Delta Raising the Stakes With Virgin

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Delta (NYSE: DAL) is reportedly in serious discussions with Singapore Airlines in a deal that could potentially restore the former biggest American airline’s profitability.

The deal would potentially hand over Singapore Airlines’ 49% stake in Virgin Atlantic Airways to Delta in order to try to grow the airline’s international activity, particularly into London’s Heathrow Airport.

The airline is focusing on flights between New York City and London, a common flight for Virgin. Singapore Airlines confirmed that it was in the middle of talks about the potential sale of that stake. However, they did not mention Delta—or any other airline, for that matter—as the prospective buyer.

If executed, the purchase would be one of many recent mergers, the biggest of which boosted a combined United (NYSE: UAL) and Continental past the recently merged Northwest Airlines and Delta as the largest U.S. carrier.

Airlines have been looking to consolidate in order to restore profitability in a time where peaks in oil prices, among other factors, have sent many airlines into bankruptcy. With the future of the economy remaining uncertain, the struggling airlines may continue to consolidate even further.

One of the most important factors of the merger for Delta is access to Heathrow Airport, both an incredibly popular destination as well as an enormous international hub. Heathrow, one of the world’s biggest and busiest, would grant Delta access on a much larger international scale.

Furthermore, it would provide a stronger relationship with Air France KLM, the largest airline in all of Europe. The two airlines are both members of the Sky Team global alliance in addition to co-running a business and sharing flights, revenues, and costs in the North Atlantic markets.

The acquisition would yield a Sky Team alliance that would legitimately compete with the One-world global alliance, which includes American Airlines and British Airways.

Virgin Airways is not a member of any of the three major airline alliances—the Star alliance being the third. This prevents the international specialist with coordinating with other airlines to provide flights to destinations that it does not service, eliminating the possibility of cost cuts. These sorts of alliances have greatly helped many of its competitors.

Virgin’s standing has not been as good as it once was: the airline lost £80 million in the fiscal year ending this past February after posting profits of £18.5 million in the year before. Competitor acquisitions have put a constant pressure on Virgin Airways, including the likes of British Airways, whose parent company, the International Airlines Group, purchased BMI British Midlands in late April, against the fights of Virgin, who claimed the deal offered excessive presence at Heathrow.

For Virgin, this serves as the perfect exit strategy in a market where competitor alliances will send the straggling Virgin Airways down the drain. In fact, Richard Branson, the founder of Virgin, has expressed intent to sell some of his 51 percent stake in the airline. However, the deal also helps Delta extend its reach overseas to one of the Europe’s biggest hubs.

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