Airline industry experts have been predicting increased consolidation in the airline industry for years now, as unpredictable volatility in oil prices, high labor costs, and an overall softened global economy have left some carriers with few options other than to be gobbled up by carriers who are on stronger financial footing.
Delta Air Lines, America’s second largest airline recently announced their intent of purchasing 49 percent of Britain’s second largest carrier, Virgin Atlantic, to help strengthen the trans-atlantic market share held by Delta. The airline is purchasing the 49 percent share of ownership that is currently being held by Singapore Airlines, with founder Sir Richard Branson retaining the remaining 51 percent of ownership. Behind this transaction are coveted and extremely valuable London Heathrow landing slots. Heathrow, despite being one of the worlds busiest airport, is actually slot-controlled which means that there is a limit as to how many flights (or “slots”) available for airlines to fly in or out with. Because supply is effectively controlled by airport administrators, fares to Heathrow are typically higher and include a premium related to the high demand for seats that many corporate business travelers don’t mind paying to get access to London’s best geographically located airport.
The partnership will provide a stronger competitor to the American Airlines – British Airways alliance that currently controls 60% of the London to United States market (with this alliance expecting to control an estimated 25% of traffic). The two airlines are also hoping to achieve anti-trust immunity that American and British Airways both currently have, which will legally allow Delta and Virgin to share their schedules, prices, and strategize together on trans-Atlantic operations which provides a real competitive advantage as the resources of the two airlines will be effectively utilized as one large carrier. Delta and Virgin have signed an agreement where they will share both the revenue and costs from their London to the United States flights.
Another advantage for Delta in this deal is that like their U.S. competition, Delta is strategically interested in dominating the New York airline market, which is difficult to do if you don’t have a strong presence in New York’s second largest travelling destination in London. This partnership will allow Delta to strengthen their New York operations by being able to offer lucrative corporate travelers better access to London’s Heathrow. Not only that, some analysts are saying that the real value in this partnership is actually the ability for customers to connect in London to other destinations throughout Europe and Asia on Virgin, giving the airline an effective and valuable hub in London that it never had before.
Delta Air Lines has transformed themselves into an industry trendsetter, with recent investments in oil refineries to produce their fuel in house, in addition to bucking the industry trend and leasing older but extremely cheap and reliable aircraft to expand their fleet. Time will tell whether these strategic decisions will pay off or burden the airline with higher costs. One thing is for sure though; their new-found access to the London Heathrow market is now the envy of their competition.