With reports that Delta Air Lines is considering the acquisition of Singapore Airlines' 49% stake in Virgin Atlantic, one of the biggest questions is how much that stake is worth. At the brokerage J.P. Morgan, aviation analyst Jamie Baker takes a shot at answering that question, based on the assumption that Delta's primary or only interest in a deal is all of the slots that Virgin holds at London's Heathrow Airport.
Currently, Baker notes, Virgin Atlantic presides over a long-haul portfolio of 44 daily slot pairs. (For his analysis, Baker is excluding the 12 daily short-haul pairs Virgin was awarded last month.) Baker says a recent Air Canada appraisal revealed that its daily slot pairs were valued at about $18 million,. Near the end of 2010, he adds, Lufthansa ascribed a value of approximately $832 million to 84 daily slot pairs that primarily consisted of early morning departures timed for short-haul services. Early morning arrivals, such as those from the U.S., are believed to be more valuable.
Based on that, Baker assumes a market price of $15-$20 million per long-haul pair held by Virgin Atlantic. Applying that range to its 44 long-haul slot pairs gives them a valuation of $660-$880 million. Baker ascribes a value of "perhaps $120 million" to the short-haul slots, but also assumes they have essentially no value to Delta.
If Baker's valuation is on target, two critical questions remain open. One of them is how much lower, if any, is Singapore Airlines willing to go in the selling price from the initial $966 million investment it made to acquire the stake. The second is how much Delta is willing to pay. Baker does not think Delta should pay any more than $350 million, but, of course, he's not Richard Anderson, Delta's CEO.
Anderson will be trying to strike a balance between two competing goals. One of them is a strong desire to get more access to Heathrow, which may be the only missing piece--but a critical one--in Delta's massive buildup since 2007 in the New York market. The other is the carrier's insistence that it will not divert from its goal to reduce its adjusted net debt below $10 billion by the end of 2013. As of Sept. 30 that debt had dropped to $11.8 billion, which is $5 billion less than at the end of 2009. Delta has avoided some new aircraft purchases to stay on track for that target, but it also has been willing to make strategic investments in an oil refinery (about $250 million for the acquisition and refinery upgrades) and two airlines: Brazil's GOL ($100 million) and Aeromexico ($65 million). An investment in Virgin Atlantic likely would exceed all of those, so the question remains: Would the cost be worth it?