Delta Air Lines (DAL.N) agreed to buy a 49 percent stake in Virgin Atlantic VA.UL, creating a joint venture that would expand Delta's access to London's Heathrow Airport and increase competition in the lucrative transatlantic market.
The partnership would let both carriers offer more flights at Heathrow, Europe's busiest airport, where landing-slot constraints have limited their growth. It also gives Delta the ability to attract prized corporate travelers as it competes with industry leader United Continental (UAL.N) and American Airlines, whose partnership with British Airways (ICAG.L) dominates travel between the United States and London.
Delta and Virgin said their agreement would generate new revenue and leverage Virgin's strong luxury brand. The venture also will be "very positive and accretive for our long-term partners ... KLM, Air France (AIRF.PA) and Alitalia CAITLA.UL," Delta Chief Executive Richard Anderson said, referring to the European airlines with which Delta already has partnerships.
The deal had been two years in the making, and talks intensified over the summer, said Peter Norris, chairman of Virgin Atlantic Group and Virgin Group Holdings.
Richard Branson, Virgin's charismatic CEO, said the deal "signals a new era of expansion," adding that the companies "will cooperate on growing the number of places we fly."
The partnership also will provide "really effective competition" with the top-ranked alliance between British Airways and AMR Corp's (AAMRQ.PK) American Airlines, which has 60 percent of the market between the United States and London, he said. Branson dismissed speculation that he would cede control or leave the business.
"I'm not going anywhere," he said.
Under the joint venture, Delta and Virgin would share costs and revenue on routes between Britain and North America, operating 31 round-trip flights between the U.K. and all of North America during the peak seasons, 23 of which operate at London Heathrow. Currently, Delta operates 10 of those flights and Virgin the remainder.
While that number would likely increase if regulators approve the partnership, officials weren't willing to discuss specifics Tuesday.
Delta "wants to dominate the biggest business market in the world, which is New York," said Ray Neidl, an analyst with Maxim Group. "You can't really dominate that without having a strong presence in the second-biggest market, which is Heathrow."
The carriers plan to apply for antitrust immunity, which would enable them to share pricing, scheduling and other information to deepen their relationship. A similar American Airlines-British Airways agreement started in late 2010.
Even though Delta is buying a minority stake in Virgin, the deal could raise antitrust concerns if the U.S. Justice Department were to determine that it reduced the incentives for the two companies to compete against each other, said Robert Doyle, an antitrust expert with the law firm Doyle, Barlow & Mazard PLLC.
"It depends on how many board seats they get. Do they have veto power on expansion plans?" said Doyle. "Does the 49 percent interest change the incentives in any way of Virgin to compete against Delta?"
Virgin said Delta will have three of seven board seats and that the share purchase would require an antitrust review, while the joint venture would require antitrust immunity.
Delta said the share purchase from Singapore Airlines (SIAL.SI) is not contingent on the joint venture receiving immunity.
Delta is buying the Virgin Atlantic stake bought by Singapore Airlines in 1999. Singapore paid $965 million for its stake, but had written off the investment and has been open to selling the asset since at least mid-2011.
Shares of Delta closed up 5.1 percent at $10.66. Among other U.S. airlines, United Continental rose 3.9 percent to $21.71 and US Airways Group was up 0.8 percent to $12.88.
MARKET SHARE POTENTIAL
For Atlanta-based Delta, the second-largest U.S. airline by revenue after United, the deal could boost its transatlantic market share by drawing more corporate customers who pay higher fares at Heathrow, a lucrative hub.
Airline consultant Michael Boyd said the venture would not change things for U.S. consumers, but would allow Delta to put its codes on Virgin Atlantic flights to places in Europe from London, where the real opportunity is. "Delta more or less will now have a de facto connecting hub in Heathrow which it didn't have before," he said.
"Delta will have the ability to flow passengers over to and beyond Heathrow, and that means American and BA are going to have more competition," said Boyd, of Boyd Group International in Evergreen, Colorado.
Delta and Virgin will operate nine daily round-trip flights from Heathrow to New York's John F. Kennedy and Newark Liberty airports.
In a statement on Tuesday, American said its partnership with British Airways now offers up to 69 daily flights between the UK and North America, with up to 16 London-New York flights a day, "significantly more than competitors."
Heathrow is operating at close to full capacity after Britain's coalition government blocked its expansion in 2010.
Delta's Anderson said the Delta-Virgin joint venture would eventually have a 24 percent to 25 percent share of the market between the United States and Britain, compared with British Airways-American's 60 percent share.
"If you look at traffic flows in the world, there's no more important market than the U.S. to London-Heathrow market," Anderson told a New York press conference. "If you look at all of the city pairs in that non-stop market, eight of the 10 largest city pairs are to London-Heathrow."
Delta has acquired stakes in Grupo Aeromexico (AEROMEX.MX) and Brazil's Gol Linhas Aereas (GOLL4.SA) over the past year, and has long hoped for more access at Heathrow to help complement the major hub it is building in New York.
Though Branson said he plans to retain his 51 percent stake in Virgin Atlantic and maintain the brand of the airline he founded in 1984, analyst Neidl that could change.
"Down the road there's always the possibility that Air France, Delta's partner, could come in and buy" some of Branson's holdings, he said.
The tie-up with Delta will also be a shot in the arm for Virgin Atlantic. The second-largest carrier at Heathrow after British Airways, Virgin Atlantic has been battered by rising fuel prices and the euro zone crisis. It lost 80 million pounds ($128 million) in its last full year.
"BA will likely face keener competition from the Delta/Virgin Atlantic combination, but consolidation in the airline industry is still a positive," said Espirito Santo analyst Gerald Khoo.
The airlines said they would file an application with the U.S. Department of Transportation and said the deal would also need to be reviewed by antitrust officials at the U.S. Department of Justice and the European Union's competition regulator.
Simpson Thacher & Bartlett was Virgin Atlantic's U.S. antitrust counsel on the agreement and Singapore was advised by Deutsche Bank. Delta was advised by Goldman Sachs. ($1 = 0.6221 British pounds)
(Reporting by Rhys Jones in London and Karen Jacobs in Atlanta; Additional reporting by Soyoung Kim and Alwyn Scott in New York; Editing by Ben Berkowitz, Kate Holton, Nick Zieminski, Tim Dobbyn, Kenneth Barry and Leslie Adler)