Delta Invests Heavily in Virgin Atlantic

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.

http://www.cnbc.com/id/100302798

6 thoughts on “Delta Invests Heavily in Virgin Atlantic

  1. This is an extremely interesting post and an even more interesting strategy by Delta airlines. While I see the value in Delta expanding its presence in Europe and London Heathrow specifically I can’t help but wonder if their is risk in confusing the two brands by consumers. I think a real challenge that Delta and Virgin Atlantic will face is how to co-brand and keep brand integrity between the two airlines that will continue to run as seperate entities. I also wonder if this new alliance will cause any conflict of interest between Delta in the US and Virgin America which is a subsidiary of the Virgin parent company. This is definitely and interesting strategy and alliance that will be faced with many challenges and it will fun to see how it all unfolds for these two airlines.

  2. I thought that Scott brought up some great points. These included survival of the fittest, especially in a cut-throat industry that isn’t getting any easier to take market share and stay alive. Understanding your customers and what their needs are and finding a way that you can better serve them than others in your industry is how you will build market share. I assume this is a way to offer a cheaper price or increased margin for the company.

    However on a side note, although I do understand that airlines or any company in transportation needs to hedge fuel costs, I wonder if investing in oil refineries is a wise decision. Should these companies stick to what they’re good at, while hedging what fuel they need, rather than investing in refineries?

  3. This is an interesting article.

    The airline industry is becoming dog eat dog, it will not be long before some major mergers or buyouts happen.

    I believe the value of Delta expanding their company in the UK, specifically Heathrow, but I am concerned with how the average person will interpret the brand after it combines with Virgin.

    Virgin is a smart, forward company with an eccentric owner. If anyone can co-brand and create something big and new, its Virgin.

    As the economy starts to come back, and the housing markets rise again, people will be buying more plane tickets.

    Its good that they are moving on the London market in order to capitalize on the New York market when the economy swings back.

  4. I really enjoyed reading this post because I have flown internationally with both Virgin and Delta airlines. I agree with Rob in the fact that I can’t help but wonder the future challenges both the airlines will face in keeping brand integrity. Virgin airlines is known for a “different” and “unique” flying experience, while Delta serves more of a “basic” and “normal” flight experience. Overall this is definitely an interesting alliance that will lead to a many challenges in the future, however I believe both airlines can learn great strategies from each other. Both customer service and overall flight experience can be improved by learning from each other.

  5. I really enjoyed reading this post because I have flown internationally with both Virgin and Delta airlines. I agree with Rob in the fact that I can’t help but wonder the future challenges both the airlines will face in keeping brand integrity. Virgin airlines is known for a “different” and “unique” flying experience, while Delta serves more of a “basic” and “normal” flight experience. Overall this is definitely an interesting alliance that will lead to a many challenges in the future, however I believe both airlines can learn great strategies from each other. Both customer service and overall flight experience can be improved by learning from each other.

  6. I belive that these airlines are definitely expanding their footprint by taking this big step into New York and Heathrow airports. I also wonder what commitments Delta had to make in order to make up with Virgin’s strong luxurious brand. It will be interesting to see how effective this partnership will be.

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