Delta Eyes International Expansion With A Stake In Virgin Airways

Delta (NYSE:DAL) is in talks with Singapore Airlines about purchasing the latter’s 49% stake in British carrier Virgin Atlantic Airways. If the deal comes through, it will significantly bolster Delta’s international presence particularly in London’s Heathrow international airport. It will also help Delta’s strategy of driving growth from international operations in the wake of increasing competition from low cost carriers like Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU) in the domestic U.S. market. The stake in Virgin Airways will be the first major deal for Delta with another airline post its acquisition of Northwest in 2008.

We currently have a stock price estimate of $10.63 for Delta, approximately 5% above its current market price.

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Virgin’s competitive disadvantage

Virgin Airways is currently not part of any major global airline alliance. Airlines enter into alliances through code share agreements and reciprocal frequent flier mile and lounge service programs in order to sell tickets on flights operated by an alliance partner. Thereby participating airlines generate additional revenue without actually operating a given flight.

Delta benefits in this way from its partnership with Sky Team alliance which also includes AirFrance KLM. The three largest airline alliances in the world – Star, Oneworld and Sky Team – generate significant benefits for their partner airlines. Major partners in the Star alliance include United, US Airways and Lufthansa while those in Oneworld include British Airways and American Airlines. Virgin by virtue of its absence from these major alliances suffers from a competitive disadvantage, more so during the current slowdown in Europe when added revenues become all the more important.

Controlling stake in Virgin will boost Delta’s international presence and growth

Virgin’s CEO Steve Ridgway told The Financial Times in an interview in January that Richard Branson, the 51% stakeholder in Virgin, was open to selling part of his stake. ^[1] If Delta were to gain a controlling stake in Virgin Airways, the latter’s competitive disadvantage will be offset as its operations will become part of the Sky Team alliance. Additionally, in such a scenario, Delta will extract significant synergies between its international hub at Paris and Virgin’s extensive presence at London’s Heathrow airport. Overall, Delta’s market share of international passenger traffic particularly that between the U.S. and the U.K. will rise significantly.

Singapore Airlines had purchased a 49% stake in Virgin Airways from Richard Branson in 1999 for approximately $962 million. ^[2] It is not clear at present the price that Delta is ready to offer for this stake. However, what is clear is that if Delta acquires this stake and furthers it to a controlling stake in Virgin, its international operations will receive a significant boost and possibly re-position it as the world’s largest airline.

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1. Delta, Seeking London Access, Ponders a Stake in Virgin Atlantic, December 2 2012, www.nytimes.com [↩]
2. Reports: Delta Air Lines In Talks To Buy Stake In Virgin Atlantic, December 3 2012, www.nasdaq.com [↩]