For many years, Delta Air Lines (NYSE:DAL) had a tense relationship with its SkyTeam alliance partner, Korean Air. Delta wanted to form a joint venture to serve the Asian market, while Korean Air resisted the idea of closer cooperation. This situation eventually led to a series of retaliatory moves by both sides.
However, the two carriers have put aside their differences since Ed Bastian took the CEO post at Delta in early 2016. Last week, Delta Air Lines and Korean Air finally signed their long-sought joint-venture agreement. If it receives regulatory approval, the joint venture will significantly improve Delta's positioning in Asia.
Joint ventures are the key to providing global connectivity
Since the Great Recession, joint ventures with foreign airlines have become a key piece of the U.S. legacy carriers' strategies for international growth. Immunized joint ventures allow airline partners to coordinate on schedules and pricing. Doing so keeps competition manageable and allows airlines to offer more connecting itinerary options to their customers.
Delta, American Airlines Group (NASDAQ:AAL), and United Continental Holdings (NASDAQ:UAL) all have joint ventures with major European airlines. Together, these joint ventures control more than 80% of capacity in the trans-Atlantic market.
In Asia, United and American have joint ventures with Japan's two dominant airlines, ANA and Japan Airlines. This situation has left Delta out in the cold, to some extent.
A decade ago, Delta inherited Northwest Airlines' small hub at Tokyo's Narita Airport. Since then, changing market conditions and the opening of the more convenient Haneda Airport to a handful of U.S. flights has undermined the Narita hub's profitability, forcing Delta to cut its service there significantly.
In response, Delta has moved to cooperate more closely with China Eastern Airlines. However, the U.S. and China do not have an open-skies agreement, so forming a joint venture is impossible in that case. As a result, Delta remains at a severe disadvantage in the trans-Pacific market relative to United Continental. (American Airlines continues to be a laggard, with relatively few flights to Asia.)
Delta Air Lines and Korean Air mend fences
Whatever their previous differences, Delta Air Lines and Korean Air have finally decided to move forward with creating a joint venture. According to Delta, the joint venture will lead to expanded code-sharing, cooperation on pricing and marketing, more seamless flight connections between the carriers, reciprocal frequent-flier benefits, and greater cooperation in the air cargo market.
Delta and Korean Air will need regulatory approval to cooperate more closely. The two carriers received joint-venture immunity from regulators in 2002, but there was far more competition in the U.S. airline industry back then. As a result, some smaller carriers in the U.S. are protesting and want the government to reconsider the joint venture in light of how much market power Delta, American, and United have accumulated.
Given that United Airlines and American Airlines already have their joint ventures with ANA and Japan Airlines, respectively, it's unlikely that regulators will block the Delta-Korean Air joint venture. That said, the government could impose restrictions on the two carriers or require asset divestitures of some sort to stimulate competition.
Delta could get an edge in Asia
Today, there are far more flights from the U.S. to Tokyo than to Seoul. This situation would seem to give American and United an advantage over Delta, as their Asian joint-venture partners are based in Tokyo.
However, service in Tokyo is split between Narita Airport and Haneda Airport, which reduces the number of feasible connections. By contrast, Incheon Airport, where Korean Air has its hub, handles the vast majority of Seoul's air traffic. In addition, Incheon Airport is routinely ranked as the best airport in the world for connections, with a host of lavish amenities.
Delta is already starting to ramp up its service to Seoul. Earlier this month, it began flying to Seoul from Atlanta, complementing its existing routes from Detroit and Seattle. As Delta and Korean Air add more flights between the U.S. and Seoul, Incheon Airport could become an even more popular connecting point for people traveling between the U.S. and Asia -- and a big competitive advantage for Delta Air Lines.