its Sky Team association. Still, though, Delta would love to paint some more of Heathrow's slots with Delta's logo.

It's unlikely British Airways will be leaving any of its docks soon. British Airways' parent company, IAG, currently controls more than 50% of the slots at Heathrow.

As for Virgin, the company is 51% owned by Branson, with the other 49% owned by Singapore Airlines. Now here's where it gets interesting. Singapore Airlines is looking to unload its portion of the company, and rumor has it Delta is a potential suitor.

Symbiosis
Both groups look to gain from a Delta-Virgin deal. For Delta, the airline will get access to Heathrow that no other U.S. airline can touch.

American Airlines, certainly not in a position to make a bid considering it's in the depths of bankruptcy, is a founding member of the One World Alliance, which partners with British Airways as well as many other European airlines. The partnership does give American Airlines some scale advantages and operating efficiencies in various markets. Since the founding of the partnership, Delta and other competitors have faced fierce competition from the American Airlines/British Airways combo with leading representation at Heathrow.

If Delta is successful in picking up nearly half of Virgin Atlantic, though, the scales certainly tip in its favor over American.

As for Virgin Atlantic, the move makes more than enough sense. Virgin Atlantic is one of the few remaining Western airlines that isn't a member of a global alliance, such as One World, Delta's SkyTeam, or United Airlines' (NYSE: LCC  ) Star Alliance. The alliances have been successful in leveraging the joint airlines' economies of scale and cutting costs for its members.

If sold to Delta, Virgin would most likely become a member of the SkyTeam alliance, eliminating that disadvantage immediately. The airline would also create much stronger ties with U.S. routes, where Virgin is still a new entrant. The move gives Virgin Atlantic some much-needed capital support. The company, along with most European carriers, has languished in the face of high fuel prices and the eurozone crisis. According to a Reuters report, Virgin Atlantic tallied an 80 million pound loss last year.

(Lack of) details
A potential selling price is yet to be determined, given how recent the talks have emerged. Singapore Airlines is not in desperate need of money nor to sell the company, so it probably won't be a discount purchase for Delta (or whoever else). Singapore bought its 49% stake in Virgin Atlantic in 1999 for 600  million  pounds (today worth about $986 million). Given last year's loss and the continuing difficulties in the industry, though, it is unlikely that Singapore will sell at a premium to its 1999 price (it's more likely the number will be in the $500 million to $600 million range, which were reported prices during a exploratory sale option last year).

For Delta, this move makes sense. The company can make bigger inroads into the lucrative Heathrow market, while also getting into business with someone who I consider to be one of the brightest minds in business -- Richard Branson. He hasn't indicated that he'd be interested in selling any of his own portion of the company, but he does support a joint venture with Delta because of those strengthenings of routes between Europe  and the United States.

These deals tend to take time, so don't expect any resolution soon. If, however, you were somehow contemplating taking a position in the airline industry, Delta may soon offer new value to investors.

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  • Report this Comment On December 05, 2012, at 12:21 PM, B757blaine wrote:

    Delta is firing on all cylinders. Their merger with NWA, purchase of an oil facility, employee labor agreements, product improvements and greatly improved service metrics show that it is leading the pack. Richard Anderson and his team should be voted airline management team of the year. Medium term investors may well be rewarded as they await a stock price that will eventually catch up to the reality that Delta is the market leader.

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