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Delta buys Singapore’s Virgin Atlantic stake for $360M

By Kari Lundgren and Mary Jane Credeur

Bloomberg News

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Delta Air Lines Inc. agreed to buy the 49 percent stake in Richard Branson’s Virgin Atlantic Airways Ltd. held by Singapore Airlines Ltd. for $360 million to boost its share of the lucrative trans-Atlantic travel market.

Virgin, the biggest long-haul rival to British Airways at London’s Heathrow airport, will also join forces with Atlanta- based Delta for the operation of flights between Europe and North America, the companies said today in a statement.

The deal positions Delta to grab a bigger slice of the world’s biggest market for premium passengers and boosts the presence of its SkyTeam alliance at Heathrow, Europe’s busiest air hub. While Virgin founder Branson will retain control, it also marks the end of a go-it-alone strategy for a company the 62-year-old U.K. billionaire founded almost three decades ago.

“Our new partnership will strengthen both airlines and provide a more effective competitor between North America and the U.K., particularly on the New York-London route, which is the largest airline route between the U.S. and Europe,” Delta Chief Executive Officer Richard Anderson said in the statement.

Delta and Virgin will file an application for antitrust immunity to the U.S. Department of Transportation to allow them to coordinate schedules, the statement said. The carriers aim to operate a “metal neutral” joint venture, sharing costs and revenue across 31 peak-day round-trip flights.

BRAND SURVIVES

The Virgin brand will be retained and Branson said in the statement that the deal “signals the start of a new era of expansion, financial growth and many opportunities.”

Branson hired Deutsche Bank AG to review Virgin Atlantic’s alliance options as long ago as 2010 and said earlier this year it was in advanced talks to join one of the three global groups.

Virgin had an 80.2 million-pound ($129 million) loss in the year ended Feb. 29 as high fuel prices crimped margins and an alliance of British Airways and AMR Corp.’s American Airlines intensified competition.

The rise of Middle Eastern carriers such as Qatar Airways Ltd. has also diverted long-haul traffic via Gulf hubs and established a new industry benchmark for in-flight service.

Singapore Air paid 600.3 million pounds for the Virgin stake in 1999, or $966 million now, and has written down about 96 percent of goodwill from the deal. A sale will boost the Asian carrier’s cash position and may spur acquisitions in China or India after last month’s purchase of 10 percent of Virgin Australia Holdings Ltd. for A$105 million ($110 million).

SMALLEST PRESENCE

By linking itself with Virgin, Delta is targeting North Atlantic flights that generate roughly one-quarter of all global revenue from first- and business-class fares — more than twice as much as second-place trans-Pacific routes, according to the International Air Transport Association.

Delta, Air France-KLM Group and their SkyTeam partners are the smallest alliance at London Heathrow, the biggest European hub for trans-Atlantic services, with about 5 percent of takeoff and landing positions. Oneworld, led by BA and American, controls almost half of services, followed by United Continental Holdings Inc. and its Star Alliance with about one-quarter.

Slots at capacity-restricted Heathrow are so prized that Continental Airlines paid $209 million for four pairs in 2008.

For its part, Virgin Atlantic has eschewed global alliances for the decade during which they’ve been crystalizing. The groups allow carriers to share lounges, combine frequent flyer programs and book passengers on one another’s planes via code- shares — adding routes without the cost of planes and crew.

BILATERALS

Virgin has also previously missed out on bilateral partnerships of the kind that will be pursued with Delta. The antitrust immune accords constitute a deeper relationship than simple alliance membership, allowing carriers to coordinate timetables and share costs and earnings on specified routes.

The Crawley, England-based carrier is also in the process of choosing a new CEO. Steve Ridgway, who steps down next year, was at the helm as Virgin cemented its place in the global long- haul market with trademark red uniforms, state-of-the-art in- flight entertainment and a service offering Club House lounges, afternoon tea, spa treatments and Lanson Black Label champagne.

More recently, Virgin has struggled to differentiate itself as features such as flat-bed seats become commonplace in premium cabins and rivals dominate passenger surveys. Of six operators awarded a five-star ranking from airline-review firm Skytrax, five are from Asia and one from the Gulf. Virgin is one of 33 carriers with four stars, alongside BA and Air France.

At Delta, which has three Skytrax stars, CEO Anderson is building stakes in foreign carriers following the transformative purchase of Northwest Airlines Corp. in 2008 and a slot trade with US Airways Group Inc. that confirmed its grip on New York’s LaGuardia airport.

The company agreed to buy 3 percent of Brazil’s Gol Linhas Aereas Inteligentes SA for $100 million in 2011 and this year completed a $65 million investment in Grupo Aeromexico SAB, with both deals bringing a boardroom seat.

“Expedited approval” for the Delta-Virgin joint venture plan is anticipated by the end of next year, the companies said.






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