Delta Airlines (NYSE:DAL) received approval Thursday, June 20, from the U.S. Department of Justice and the European Commission for purchase of 49% stake in Virgin Atlantic Airways. In December, Delta had announced the desire to purchase this stake for $360 million, to gain greater access to slots at London’s congested Heathrow international airport and increase its share in the lucrative business travel market between the U.S. and the U.K.. 
Following these approvals, Delta now awaits the final approval from the U.S. Department of Transportation before it can go ahead with the planned joint venture with Virgin Atlantic. We believe the final approval will likely come by as there have been precedents where carriers with market share greater than Delta and Virgin’s have received permission to form a joint venture.
- Delta Q3’16 Earnings Review: Continued Headwinds In Unit Revenues, Despite Reduction In Capacity
- Delta Q3’16 Earnings Preview: Technology Outage Episode, Headwinds In Trans-Atlantic Region To Be A Drag
- How Did Delta Perform Operationally In September?
- Delta’s Pending Pilot Contract To Sabotage Southwest’s Recently Approved Labor Agreement
- How Did Delta Perform Operationally In August?
- What Is The Impact Of Flight Delays?
Delta chose to invest in Virgin as the latter controls many slots at Heathrow that will allow Delta to compete more effectively against the American Airlines-British Airways alliance, which currently dominates the U.S.-U.K. air travel market. Furthermore, slots at Heathrow are a prized commodity, as the airport works near full capacity with further expansion resisted by many nearby residents and environmentalists.
We currently have a stock price estimate of $16.30 for Delta, around 10% below its current market price.
The Air Travel Market Between The U.S. And London Heathrow Is Highly Lucrative
The current market size of air travel between the U.S. and London Heathrow is around $2 billion a year, which is nearly three times the size of next non-stop travel market between the U.S. and a European city.  Post the final approval, Delta and Virgin will control 36% of the air travel between New York and London. This market is currently dominated by American Airlines-British Airways (BA) alliance with a 50% market share, according to Buckingham Research Group. United (NYSE:UAL), which is the largest U.S. carrier occupies 13% of this market. 
Delta will also be able to leverage its recent investments at New York, to strengthen its position in the New York-London air travel market. Overall, this venture will grow Delta’s presence in the most lucrative international business travel market. It will also likely raise margins at Delta, by increasing the share of corporate travelers.
Reciprocal Frequent Flier Program Will Aid Top Line Growth Through Traffic Retention
The proposed joint venture (JV) between Delta and Virgin Atlantic also includes reciprocal frequent flier and airport lounge service features. This means that passengers of both Delta and Virgin will be able to earn and burn miles on either airline. This will help both airlines to retain traffic on their flights beyond the routes operated by the JV, growing their top line. Additionally, through the reciprocal airport lounge service program, Delta’s premium-class passengers will be able to access Virgin’s state-of-the-art lounge services at Heathrow airport.
Delta already has two such trans-Atlantic alliances with Air France-KLM and Alitalia. Its alliance with Air France occupies the largest share of the air travel market between the U.S. and Paris – the second-largest travel market behind U.S.-London among trans-Atlantic markets. With this venture, it will have to work on coordinating among its trans-Atlantic alliances.Notes:
- DELTA AND VIRGIN ATLANTIC TO FORM STRATEGIC ALLIANCE, December 11 2012, www.delta.com [↩]
- Richard Anderson, CEO, Delta Air Lines’ address during the news conference discussing the Delta-Virgin Atlantic JV, December 11 2012, www.delta.com [↩]
- Delta stake in Virgin Atlantic makes headway, June 20 2013, online.wsj.com [↩]