Delta Eyes Virgin Atlantic Joint Venture

Despite rumors to the contrary, Richard Branson, founder and chairman of Virgin Group, will maintain control of Virgin Atlantic Airways as Delta Air Lines (NYSE:DAL) negotiates with Singapore Airlines over the purchase of its 49 percent stake in the company. Branson owns the other 51 percent of Virgin Atlantic.

Is a Delta-Virgin Atlantic Joint Venture in the Works?Virgin Atlantic

A source familiar with Branson’s thinking told Reuters that Delta and Virgin Atlantic could be pursuing a joint venture for transatlantic flights. The relationship could mean cost and revenue sharing, giving each company the right to book flights on the other airline.

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The deal could work out to the benefit of both airlines. Virgin Atlantic is the second-largest carrier at Heathrow, where space is constrained by high capacity. The joint venture would give Delta increased exposure to the airport, while Virgin could be bolstered by Delta’s growing revenue passenger and available seat miles.

It’s no secret that Virgin Atlantic has been suffering in the face of high fuel costs, the euro-zone crisis, and competition from American Airlines and British Airways, which already have a transatlantic partnership and a commanding spot at Heathrow.

A Good Move for Delta?

Delta Airlines took a public-relations hit recently when it was reportedly caught illegally collecting information from its mobile app, but the bad news doesn’t seem to be outweighing the positive speculation. Shares have been trending up for the last five days as rumors circulated…

Access to Heathrow, and by extension many other European hubs, by a partnership with Virgin Atlantic would certainly be to Delta’s benefit. However, if the U.S. carrier wants to control any joint venture, European law mandates that EU carriers remain under European control, meaning Delta would need a partner.

The most likely is Air France-KLM. Observers speculate that Air France could buy a small stake from Branson to create a controlling share between it and Delta to establish the JV. Air France is not participating in any of the discussions between Delta and Singapore Airlines.

If successful, Delta could gain an edge against other U.S. carriers in a market that has become tremendously competitive over the past few years. The financial collapse drove many carriers to the brink of collapse and recovery has been slow and expensive. Delta did not survive the recession unscathed and is in a more dubious position than competitors such as Southwest Airlines (NYSE:LUV). Every cost-cutting plan has been put on the table and consolidating the efforts of different airlines is a well-established means of driving efficiency.

Evidence of this is how aggressive US Airways Group (NYSE:LCC) has been in its bid to take over American Airlines. The Delta-Virgin Atlantic initiative could be an effort to better position Delta for a future where US Airways and American Airlines are consolidated.

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