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Delta Covets London Growth With Stake in Virgin Atlantic

Delta Air Seen Tempted by Richest Travel Market Via Virgin Stake
A Boeing Co. 747 aircraft, operated by Virgin Atlantic, right, is guided by an aircraft tractor on the tarmac at Heathrow airport in London. Photographer: Chris Ratcliffe/Bloomberg

Delta Air Lines Inc.’s interest in buying a stake in Virgin Atlantic Airways Ltd. would position the U.S. carrier to grab more of the world’s most lucrative market for premium passengers.

Talks are under way for Delta to acquire Singapore Airlines Ltd.’s 49 percent of Virgin Atlantic, two people familiar with the matter said. An agreement could let Virgin form a trans-Atlantic venture with Delta and SkyTeam alliance partner Air France-KLM Group to serve London’s Heathrow airport.

North Atlantic flights generate roughly a quarter of all global revenue from first- and business-class fares, more than twice as much as the second-place Pacific routes, according to the International Air Transport Association. Heathrow is closer to London than Delta’s previous base at Gatwick airport, which U.S. airlines have shunned since flight rules eased in 2008.

“Delta doesn’t have that many flights to Heathrow, and Virgin would get more access” to airports in New York and Los Angeles via Delta, said Jeff Straebler, an analyst with John Hancock Financial Services in Boston. “In terms of having a presence at Heathrow, it’s the only way for Delta.”

Richard Branson, Virgin’s founder and owner of a 51 percent stake, touched off industry speculation about a Heathrow land grab after hiring Deutsche Bank AG to assess options in 2010. The London airport finished 2011 as Europe’s busiest and No. 3 in the world, behind Atlanta’s Hartsfield and Beijing.

‘Interested Parties’

Singapore Airlines said yesterday that negotiations with “interested parties” may not result in a transaction. Spokesmen for Atlanta-based Delta, Virgin and Air France-KLM declined to comment about any talks on the sale of the stake.

For Branson, joining an airline marketing group would break with his history. While British Airways and other rivals grew with mergers and alliances, the 62-year-old billionaire sought to lure high-fare fliers to Crawley, England-based Virgin with amenities such as a cheese trolley and Lanson Black Label Champagne.

“Virgin desperately needs something like this,” said Jay Sorensen, who formed an agreement to share booking codes with Virgin when he worked at Midwest Express in the early 2000s. “They would benefit from Delta’s discipline and strategic direction.”

The risk for Virgin Atlantic is whether a business association with a traditional airline would change its emphasis on style and comfort, said Sorensen, who now runs consultant IdeaWorks in Shorewood, Wisconsin.

Brand Risk?

“There really is an essence of this brand that is incompatible with everyone else,” he said. “How would you integrate that service and those expectations? The answer is you can’t, not easily.”

Chief Executive Officer Richard Anderson has focused Delta on transformative deals such as the 2008 purchase of Northwest Airlines Corp., a slot trade with US Airways Group Inc. that strengthened Delta’s grip on New York’s LaGuardia airport and the purchase of an oil refinery this year to help make jet fuel.

Some of the strategic approach at Delta, the world’s second-biggest airline, would probably be pressed upon Virgin, said Vicki Bryan, an analyst at New York-based debt researcher Gimme Credit LLC.

“Not everybody can do what Delta does, and Delta isn’t going to do a deal like this unless they think they can influence Virgin’s path,” Bryan said. Virgin had a pretax loss of 80.2 million pounds ($129.1 million) for the year ended in February.

Prized Slots

Delta, Air France-KLM and their SkyTeam partners are the smallest alliance group at Heathrow, with about 5 percent of takeoff and landing slots. Oneworld, led by British Airways and AMR Corp.’s American Airlines, dominates with almost half of all service, followed by United Continental Holdings Inc. and its Star Alliance with about a quarter of slots.

Heathrow slots are so prized that Continental Airlines paid $209 million for four pairs in 2008. That was the year when new EU rules allowed Delta and more of its U.S. rivals to start serving Heathrow, located about 15 miles (24 kilometers) from London, roughly half as far as Gatwick.

Singapore Air paid 600.3 million pounds for the Virgin stake in 1999, or about $966 million now. Delta may pay $1.1 billion to $1.3 billion for the stake, CNBC reported yesterday, citing sources it didn’t identify.

EU Rules

Delta is discussing buying all or part of the Singapore Airlines stake, said the people familiar with the discussions, who asked not to be identified because the matter is private. Paris-based Air France-KLM, Europe’s largest carrier, might also purchase stock, they said. European Union rules require the zone’s airlines to be under European control.

Delta rose 1.1 percent to $9.73 at the close in New York. British Airways parent International Consolidated Airlines Group SA gained 0.8 percent to 172.70 pence in London, while Singapore Airlines closed 0.1 percent lower at S$10.72.

Branson’s influence over his signature airline and his other holdings such as the U.S. carrier Virgin America Inc., which he founded with a 25 percent stake, extends beyond the financial.

In 2011, he handed out Virgin America travel vouchers to people riding a train from Chicago’s O’Hare airport and later committed to a flight attendant’s request to have the entire cabin crew of 500 outfitted with red stiletto heels similar to the ones their U.K. counterparts wear.

No Alliances

Virgin Atlantic has rejected the global alliances for a decade. The groups allow carriers to book passengers on one another’s planes -- in effect expanding their networks without the cost of additional planes and crew.

Some carriers such as Delta and Air France-KLM have an even deeper relationship with antitrust immunity that lets them coordinate fares and flight times and operate as a single entity. European and U.S. laws prevent foreign carriers from owning a majority stake in an airline.

A Virgin deal would be Delta’s third with a foreign carrier in recent years, after agreeing to buy 3 percent of Brazil’s Gol Linhas Aereas Inteligentes SA for $100 million in 2011, and completing a $65 million investment in Grupo Aeromexico SAB this year. Both deals also gave Delta a board seat.

Any involvement with Virgin would have to be on favorable terms, said Bryan, the Gimme Credit analyst, who rates Delta’s bonds as outperform.

“Delta doesn’t overpay for assets, and they’re not just going to write a check,” she said.

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