Delta Air Lines (DAL +3.50%) is looking to cozy up even more with its biggest trans-Atlantic partners. Under a deal announced last week, Delta will take a 10% stake in joint venture partner Air France-KLM, while Air France-KLM will buy 31% of Virgin Atlantic (Delta's British partner). The three airline operators also plan to form a new combined joint venture.
These deals should foster even greater cooperation among the airlines. Virgin Atlantic -- being far smaller than the others -- has the most to gain. But that means Delta Air Lines is poised to profit, too, because it already owns a 49% stake in Virgin Atlantic.
Delta is the king of the joint venture
All three U.S. legacy carriers have made broad use of antitrust-immunized joint ventures with foreign airlines to serve international markets. These allow U.S. carriers to offer more flight options to customers, while reducing competition -- a proven tactic for boosting profitability.
Of the three, though, Delta Air Lines is probably the biggest joint venture proponent. For years, it has had a joint venture with Air France-KLM and Alitalia to serve traffic between the U.S. and Continental Europe. In 2013, it finalized a separate joint venture with Virgin Atlantic for flights to the U.K.
Joint ventures are critical to Delta's global growth strategy. Image source: Delta Air Lines.
In 2011, it formed a joint venture with Virgin Australia for flights between the U.S. and the South Pacific. Delta also recently formed a joint venture with Aeromexico for U.S.-Mexico routes, and signed an agreement with Korean Air to form a joint venture for U.S.-Asia flights.
Minority investments are another cornerstone of Delta's strategy. The company owns 49% of Virgin Atlantic and Aeromexico, and holds smaller stakes in Brazilian airline GOL and China Eastern. These investments typically give Delta board representation, offering it more influence with its partners.
Broader cooperation
Under last week's deal, Delta will invest 375 million euros (about $411 million) for that 10% stake in Air France-KLM. Air France-KLM will in turn spend 220 million pounds (about $291 million) to buy 31% of Virgin Atlantic from founder Richard Branson's Virgin Group. The companies will then form a combined joint venture. Separately, China Eastern also plans to buy a 10% stake in Air France-KLM.
Delta already cooperates very closely with Air France-KLM -- and to a lesser extent, Alitalia -- to coordinate schedules and fares for U.S.-Europe flights. It also works closely with Virgin Atlantic for the key U.S.-U.K. market.
By contrast, Air France-KLM has no relationship with Virgin Atlantic today. Thus, the intra-European side of the deal will drive the biggest changes. Air France-KLM may profit from Virgin Atlantic's access to London's crowded Heathrow Airport, while Virgin Atlantic will benefit from Air France-KLM's global route network.
Virgin Atlantic is the big winner
While Virgin Atlantic has a loyal following, it has had trouble staying competitive with British Airways, its much larger rival. It also made an ill-advised bet on four-engine aircraft like the A340 and 747, which has put it at a cost disadvantage. As a result, Virgin Atlantic routinely lost money prior to forming its joint venture with Delta a few years ago.
After partnering with Delta, Virgin Atlantic's results improved significantly. For the past few years, it has been profitable -- but just barely. Then Brexit took a toll on the carrier's results due to the plunge in the pound that followed the U.K.'s exit vote.
Virgin Atlantic has been earning meager profits in recent years. Image source: Pixabay.
Virgin Atlantic's biggest problem is its small size. British Airways holds more than half of the slots at Heathrow Airport -- the preferred London airport for business travelers -- while Virgin Atlantic has just 3%. That's only enough to support about two dozen daily departures, putting severe limits on the number of destinations it can serve.
A joint venture with Air France-KLM will help address this issue. Virgin Atlantic will be able to connect passengers from its North American markets to Paris and Amsterdam, two key business and leisure destinations that it doesn't serve itself. Its customers will also be able to make connections in Paris and Amsterdam to an enormous number of cities served by Air France and KLM.
Thus, a tie-up between Delta, Virgin Atlantic, Air France, and KLM could be the key to improving Virgin Atlantic's profit margin. Delta Air Lines and Air France-KLM would then participate in this success due to their significant ownership stakes in Virgin Atlantic.
