Virgin Atlantic - DL tie up?

[FrugalFlyerv2.0]

The airline added that negotiations were at "early stages", and that it was "far too early" to comment further.
Delta has also declined to comment.
BBC story

 

[WorldTraveler]

An indication that the next phase of industry consolidation will be global - long overdue but for years limited by ownership restrictions. Now that you have a handful of truly global airlines, those are in a position to reinforce the weaknesses that each carrier and alliance has. Whether anything develops with DL and VS, it is certain that you will see more global mergers and acquisitions.

DL's strategy of not spending much on fleet acquisitions for the next five years seems prudent if they wish to use their cash for balance sheet improvement which ultimately facilitates further mergers and acqusitions.

Virgin Atlantic seemed destined to have to solve its small network size via an alliance or acqusition eventually and it would seem that of the US carriers, DL makes the most sense. A joint bid with AF/KL might overcome ownership restrictions.

 

[FrugalFlyerv2.0]

Virgin Atlantic seemed destined to have to solve its small network size via an alliance or acqusition eventually and it would seem that of the US carriers, DL makes the most sense. A joint bid with AF/KL might overcome ownership restrictions.

Can you elaborate why DL, of all the USA-based carriers makes the most sense for VS? What does DL bring to the table for VS that no other USA-based carrier can offer?

 

[BoeingBoy]

For now DL has the broadest network of the U.S. carriers and looking at it from the other end DL has the widest international presence of the U.S. carriers. Once UA/CO is integrated they will mostly offer the same although not the SE U.S. hub. Of course, a merger will require a change in the ownership rules.

Jim

 

[WorldTraveler]

exactly, Jim.
And to add, UA will have a LHR presence comparable to AA (without BA) but Star members have ownership interests in BMI so you potentially run into the same anti-trust issues that AA/BA have... but I'm not sure that Star has fully taken advantage of the opportunities in integrating LHR anyway.

DL and Skyteam have no UK members, are the smallest of the big 3 at LHR - and thus have the greatest potential to be of benefit to VS without growing to a size that would create antitrust concerns.

The UK is the largest int'l travel market from the US and DL and VS are respectively the two largest carriers that don't have partnerships with each other.

A joint acquisition of VS by DL and AF could overcome ownership restrictions. Given that nearly all of DL's LHR operation is possible because of AF/KL slots, AF is interested in claiming a piece of the UK market as well.

 

[eolesen]

I know Delta is the perfect partner for any carrier, but is London willing to throw Virgin America under the bus entirely? I don't see them being merged into DL, but stranger things have happened.


In related news.... the Australia version of the DOJ approved a link-up between ANZ and DJ, and as "important" as Delta is to DJ/VA, I suspect
having ATI with ANZ is a lot more critical to them since it is in their home market.

Hauenstein may think DL can convince the US to grant ATI to DJ/VA/DL, but I can't help but wonder how excited ANZ will be about that. There's lots of speculation down under that membership in Star Alliance will be the next step, so why would they want to get closer to Delta if they could be closer to United (who you've repeatedly claimed is a powerhouse who will annihilate AA and oneworld)?

 

[WorldTraveler]

I know Delta is the perfect partner for any carrier, but is London willing to throw Virgin America under the bus entirely? I don't see them being merged into DL, but stranger things have happened.


In related news.... the Australia version of the DOJ approved a link-up between ANZ and DJ, and as "important" as Delta is to DJ/VA, I suspect
having ATI with ANZ is a lot more critical to them since it is in their home market.

Hauenstein may think DL can convince the US to grant ATI to DJ/VA/DL, but I can't help but wonder how excited ANZ will be about that. There's lots of speculation down under that membership in Star Alliance will be the next step, so why would they want to get closer to Delta if they could be closer to United (who you've repeatedly claimed is a powerhouse who will annihilate AA and oneworld)?

Who is "London" and why does having a partnership with DL or any airline constitute "throwing them under the bus?"
I don't see DL acquiring a full stake in Virgin since Sir Richard apparently isn't ready to cash out completely or in them losing their identity since, quirky as it is, since it does draw some people. I suspect simply creating marketing links with other carriers - possibly as part of an alliance/JV/ATI - but ownership doesn't have to be at stake. DL obviously would like to buy into the UK market since there is value in it at the right price.

All of the consolidation in the industry outside of the US has implications for US carriers. AA lost Tam to Star recently but might get them back as part of the TAM-LAN merger so, yes, the consideration of US carriers is not the primary factor in these kinds of decisions.

So far as I know, Skyteam isn't even an option for LAN-Tam so DL will have to make it work one way or the other in those markets. Likewise, I don't think whatever Virgin does is going to force DL out of either LHR or Australia but it might make them more profitable.

DL and Virgin Australia clearly knew when both started service that they both could badly hurt by QF and UA- and hurt each other if there were 4 independent carriers battling it out. DJ and DL's ATI/JV proposal is undoubtedly partly to reduce some of that bruising competition and the DOT might well agree if both can convince them that they aren't just trying to eliminate competitive forces over the S. Pacific.
It isn't at all a given that the US or Australia would grant ATI/JV to UA/NZ/DJ which would push DJ back out of an ATI/JV relationship if DJ was dragged into Star as part of its NZ relationship. But it is also quite normal in the airline industry for a carrier to have one partner in one part of the world but another in other parts. Alliances don't like that but in the case of Virgin, they may have no choice but to work with DL or face the prospect of losing ATI/JV with a US carrier at all.
While the Virgin brands are distinct, DL is also developing a relationship with Virgin Nigeria so if DL is able to secure the deepest possible partnerships with Virgin Atlantic, Virgin Nigeria, and Virgin Australia, the Virgin airline group might overall lean alot more toward Skyteam than they ever have leaned to any other alliance.

 

[USFlyer]

Let's not forget that Singapore Airlines already owns 49% of Virgin Atlantic.

 

[eolesen]

WT, I think you know who London is with regard to Virgin America.... They might have fixed the ownership issues, but Branson is still very much involved with VX, to the extent he showed up at the SFO-DFW inaugural festivities last month.

Since I've done paid work for Virgin Blue & V-Australia in the last two years, I probably have to now refrain from further comment other than what's been mentioned in the news about their ATI approval with ANZ, and to mention that V-Australia is an Amadeus user, which appears to be the RES/DCS platform of choice for major participants at all three alliances, while DJ is still a Navitaire user.

Let's not forget that Singapore Airlines already owns 49% of Virgin Atlantic.

And let's overlook the fact that VS still has a partnership agreement with CO despite BMI's participation in Star Alliance.

I see more and more ties to Star than not here.

 

[WorldTraveler]

Flyer,
it is the 49% of VS that SQ owns that is potentially in play. SQ has said that they would like to sell and news reports indicate that DL has expressed interest in an equity arrangement although no one knows for sure exactly what is being proposed - and Sir Richard justifiably is engaging professional advisers to help decide on the right price if part of VS should be sold as well as to decide on any strategic options that might not involve equity.

E,
I gest only a little bit about London's control of VX since Sir Richard is supposed to have a non-controlling (less than 26% interest) role in VX.
As you know, VX has done very well in obtaining premium revenue in longhaul US markets but those gains have - forgive me for saying it - not been largely at DL's expense. In fact, DL and VX have maintained fairly constant 20% shares in JFK-LAX while VX has gained share at the dominant carrier in that market's expense. VX also has a revenue premium to DL in the markets in which they compete and is closer to the market average fares than DL is. Given that VX has targeted transcon markets which DL doesn't fly and has succeeded in pushing AA out of markets like BOS-SFO and they are now entering DFW to LAX and SFO with an eye on ORD, VX's strategy is clearly to grow in AA markets.
Further, it is doubtful that VS connects alot of traffic to VX since VS flies to most of the cities that VX serves. VX may pick up a lot of stopover traffic within the US, though I don't know.
VS is clearly approaching any decision about a partner with a focus on their transatlantic operation which generates far more revenue than whatever connections might be at stake on VX within the ownership that Richard has in it. VS can't help VS compete over the Atlantic by narrowing the gap between AA/BA and CO/UA/BMI.

And yes CO does have an agreement with VS but it is likely they aren't buying many VS seats anymore given that VS operates largely on routes which UA or CO operates on.

As for the S. Pacific, the VS/VX/DL decision highlights the difficulties in making the next round of alliance decisions because there are partnerships in play among carriers that didn't exist when the first round of alliance decisions were made.
I have no doubt that ANZ, UA, and Star would love to see DJ join them but again DJ has to do what is in its best interest - and if they cannot obtain ATI/JV with UA in the picture (highly possible) they may opt for a "lesser" partner.
Remember that there were JAL execs who pushed for a DL partnership but "settled" for AA because of AA's public statements (also made in JAL's boardroom) that JAL could not get ATI/JV with DL. So, JL now has to compete with DL and its larger size even though ATI w/ AA will provide it with some benefits.
For right now, DJ is proceeding w/ a DL ATI/JV and there may well be penalty clauses in the agreement if DJ decides to bolt.

Given that CO has plans to enter AKL, there could be problems with UA seeking a JV with NZ anyway.

Further, AKL is within the range of a 767 or 332 from LAX so DL could add AKL service anyway.

Nothing is certain as you well know but I don't honestly see DJ going lock stock and barrel to Star.

But I also have less information and emotions about the S. Pacific market than I do about the US market.

 

[eolesen]

DJ doesn't have to bolt. They just don't have to agree to any commercial or operational conditions DOT might place on them, such as agreeing not to reduce services.

As for UA... One of the reasons cited by DOT for not approving ATI was the fact that both DL and VA were new to the market, and had not demonstrated that they were committed for the long term and/or would provide consumer benefits.

UA on the other hand has been in Oz for decades, and their hub at SFO would present a good alternative to the AA hub at LAX with QF. DL has no hub unless you want to count Portland, and there's simply no O&D market for Oz outside of California.

 

[WorldTraveler]

Good morning, E,

As always you raise good points and they are worthy of consideration.

UA and DJ both would like to have the largest market shares via their own metal and their partners to the greatest extent possible alliances but that doesn't mean that regulators would approve certain combinations. It is precisely because UA and DJ combined would have 35% of the US-OZ capacity, #2 behind QF's 50% that there would have to be concerns about whether a combination of DJ and UA would be in consumer interests.
Once again, remember that it was AA who argued that JL should NOT ally with DL because of the combined size; by the same token, the EU and the US specifically found that there was excessive market concentration at LHR after AA-BA which provided the means for DL to obtain the slots using AA-BA assets for the 3 new LHR slots which DL will start.
It is also very possible that the TAM-LAN decision might favor UA over AA because of AA's already dominant position in Latin America which TAM-LAN will also have. The TAM-LAN decision is also complicated by the fact that it involves a promise from the Brazilian government to provide access to GRU at some point in the future - but which is still not here. As such, the ability of TAM-LAN to cooperate with AA in all markets may be impacted by the limited access to the Brazilian market by competitors.
If this sounds familiar, it is exactly what happened at LHR - other carriers had functional Open Skies agreements in other markets while AA was left waiting until it divested slots in order to obtain ATI/JV - and that delay has hurt AA and BA significantly while competitors have ramped up their TATL operations.
That is not to say that the weakest player in a market is automatically guaranteed ATI/JV with other small players but when there are only 4 players in the market, you have to ask what is being accomplished if there are combinations of #1-3 with each other such that #4 (DL is so small - 7% of the US-Australia capacity- that it will hinder their ability to be a long term effective competitor.
Since the US and Australia both argued for Open Skies in order to add a 3rd competitor to the market, there will certainly be challenges if the market is effectively returned again to a 2 carrier market. Also, OZ denied SQ's request to enter the OZ-US market based on allowing Open Skies wih the US to develop.

Also, the DOT has no statutory authority to consider market longevity, to make expectations about who might or might not be in the market for how long, or to require that carriers make commitments as to a mnimium size in the market as part of an ATI/JV decision nor to my knowledge have they demanded that from other carriers. The same argument about DJ's longevity in the market could be applied to a decision involving another carrier as well.

You and I can speculate about DL's relationship with both Virgin Atlantic and Virgin Australia but until we have more details, what is known is that DJ and DL have requested and obtain ATI/JV from the US and OZ; the OZ gov't has provided it and is now asking the US DOT to reconsider its decision. It is not known where DL and VS discussions are or how they will develop but the same market concentration concerns involving LHR will arise if VS combines with any other US TATL carriers other than DL or US- and it is pretty clear that DL has more to offer. Any other combinations of US-LHR carriers simply return the market to the same 4 carriers that existed before - and perhaps worse since ATI-JV results in even further concentration of the market. Further, unlike even OZ, slots at LHR are not available at reasonable prices on the open market which is why AA-BA had to divest slots to DL's benefit.

I fully expect that DJ will move forward with ATI/JV with DL as well as a similar arrangement with NZ covering only the S. Pacific. DJ, like many Virgin carriers will remain unallied because it is in their best financial interests to remain independent.

Each of the companies involved with do what is in the best interest of their own companies and if DL is a part of those combinations, then it will be great for DL; if not, DL will have to find other ways to compete in those particular markets.

 

[metopower]

Good morning, E,

As always you raise good points and they are worthy of consideration.

UA and DJ both would like to have the largest market shares via their own metal and their partners to the greatest extent possible alliances but that doesn't mean that regulators would approve certain combinations. It is precisely because UA and DJ combined would have 35% of the US-OZ capacity, #2 behind QF's 50% that there would have to be concerns about whether a combination of DJ and UA would be in consumer interests.
Once again, remember that it was AA who argued that JL should NOT ally with DL because of the combined size; by the same token, the EU and the US specifically found that there was excessive market concentration at LHR after AA-BA which provided the means for DL to obtain the slots using AA-BA assets for the 3 new LHR slots which DL will start.
It is also very possible that the TAM-LAN decision might favor UA over AA because of AA's already dominant position in Latin America which TAM-LAN will also have. The TAM-LAN decision is also complicated by the fact that it involves a promise from the Brazilian government to provide access to GRU at some point in the future - but which is still not here. As such, the ability of TAM-LAN to cooperate with AA in all markets may be impacted by the limited access to the Brazilian market by competitors.
If this sounds familiar, it is exactly what happened at LHR - other carriers had functional Open Skies agreements in other markets while AA was left waiting until it divested slots in order to obtain ATI/JV - and that delay has hurt AA and BA significantly while competitors have ramped up their TATL operations.
That is not to say that the weakest player in a market is automatically guaranteed ATI/JV with other small players but when there are only 4 players in the market, you have to ask what is being accomplished if there are combinations of #1-3 with each other such that #4 (DL is so small - 7% of the US-Australia capacity- that it will hinder their ability to be a long term effective competitor.
Since the US and Australia both argued for Open Skies in order to add a 3rd competitor to the market, there will certainly be challenges if the market is effectively returned again to a 2 carrier market. Also, OZ denied SQ's request to enter the OZ-US market based on allowing Open Skies wih the US to develop.

Also, the DOT has no statutory authority to consider market longevity, to make expectations about who might or might not be in the market for how long, or to require that carriers make commitments as to a mnimium size in the market as part of an ATI/JV decision nor to my knowledge have they demanded that from other carriers. The same argument about DJ's longevity in the market could be applied to a decision involving another carrier as well.

You and I can speculate about DL's relationship with both Virgin Atlantic and Virgin Australia but until we have more details, what is known is that DJ and DL have requested and obtain ATI/JV from the US and OZ; the OZ gov't has provided it and is now asking the US DOT to reconsider its decision. It is not known where DL and VS discussions are or how they will develop but the same market concentration concerns involving LHR will arise if VS combines with any other US TATL carriers other than DL or US- and it is pretty clear that DL has more to offer. Any other combinations of US-LHR carriers simply return the market to the same 4 carriers that existed before - and perhaps worse since ATI-JV results in even further concentration of the market. Further, unlike even OZ, slots at LHR are not available at reasonable prices on the open market which is why AA-BA had to divest slots to DL's benefit.

I fully expect that DJ will move forward with ATI/JV with DL as well as a similar arrangement with NZ covering only the S. Pacific. DJ, like many Virgin carriers will remain unallied because it is in their best financial interests to remain independent.

Each of the companies involved with do what is in the best interest of their own companies and if DL is a part of those combinations, then it will be great for DL; if not, DL will have to find other ways to compete in those particular markets.

Great stuff and you seem to have good knowledge of Dal. The A330-200 and the B733er can make AKL but would not be able to carrry much. The B777 200ER is limited because of alternates so the only planes that work are the B777lr or the B747 that are in our fleet. Av uses B777 300er and it works ok but they dispatch under differrent rules then Dal.

 

[WorldTraveler]

Great stuff and you seem to have good knowledge of Dal. The A330-200 and the B733er can make AKL but would not be able to carrry much. The B777 200ER is limited because of alternates so the only planes that work are the B777lr or the B747 that are in our fleet. Av uses B777 300er and it works ok but they dispatch under differrent rules then Dal.

Thanks Meto. I do enjoy following the US network industry.
I am not even certain that DL has any desire to fly to AKL but I would imagine DL could figure out a way to make it work.
According to the Great Circle Mapper, LAX-AKL is right on the edge of the 180 min ETOPS no fly zone.
UA has flown LAX-SYD and LAX-AKL with 772ERs (PW engines); DL's have higher TOW - although UA's dispatch rules are different.
One of the merger items that was brought to light was that DL had "stricter" dispatch rules than NW; as with many operational items, DL chose to accept largely one set of standards or the other in order to get the single ops certificate issued. It is possible that DL could choose to relax its dispatch requirements once the operational aspects of the merger are settled, esp. if the fleet could be used more efficiently.
I would consider the 767 to AKL to be not terribly likely because that route would be close to the limits of that plane even aside from ETOPS restrictions but DL has said they plan to convert the 332s at least (not sure if the 333s can be done) to the higher TOW package which includes about an hour add'l flying time (or equivalent) in TOW. It is possible that the 332s do become viable to do more 12+ hr flying although there aren't a lot of routes being operated that way now. As I'm sure you know, DL is using the 333 on LAX-NRT this summer so they do want to push the 330s where they can.
I believe the LRs and 330s are being used more for the onboard product right now since the LR has had the best product in the DL fleet; now that the 772ERs and the 764ERs will also have lie flat seats by next summer. Since the 330s have a very good angled business class product and a competitive coach product but few 767s do (other than the 764s which are being used heavily to LHR), the 332 is being used largely where a higher quality onboard product is needed even though the 332 should be capable of longer routes, esp. once the performance improvement package is installed.
As the lie flat product is extended to a larger portion of the fleet and as the PIP is added to the 332s, I expect they will be flying longer haul routes than they are now.
Of course, there have been rumors that DL is looking to acquire more used 772ERs since winglets should be available on those planes before too long; for now, the 777 market is still fairly tight but the expectations are that it will open up when 787 deliveries ramp up to carriers that could begin replacing 777s.

 

[metopower]

Thanks Meto. I do enjoy following the US network industry.
I am not even certain that DL has any desire to fly to AKL but I would imagine DL could figure out a way to make it work.
According to the Great Circle Mapper, LAX-AKL is right on the edge of the 180 min ETOPS no fly zone.
UA has flown LAX-SYD and LAX-AKL with 772ERs (PW engines); DL's have higher TOW - although UA's dispatch rules are different.
One of the merger items that was brought to light was that DL had "stricter" dispatch rules than NW; as with many operational items, DL chose to accept largely one set of standards or the other in order to get the single ops certificate issued. It is possible that DL could choose to relax its dispatch requirements once the operational aspects of the merger are settled, esp. if the fleet could be used more efficiently.
I would consider the 767 to AKL to be not terribly likely because that route would be close to the limits of that plane even aside from ETOPS restrictions but DL has said they plan to convert the 332s at least (not sure if the 333s can be done) to the higher TOW package which includes about an hour add'l flying time (or equivalent) in TOW. It is possible that the 332s do become viable to do more 12+ hr flying although there aren't a lot of routes being operated that way now. As I'm sure you know, DL is using the 333 on LAX-NRT this summer so they do want to push the 330s where they can.
I believe the LRs and 330s are being used more for the onboard product right now since the LR has had the best product in the DL fleet; now that the 772ERs and the 764ERs will also have lie flat seats by next summer. Since the 330s have a very good angled business class product and a competitive coach product but few 767s do (other than the 764s which are being used heavily to LHR), the 332 is being used largely where a higher quality onboard product is needed even though the 332 should be capable of longer routes, esp. once the performance improvement package is installed.
As the lie flat product is extended to a larger portion of the fleet and as the PIP is added to the 332s, I expect they will be flying longer haul routes than they are now.
Of course, there have been rumors that DL is looking to acquire more used 772ERs since winglets should be available on those planes before too long; for now, the 777 market is still fairly tight but the expectations are that it will open up when 787 deliveries ramp up to carriers that could begin replacing 777s.

You are right about most of the things that Dal is doing with the fleet. The 772er is really not a player because the LR is such an improvement over the ER . Now maybe some cheap aircraft with winglets might be attractive I never thought of that. The other thing that you have to take into consideration on ETOPS besides the 180 or 120 rules are alternates . In the south pac because of the rules divert fields for two engine aircraft on a specific route are limited. The rule is that with a loss of one engine the airport has to be available WITHOUT dumping fuel. Many times we are routed over HNL just so on the next leg the routing will take us on a route that allows us to use Fiji. It also cause us to burn more fuel . I think the whole reason for the Virgin Australia deal is for Akl .