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Delta Airlines announced this morning that it had purchased a 49 per cent stake in Virgin Atlantic for $360 million. The joint venture is not unexpected. The airline industry is consolidating in general, in response to rising oil costs, shrinking profit margins, and limited airport slots.
United Airlines and Continental have joined; British Airways and American Airlines have a partnership; Delta already works with Air France and KLM.
For Delta, the motivation to invest in Virgin is clear: Richard Branson’s airline has three per cent of the highly coveted spots at London’s Heathrow airport. At a press conference this morning, Delta CEO Richard Anderson said the New York to London route is the world’s most profitable by a wide margin.
Delta is expanding in New York, with new terminals and renovations at JFK and LaGuardia, and needs more space in London to match.
But the debate in the UK over how to get more planes into London has gone nowhere, as competing plans to expand the airport and build a new one in the region all have significant downsides and limited support.
Without the prospect of more space being created in London in the near future, Virgin’s Heathrow slots are hugely valuable. (British Airways dominates the airport, with 53 per cent of slots, according to the New York Times.)
Despite its small size, Virgin has “punched above its weight,” in Branson’s words: On the routes it serves, the airline carries a quarter of all travellers.
Much of the coverage of the joint venture has focused on the spat between Branson and British Airways boss Willie Walsh, who suggested that Delta will keep Virgin’s Heathrow slots and do away with the brand. (It has led to a wager between the two: One will knee the other in the groin in 2017, depending on whether or not Virgin still exists.)
At the press conference, Business Insider asked whether there is any credence to Walsh’s suggestion.
“No,” Delta CEO Anderson flatly replied. “That actually gets my blood to boil…The whole purpose is to join the networks and join the brands together.” He called Richard Branson’s involvement the “centrepiece” of the partnership.
In a video presented during the conference, Branson said:
Ignore the press speculation – I’m not going anywhere…I am sure that Virgin Atlantic will retain that independent spirit that our customers know and love – but from now on we can work with Delta to ensure we can bring that service to many more people on both sides of the Atlantic.
Delta and Virgin expect the deal, three months in the making, to be fully in place by the end of 2013. For it to work, the joint venture needs antitrust immunity from the US Department of Justice.
Anderson is confident it will be granted, pointing out the British Airways / American Airlines partnership, which covers 60 per cent of its market, was given such immunity.
“The product we offer…will be great for consumers,” he said, as it offers a competing alliance.