Dec 11 - Delta Air Lines' purchase of a 49% equity stake in Virgin
Atlantic Airways could drive significant long-term strategic value for the U.S.
carrier in its effort to strengthen market share in high-yielding trans-Atlantic
markets, according to Fitch.
Although realization of full joint venture benefits and solid returns will
ultimately depend upon approval of antitrust immunity by U.S. and European
regulators, future expansion of access to slot-controlled London Heathrow and a
broadened trans-Atlantic route network will open significant new revenue
opportunities for Delta.
We see Delta's planned $360 million Virgin investment as modest, both in terms
of liquidity and leverage. Delta's unrestricted liquidity position stood at more
than $5 billion as of Sept. 30. The carrier's generation of $1.3 billion in FCF
over the last year provides headroom for the transaction, particularly in light
of Delta's modest aircraft capital spending plans. Still, we remain cautious
about a future JV's profitability contribution in light of Virgin's weak
stand-alone margin profile.
A prospective Delta-Virgin JV with antitrust immunity would allow the two
carriers to cooperate on capacity and pricing decisions in trans-Atlantic
markets, similar to the benefits already achieved in Delta's JV with Air France
KLM. Virgin's market share strength at Heathrow, in particular, will likely be a
critical stepping stone for Delta in challenging the prevailing strength of
United and American in high-margin business service between London and New York.
Delta, through its merger with Northwest Airlines in 2008, has established a
leading market share position on trans-Pacific routes. In addition, cooperation
with Air France KLM through the trans-Atlantic JV and joint membership in the
SkyTeam alliance have helped improve passenger yield and unit revenue
performance across the Atlantic.
But Heathrow's crucial value in terms of high-yielding traffic remains untapped
owing to Delta's limited U.K. market access. Once approved, the carriers could
jointly operate 31 daily round-trip flights between the U.K. and North America
during the peak summer season. A total of nine daily flights would operate
between London and New York (both JFK and Newark). Once the JV is approved, we
estimate that Delta's trans-Atlantic market share will increase to 25% from 8%
currently. This compares with approximately 60% for the combined operations of
American and British Airways, and approximately 10% for United.
The Virgin investment agreement, which also includes three board seats for
Delta, would represent the third significant investment by Delta in a foreign
carrier this year. The airline previously completed investments in Aeromexico
and Brazil's Gol, strengthening network cooperation in Latin America.