Whoa: Delta Is Buying 10% Air France Stake, Air France Is Buying 31% Virgin Atlantic Stake

We’ve seen a lot of strategic airline investments lately, some of which make sense, and some of which are confusing. Here’s the latest such investment, which is even more complicated than usual.

Delta has just announced that they’re investing in Air France, and Air France has just announced that they’re investing in Virgin Atlantic. The basic details are as follows:

  • Delta is buying a 10% equity stake in Air France-KLM, at a cost of 375 million EUR
  • Air France-KLM is buying a 31% equity stake in Virgin Atlantic, at a cost of 220 million GBP
  • This isn’t new, but in 2012 Delta bought a 49% stake in Virgin Atlantic, meaning that the Virgin Group will lose a majority stake in the airline, and will own just 20% of Virgin Atlantic

This is smart on Delta’s part, not surprisingly. First of all, keep in mind that Delta couldn’t buy more of Virgin Atlantic if they wanted to, due to foreign ownership laws. But Air France-KLM can, and then Delta can in turn buy a stake in them. And Delta complains about other airlines being sneaky…

As it stands, Delta has a joint venture with Virgin Atlantic, and a separate joint venture with Air France, KLM, and Alitalia. With this proposed change, all the airlines would form a single transatlantic joint venture, which would include Air France, Alitalia, Delta, KLM, and Virgin Atlantic.

Here’s how Delta’s CEO describes the expanded joint venture that they’re going for:

“A dynamic global landscape means it’s more important than ever for Delta to deepen ties with our global partners to provide opportunities for mutual growth,” said Delta CEO Ed Bastian. “Bringing together the strengths of Delta, Air France-KLM and Virgin Atlantic into a combined joint venture will create the trans-Atlantic partnership of choice for customers.”

The expanded joint venture, including Alitalia, will offer nearly 300 daily nonstop trans-Atlantic flights and convenient flight schedules. Customers also will benefit from the ability to earn and redeem miles across all carriers, co-location of facilities at key airports to improve connectivity and access to each carrier’s airport lounges for premium customers.

Joint ventures sound nice in theory, in the sense that they allow airlines to align their schedules, co-locate in terminals around the world, offer expanded reciprocal benefits to frequent flyers, etc.

But the flip side is that it essentially reduces competition, as the airlines act as one when it comes to selling tickets. They align fares, and it’s the equivalent of eliminating a competitor.

Joint ventures, including expanded joint ventures, are subject to government approval. I suspect that’s the case here as well, even though Delta already has individual joint ventures with both parties. Let’s be clear here — joint ventures aren’t typically in consumers’ best interests, and given how the airline industry has evolved, neither are expanded joint ventures.

However, I suspect the current administration would approve it without batting an eyelid.

From Delta’s perspective this seems like a smart move, but for consumers this means that the five airline joint venture will have a lot more pricing power, which means higher ticker prices.

What do you make of this interesting three-way investment?

Comments

  1. I don’t disagree that this joint venture will reduce competition in some locations, but I doubt that it can be any more anti-competitive than the BA/AA joint venture has been at London. In fact while this JV may reduce competition in some locations, it may well enhance competition in London.

  2. @ Another Steve — There’s no denying that the AA/BA JV has limited competition a lot in London, but this would have the same effect in Europe on a much larger scale. I’m also not sure how it would enhance competition in London. I doubt we’ll see more service to London, but rather since there’s fixed pricing, AF, KL, and AZ may very well raise their pricing out of London to match VS’ pricing. Typically airlines have better pricing from their non-hubs, so while right now you can typically snag a deal on AF out of London, I’m not sure that would be the case as much after this.

  3. Lucky do you think that Delta is planning to slowly integrate Virgin Atlantic into Sky Team? I have Virgin elite status and might consider renewing it if you see it as part of the alliance.

  4. @ Lucky. I think you are quite correct. One of my hidden secrets for years was using AF via CDG when traveling LHR-IAD. The business class pricing, even one way, was often a bargain. I have a sense that this will go away and AF will no longer be interested in poaching LHR traffic to the U.S. and will be fine to see flyers paying a premium on VS or Delta and taking their cut.

  5. Jeez. A oneworld JV, and now a SkyTeam JV.. how long until Lufthansa Group and UA integrate to make a JV of their own? What would it take for anyone from both sides of the Atlantic to slap these airlines with antitrust? With reduced competitions and higher fares, I think Norwegian Air should look into buying larger planes..

  6. I’m a big Delta but Delta et al ain’t doing this for any kind of customer enhancement. This benefits stockholders and stockholders only.
    I assume their plea to the regulators will involve some sort of laughable and embarrassing “seamless global experience” with “enhanced scheduling ability…” blah blah blah.
    Make no mistake, this is a bad deal for Skyteam flyers.

  7. Great, VS redemption on AF should soon be possible.
    Hopefully VS status will allow you to redeem 1st class on AF (using FB points).

  8. Note that China Eastern is also buying 10% of AF/KLM Group. After the 220m investment in Virgin Atlantic, AF/KLM will have a lot of cash left over to deploy in new planes… or an investment in another European airline, like Alitalia….

  9. Delta’s market cap is $36B. Air France/KLM is $3.6B. I guess it says who wears the pants on this partnership.

  10. Lucky, Ive got a kit of respect and admiratie for your Posts, but please stay true to news and facts; Not Air France is buying or being bought; It’s Air France-KLM ( or the shorter AF-KLM). The mother merger company with entities like Air France, KLM, Transavia, Hop!, Joon, Martinair etc. You do refer to ISG when talking of Level for example, instead of ‘Iberia founds Level’. You refer to AF-KLM as Air France in Flying Blue post as well.. it’s just factual incorrect.

  11. @Raul. Lufthansa, United, and Air Canada have actually had a JV for their transatlantic flights for a number of years now.

  12. my maths say that Virgin is worth only 710 million pounds, how much did Delta pay for their 49%, or is it ? a percentage of Delta,s share? something is amiss,? let me know,

  13. I,m a diamond member, with Delta, I have tried to use my WW (Global)upgrades with virgin, and they are never available? now with AF, or KLM, you can use them, ! great? but in higher fare, in coach usually, which is more, than cheap business class, good if you want a flex fare, but otherwise , no good, try to use these on Delta , HNL, to ATL, always full up. Great they give you something thats hard to use, any info anyone?

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