Delta Air Lines' purchase of a 49% equity stake in Virgin Atlantic
Airways could drive significant long-term strategic value for the U.S.
carrier in its effort to strengthen market share in high-yielding
trans-Atlantic markets, according to Fitch.
Although realization of full joint venture benefits and solid returns
will ultimately depend upon approval of antitrust immunity by U.S. and
European regulators, future expansion of access to slot-controlled
London Heathrow and a broadened trans-Atlantic route network will open
significant new revenue opportunities for Delta.
We see Delta's planned $360 million Virgin investment as modest, both in
terms of liquidity and leverage. Delta's unrestricted liquidity position
stood at more than $5 billion as of Sept. 30. The carrier's generation
of $1.3 billion in FCF over the last year provides headroom for the
transaction, particularly in light of Delta's modest aircraft capital
spending plans. Still, we remain cautious about a future JV's
profitability contribution in light of Virgin's weak stand-alone margin
A prospective Delta-Virgin JV with antitrust immunity would allow the
two carriers to cooperate on capacity and pricing decisions in
trans-Atlantic markets, similar to the benefits already achieved in
Delta's JV with Air France KLM. Virgin's market share strength at
Heathrow, in particular, will likely be a critical stepping stone for
Delta in challenging the prevailing strength of United and American in
high-margin business service between London and New York.
Delta, through its merger with Northwest Airlines in 2008, has
established a leading market share position on trans-Pacific routes. In
addition, cooperation with Air France KLM through the trans-Atlantic JV
and joint membership in the SkyTeam alliance have helped improve
passenger yield and unit revenue performance across the Atlantic.
But Heathrow's crucial value in terms of high-yielding traffic remains
untapped owing to Delta's limited U.K. market access. Once approved, the
carriers could jointly operate 31 daily round-trip flights between the
U.K. and North America during the peak summer season. A total of nine
daily flights would operate between London and New York (both JFK and
Newark). Once the JV is approved, we estimate that Delta's
trans-Atlantic market share will increase to 25% from 8% currently. This
compares with approximately 60% for the combined operations of American
and British Airways, and approximately 10% for United.
The Virgin investment agreement, which also includes three board seats
for Delta, would represent the third significant investment by Delta in
a foreign carrier this year. The airline previously completed
investments in Aeromexico and Brazil's Gol, strengthening network
cooperation in Latin America.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at www.fitchratings.com.
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