Delta To Bolster Corporate Sales, Heathrow Position With Virgin Stake

Delta Air Lines and Virgin Atlantic Airways plan by the end of next year to launch a "fully integrated" transatlantic joint venture, through which they would share revenue, align corporate sales and coordinate schedules. Pending regulatory approvals, the agreement positions Delta to fill a significant gap in its network for corporate travelers and win new business in the lucrative New York-London market.

As part of the deal, Delta paid Singapore Airlines $360 million for its 49 percent stake in Virgin Atlantic. With its investment, Delta picks up three seats on Virgin Atlantic's board of directors.

"You need Boardwalk to win," according to Buckingham Research Group senior vice president of Airline Equity Research Daniel McKenzie. "The move gives Delta access to a critical game piece in the corporate travel arena—London Heathrow."

While Delta during the past year has claimed a growing share of corporate business, recently topped BTN's annual air survey and posted above average corporate revenue gains, "the lack of access to London Heathrow has been an impediment for Delta to winning the lucrative business" on the New York-London market, according to McKenzie.

Delta currently holds what he called "a mere three" Heathrow slots accommodating an "inadequate" number of frequencies to properly serve corporate clients on the route. The magic number of daily frequencies to attract meaningful corporate business is eight, according to McKenzie, and Virgin brings six in aggregate from London to Newark and JFK.

Combined, the carriers would hold 36 percent of the market between Heathrow and the New York area, "enough to be relevant and walk away with more corporate travel accounts presumably at AMR's expense," according to McKenzie. "An agreement with Virgin not only remedies a shortfall needed to win more corporate contracts, but the move positions Delta to also walk away with more business to Latin America, Asia and of course domestically."

Corporate Sales Would Align 'Rapidly' 

Delta and Virgin Atlantic plan to align transatlantic corporate and travel agency sales and provide reciprocal frequent flyer benefits and lounge access.

Virgin Atlantic chief commercial officer Julie Southern during a Tuesday press conference in New York said the carriers' plans for joint corporate agreements "are not fleshed out yet" as they wait on the U.S. Department of Transportation to grant antitrust immunity. "It's something for further down the road," she said.

Still, Delta CEO Richard Anderson said that should immunity be granted, the carriers quickly would launch new corporate programs. Given its history of antitrust-immune joint ventures, Delta has "developed a good construct and a good capability for sales cooperation," Anderson said. "We have a really good methodology for being able to include Virgin almost instantaneously [upon approval]. It takes time obviously to go through every corporate agreement, but we have a construct and a methodology to put them in our corporate agreements rapidly. That's where a lot of the benefit will come fairly quickly.

"We basically have large corporate agreements with all Fortune 100 corporations in the U.S.," Anderson continued. "We will immediately add Virgin and some of that can actually be done before we receive antitrust immunity on a more limited cooperation basis."

Noting that Delta has $10 billion in annual corporate revenue and relationships with key U.S.-based corporations, Anderson said "one of the great benefits we can bring to Virgin is significant corporate traffic flows."

Delta has a similar joint venture with Virgin Australia between the United States and Australia, as well as the larger transatlantic antitrust-immune joint venture with Air France-KLM and Alitalia.

Delta's two transatlantic JVs would remain separate, but officials did not dismiss potential coordination. Southern added that Virgin "in the next few months" could reach a decision on whether to become a member of Delta's SkyTeam alliance.

Competing With AA-BA 

Combined, Delta and Virgin Atlantic would be "number two" in the U.S.-U.K. market with a nearly 25 percent market share, second to the immunized joint venture between American Airlines and British Airways, which accounts for 60 percent of the market, Anderson said. He expressed confidence that regulators on both sides of the Atlantic would approve the joint venture as a counterweight to that dominance.

"The partnership allows both carriers to offer a greatly expanded network at Heathrow and to overcome slot constraints, which have limited the growth and competitive capability of both airlines," according to a joint announcement from Delta and Virgin. "The two carriers will operate a total of 31 peak-day roundtrip flights between the U.K. and North America, 23 of which operate at London Heathrow."

While Delta and Virgin both fly from JFK's Terminal 4, Southern said co-location at Heathrow's Terminal 3 is a possibility "over the coming years."

Despite speculation inflamed by British Airways CEO Willie Walsh, Virgin founder Richard Branson and Delta's Anderson dismissed the notion that that the Virgin brand would fade away. Branson continues to hold the remaining 51 percent stake in Virgin Atlantic and today told reporters that "I'm not going anywhere."