Delta Air Lines (NYSE:DAL) would significantly boost its presence on profitable transatlantic business routes if the SkyTeam airline consortium of which it is a part can win a rumored bid to acquire Virgin Atlantic.
But the cost and complexity of supporting the Virgin brand may dilute its value.
Since late last week, rumors have been swirling through the industry that the SkyTeam consortium, an alliance of Delta and Air France-KLM, has hired Goldman Sachs to represent it in a bid for Sir Richard Branson’s brainchild. Other potential suitors reportedly include Abu Dhabi-based Etihad Airlines and International Airlines Group, the parent company of British Airways and Iberia which completed their merger last month.
Ironically, it was U.K. regulators’ approval of a transatlantic alliance between British Airways, Iberia and AMR Corp.’s (NYSE:AMR) American Airlines that turned up the competitive heat on Virgin by further constraining the availability of valuable slots at Heathrow. This forced Branson to explore options for selling the 51% stake he holds in the airline. (Singapore Airlines owns the remaining 49%, but likely would be willing to sell if the price is right.)
But here’s where it gets interesting: Branson wants to keep the Virgin brand intact come Hell or high water. “Virgin Atlantic is one of the most successful brands in the world from a branding perspective,” Paul Dickinson, Virgin Atlantic’s director of sales and marketing, said in a recent interview. “I can’t see a scenario where the Virgin brand would disappear from the airline.”
And the idea of supporting the Virgin brand is an absolute nonstarter for IAG. “When I look at Virgin, what I see are slots at Heathrow,” IAG CEO Willie Walsh told Airline Business magazine this week. “If it is someone from within the industry, then I don’t see that they’ll want to retain the Virgin brand, particularly a brand that is intrinsically linked to a personality.”
So what would the Delta consortium do if it emerged as the successful suitor:seize the slots or support the brand? Nobody knows, since Delta and its partners aren’t talking. In fact, while Delta CEO Richard Anderson has said he’s gearing up to be a player in further industry consolidation, the airline has declined comment on the rumored bid “as a matter of policy”.
Bottom line: There are two clear paths Delta and its partners could pursue with regard to Virgin Atlantic: either acquire the airline to gain slots at Heathrow or build on Branson’s foundation by supporting the separate brand.
The first strategy, while lower risk, likely would pit the Delta team against IAG in a bidding war for the Virgin slots. Since Delta already has acquired Heathrow slots that IAG had to give up when it forged its alliance with American, the airline may need to make sure the value of the additional slots exceeds what it will cost to purchase them.
Virgin Atlantic as a separate brand offers more upside potential in the long run, but a strategy would have to be aggressively managed to avoid soaring operating costs and cannibalization of either brand. That’s not an easy needle to thread in the best of times, let alone at a time when fuel price volatility has the entire airline sector running for cover.
With Libyan unrest pushing New York oil prices up over $100 a barrel on Thursday (although pulling back to about $96 in recent Friday trading), cost control is the paramount concern for airlines. Along with other major U.S. airlines, Delta shares have taken a beating so far this week – they have dropped some 12% since the beginning of this year.
As of this writing, Susan J. Aluise did not hold an interest in any of the stocks named here.
