Delta Buys 49% Virgin Atlantic Stake to Boost London Links

Delta Air Lines Inc. agreed to buy the 49 percent stake in Richard Branson’s Virgin Atlantic Airways Ltd. held by Singapore Airlines Ltd. for $360 million to boost its share of the lucrative trans-Atlantic travel market.

Delta and Virgin Atlantic, the biggest long-haul rival to British Airways at London’s Heathrow airport, will also begin a joint venture on 31 roundtrip daily flights between the U.K. and North America, the companies said today in a statement.

The deal positions Atlanta-based Delta to grab a bigger slice of the world’s biggest market for premium passengers. While Virgin founder Branson will retain control, it also marks the end of a go-it-alone strategy for a company the 62-year-old U.K. billionaire founded almost three decades ago.

“This is not a massive game-changer for Delta, but a nice slot-on,” said James Hollins, an analyst at Investec in London. “Where Virgin struggles to compete is the sheer scale of running a trans-ocean operation, the fuel headwinds and being able to offset that when you’re a small operator.”

Poor Performance

Singapore Air said it had been evaluating the position for some time and that an investment in Virgin spanning more than a decade “has not performed to expectations and the synergies the parties originally hoped for have not materialized.”

Delta and Virgin Atlantic said they will seek antitrust immunity from regulators, which would allow them to coordinate schedules and pricing and share costs and revenues from joint- venture flights regardless of whose plane operates the route.

Nine daily flights covered by the agreement will be from Heathrow to New York’s John F. Kennedy International Airport and New Jersey’s Newark Liberty International Airport, targeting the busiest airline route between Europe and the U.S.

Delta and Virgin Atlantic will also provide reciprocal frequent flier benefits, and allow elite passengers to use each other’s airport lounges. The statement made no mention of any plan for Virgin to join the U.S. carrier’s SkyTeam group, and alliance leader Air France-KLM Group plays no part in the deal.

“Our new partnership will strengthen both airlines and provide a more effective competitor between North America and the U.K.,” Delta Chief Executive Officer Richard Anderson said in the statement.

Delta advanced 1.6 percent to $10.30 at 8:35 a.m. before the start of regular New York trading. Singapore Airlines earlier closed 0.7 percent higher at S$10.75.

Brand Survives

The Virgin brand will be retained and Branson said in the statement that the deal “signals the start of a new era of expansion, financial growth and many opportunities.”

Branson began to review Virgin Atlantic’s alliance options as long ago as 2010 and said earlier this year the company was in advanced talks to join one of the three global groups.

Virgin had an 80.2 million-pound ($129 million) loss in the year ended Feb. 29 as high fuel prices crimped margins and an alliance of British Airways and AMR Corp.’s American Airlines intensified competition.

The rise of Middle Eastern carriers such as Qatar Airways Ltd. has also diverted long-haul traffic via Gulf hubs and established a new industry benchmark for in-flight service.

Singapore Air paid 600.3 million pounds for the Virgin stake in 1999, or $966 million now, and has written down about 96 percent of goodwill from the deal.

Profit Booked

The Asian carrier said in an e-mail that the deal with Delta will result in a profit being booked to its accounts, and that reciprocal arrangements with Virgin including code-shares, frequent-flyer ties and lounge access should remain in place.

The improved cash position may spur acquisitions in China or India after last month’s purchase of 10 percent of Virgin Australia Holdings Ltd. for A$105 million ($110 million).

“Singapore will be pleased to have got that amount for their stake,” Douglas McNeill, an analyst at Charles Stanley Securities, said in a telephone interview.

By linking itself with Virgin, Delta is targeting North Atlantic flights that generate roughly one-quarter of all global revenue from first- and business-class fares -- more than twice as much as second-place trans-Pacific routes, according to the International Air Transport Association.

Delta, Air France-KLM and their SkyTeam partners are the smallest alliance at London Heathrow, with about 5 percent of takeoff and landing positions. Oneworld, led by BA and American, controls almost half of services, followed by United Continental Holdings Inc. and its Star Alliance with about one-quarter.

Slot Demand

Slots at capacity-restricted Heathrow, Europe’s busiest aviation hub, are so prized that Continental Airlines paid $209 million for four pairs in 2008.

Virgin Atlantic has so far eschewed global alliances. The groups allow carriers to book passengers on one another’s planes through code-shares, adding routes without the cost of planes.

Virgin has also previously missed out on bilateral partnerships of the kind that will be pursued with Delta. The antitrust immune accords allow for deeper relationships than simple alliance membership, letting carriers coordinate timetables and share costs and earnings on specified routes.

Crawley, England-based Virgin Atlantic is also in the process of choosing a new CEO. Steve Ridgway, who steps down next year, was at the helm as Virgin cemented its place in the global long-haul market with trademark red uniforms, state-of- the-art in-flight entertainment and a service offering Club House lounges, afternoon tea, spa treatments and Lanson Black Label champagne.

Luxury Rivals

More recently, Virgin has struggled to differentiate itself as features such as flat-bed seats become commonplace in premium cabins and rivals dominate passenger surveys. Of six operators awarded a five-star ranking from airline-review firm Skytrax, five are from Asia and one from the Gulf. Virgin is one of 33 carriers with four stars, alongside BA and Air France.

At Delta, which has three Skytrax stars, CEO Anderson is building stakes in foreign carriers following the transformative purchase of Northwest Airlines Corp. in 2008 and a slot trade with US Airways Group Inc. that tightened its grip on New York’s LaGuardia airport.

Delta agreed to buy 3 percent of Brazil’s Gol Linhas Aereas Inteligentes SA for $100 million in 2011 and this year completed a $65 million investment in Grupo Aeromexico SAB, with both deals bringing a boardroom seat. Delta will gain three seats on Virgin Atlantic’s board, the companies said today.

“Expedited approval” for the Delta-Virgin Atlantic joint venture plan is anticipated by the end of next year, the companies said.

Delta was advised by Goldman Sachs and its legal firm was Cravath, Swaine & Moore LLP. Deutsche Bank AG advised Singapore Airlines.