The phrase "location, location, location" is often applied to real estate but serves the airline industry equally well. Since slots at popular airports are limited, competition is fierce and can make or break a section of an airline's route network. Among the most valuable airports is London Heathrow Airport and major airlines are doing whatever they can to add more London Heathrow flights to their networks.
Why London Heathrow?
Heathrow has a value-increasing combination of high demand and limited supply. Let's begin with the high-demand part.
Business travel is a key source of revenue for airlines since these travelers tend to spend more. After all, they aren't personally paying for the ticket -- corporate is. As a result, business travelers generate a disproportionately large share of airline revenue. And with London being a major financial capital, the city attracts plenty of high-paying business travelers.
But London Heathrow can't just expand to meet the airlines' demands. Parliament decided against expanding the airport back in 2010, keeping the airport at its current size.
British Airways, a subsidiary of International Air Group (NASDAQOTH:ICAGY), has a major slot advantage at Heathrow. After merging with bmi, British Airways controls around half the total slots at the airport.
This brings an advantage to the other members of the OneWorld airline alliance since other members can operate codeshares on British Airways' routes. American Airlines, a subsidiary of AMR (UNKNOWN:AAMRQ.DL), is the only major U.S.-based airline to be able to codeshare on these London routes.
But the expected merger between AMR and US Airways (UNKNOWN:LCC.DL) gives US Airways shareholders a chance to benefit from these routes as well. The new American Airlines Group would not only be able to codeshare these routes but would also take the crown of world's largest airline.
Buying a home team
Delta Air Lines (NYSE:DAL) wants to play a greater role in the London Heathrow market but did not have the advantage of the OneWorld alliance or being a British airline. But there was another airline not committed to any major airline alliance and Delta took advantage of the opportunity.
For $360 million, Delta purchased a 49% stake in Virgin Atlantic. As part of the deal, Delta and Virgin set up a codeshare to create more Delta network flights between New York JFK International and London Heathrow.
With this setup, Delta has effectively bought itself a codeshare into the Heathrow market. Although British airways has more total slots than Virgin Atlantic at Heathrow, the new codeshare between Delta and Virgin is a key part of developing Delta's international network.
Where from here?
London Heathrow is one of the most in-demand airports in the world with major airlines sometimes making major investments to gain greater access. While the demand for Heathrow flights will likely remain the same or even increase along with a recovering economy, there is a possibility that the airport could see a new round of expansion. A commission study report is expected for 2015. And if the politics are in favor of expansion, expect strong competition for new slots.
Alexander MacLennan owns shares of AMR and Delta Air Lines and has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, long January 2015 $30 calls on Delta Air Lines, and long January 2015 $17 calls on US Airways Group. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.