signed a deal to acquire a 49% stake in Aairways for $360 million, forming a strategic alliance that will dramatically boost Delta’s access to and potentially provide a path for Virgin to restore its financial luster while retaining its brand and iconic leader, Chairman Richard Branson. But there are several steps the airlines need to complete to fully realize the potential benefits of the agreement—some that could happen in the short term but at least one of which could be years away.
The most critical need is getting regulatory approval for their planned joint venture, which would let the airlines move their arrangement beyond frequent flyer reciprocity and code-sharing to encompass joint pricing, capacity planning and cost and revenue sharing across the Atlantic. The deal also gives Delta three seats on Virgin Atlantic’s board.
Under the new collective bargaining agreement Delta reached with its pilots union earlier this year, the airline also needs to reach an agreement with the union on the “production balance” in the joint venture (JV), namely the percentage of block hours flown by Delta pilots on the transatlantic flights. Otherwise, as the Air Line Pilots Association has described it, the contract includes automatic limitations that will kick in “to ensure that the Delta pilots retain an appropriate share of flying in the new JV and continue to restrict Delta’s ability to sell code on its JV partner.”
Beyond those more immediate concerns, the airlines need to move closer together at Heathrow to make connections there more convenient. Delta currently operates out of Terminal 4 with itsalliance partners, and Virgin Atlantic out of Terminal 3.
At a press briefing about the deal on Dec. 11, Virgin Atlantic Chief Commercial Officer Julie Southern says the plan is for Delta to move to Terminal 3, eventually, to ease connections and take advantage of Virgin Atlantic facilities there, such as its clubhouse and Upper Class Wing. “It’s not something we can achieve immediately with the physical challenges of a constrained airport at Heathrow, but we’ll work hard to try to make that happen over the coming years,” Southern says. She did not specify how, but one possibility is that the space could be created in 2014, when Heathrow opens its Terminal 2, the planned home forcarriers and flights and Virgin Atlantic domestic routes.
Location is not an issue at New York John F., where both airlines already operate out of Terminal 4. When Delta completes its expansion project at Terminal 4, Delta and Virgin will be co-located in the new section, Delta CEO Richard Anderson says.
Delta also stands to benefit if Virgin Atlantic joins its SkyTeam alliance, but Southern insists that decision has not been made. “There’s a lot of work to evaluate SkyTeam and the additional benefits that it can bring,” she says. But she adds that she expects a decision on the alliance to be made “over the next few months.”
Anderson says/ , already joint-venture partners with Delta and on transatlantic services, has expressed “strong support” for the Virgin Atlantic deal. But some additional work will be required with that joint venture, which got off to a somewhat rough start on transatlantic capacity decisions but seems to have resolved the issue during the past year. “We will be working with them over time to make sure we’re well coordinated between the two joint ventures,” Anderson says.
While there is work to be done to help the Delta-Virgin Atlantic partnership and Delta’s investment pay off, the leaders of both carriers are expressing confidence in the benefits of the deal—and noting some near-immediate payoffs.
Together, the carriers will operate 31 peak-day flights between the U.K. and North America, including 23 from Heathrow. The latter will include seven daily roundtrip flights between Heathrow and New York Kennedy Airport, where Delta operates an international hub, and two between Heathrow and Newark Liberty International Airport.
Delta currently operates only three daily flights between New York and London (all to Heathrow) because of the slot constraints at Heathrow, and only nine in total to Heathrow from any point in the U.S. Delta says the combined operations will give the carriers about a quarter of the Heathrow flights.
New York is a critical component of Delta’s growth strategy—with big service build-ups and investments at Kennedy and LaGuardia Airport—but the dearth of Heathrow access remained a big hole in its drive to become the No. 1 carrier in the New York area and continue to increase its share of corporate traffic. The Atlanta-based carrier is getting Virgin Atlantic and its slots at what could be considered a bargain price, with Singapore having paid about $966 million when it acquired its 49% share 12 years ago. J.P. Morgan analyst Jamie Baker recently estimated the value of Virgin’s long-haul slot portfolio at Heathrow at $660 million to $880 million.
Delta and Virgin Atlantic also hope to begin frequent flyer reciprocity and code-sharing as soon as possible, and Anderson says Delta already has the corporate deal structure in place to incorporate Virgin Atlantic into those contracts “almost instantaneously”—even, perhaps, with the restricted cooperation between the carriers before an immunized joint venture is approved.