Fitch: Strategic Value Upside Clear in Delta's Virgin Stake
CHICAGO -- December 11, 2012
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 profile.
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%
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.
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