LONDON/NEW YORK Delta Air Lines (DAL.N) agreed to buy a 49 percent stake in Virgin Atlantic, creating a joint venture that would expand Delta's access to London's Heathrow airport and increase competition in the lucrative transatlantic market.
The partnership would let both carriers expand at Heathrow, where landing slot constraints have limited growth. It also gives Delta firepower to attract prized U.S. corporate travellers as it competes with industry leader United Continental (UAL.N) and American Airlines, whose partnership with British Airways (ICAG.L) dominates travel between the United States and London.
Delta and Virgin said the partnership would generate new revenue and would leverage Virgin's strong luxury brand. The venture also will be "very positive and accretive for our long-term partners ... KLM, Air France (AIRF.PA) and Alitalia," Delta Chief Executive Richard Anderson said, referring to European airlines with which Delta already has partnerships.
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The deal had been two years in the making, but talks intensified over the summer, said Peter Norris, chairman of Virgin Atlantic Group and Virgin Group Holdings.
The deal "signals a new era of expansion" and the companies "will cooperate on growing the number of places we fly," Virgin CEO Richard Branson said.
The partnership also will provide "really effective competition" with the top-ranked alliance between British Airways and AMR Corp's (AAMRQ.PK) American Airlines, which has 60 percent of the market between the United States and London.
Branson dismissed speculation that he would cede control or leave the business. "I'm not going anywhere," he said.
Under the joint venture, Delta and Virgin would share costs and revenue on routes between Britain and North America, operating 31 round-trip flights between Britain and all of North America during the peak seasons, 23 of which operate at London Heathrow. Currently Delta operates 10 of those flights and Virgin the remainder.
While that number would likely increase if regulators approve the partnership, officials weren't willing to discuss specifics Tuesday.
The two also would cooperate on frequent-flier programs and share travel lounge amenities.
Delta "wants to dominate the biggest business market in the world, which is New York," said Ray Neidl, an analyst with Maxim Group. "You can't really dominate that without having a strong presence in the second-biggest market, which is Heathrow."
The two carriers plan to apply for antitrust immunity, which would enable them to share pricing, scheduling and other information to deepen their relationship. The similar American Airlines-British Airways agreement has been in place since 2010.
Delta is buying the Virgin Atlantic stake bought by Singapore Airlines (SIAL.SI) in 1999. Singapore paid $965 million for its stake but had written off the investment and has been open to selling the asset since at least mid-2011.
Shares of Delta were up 7.3 percent to $10.88 in afternoon trading. Among other U.S. airlines United Continental rose 4.7 percent to $21.88 and US Airways Group was up 3 percent to $13.17.
MARKET SHARE POTENTIAL
For Delta, the second-largest U.S. airline by revenue after United, the deal could boost its transatlantic market share by drawing more customers who pay higher fares at London's Heathrow, a lucrative hub where landing slots are generally hard to acquire.
"The move gives Delta access to a critical game piece in the corporate travel arena--London Heathrow," Buckingham Research analyst Dan McKenzie said in a note to clients. He said the lack of access at Heathrow has hurt Delta's ability to win corporate accounts.
Delta and Virgin will operate nine daily round-trip flights from Heathrow to New York's John F Kennedy and Newark Liberty airports. That compares with three currently for Delta alone. McKenzie wrote those nine New York area flights could allow Delta to lure more business travellers "presumably at AMR's expense."
Heathrow, Europe's busiest airport, is operating at close to full capacity after Britain's coalition government blocked its expansion in 2010.
Delta's Anderson said the Delta-Virgin joint venture would eventually have a 24 percent to 25 percent share of the market between the United States and Britain, compared with British Airways-American's 60 percent share.
"If you look at traffic flows in the world, there's no more important market than the U.S. to London-Heathrow market," Anderson told a press conference in New York. "If you look at all of the city pairs in that non-stop market, eight of the 10 largest city pairs are to London-Heathrow."
Delta has acquired stakes in Grupo Aeromexico (AEROMEX.MX) and Brazil's Gol Linhas Aereas (GOLL4.SA) over the past year, and has long hoped for more access at Heathrow to help complement the major hub it is building in New York.
Though Branson said he plans to retain his 51 percent stake in Virgin Atlantic and maintain the brand of the airline he founded in 1984, analyst Neidl that could change.
"Down the road there's always the possibility that Air France, Delta's partner, could come in and buy" some of Branson's holdings, he said.
The tie-up with Delta will also be a shot in the arm for Virgin Atlantic. The second-largest carrier at Heathrow after British Airways, Virgin Atlantic has been battered by rising fuel prices and the euro zone crisis. It lost 80 million pounds in its last full year.
"BA will likely face keener competition from the Delta/Virgin Atlantic combination, but consolidation in the airline industry is still a positive," said Espirito Santo analyst Gerald Khoo.
The airlines said they would file an application with the U.S. Department of Transportation and said the deal would also need to be reviewed by antitrust officials at the U.S. Department of Justice and the European Union's competition regulator.
Singapore Airlines has been refocusing on its key markets where it is under pressure from budget airlines, launching its own budget carrier, Scoot, to ply Asian middle-distance routes and bolstering its Asian regional carrier, SilkAir.
(Reporting by Rhys Jones in London and Karen Jacobs in Atlanta, additional reporting by Soyoung Kim and Alwyn Scott in New York.; Editing by Ben Berkowitz, Kate Holton, Nick Zieminski, Tim Dobbyn and Kenneth Barry)
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