Air France-Delta Deal: Atop the Atlantic

A $12 billion-per-year Air France-Delta joint venture will own 25% of transatlantic traffic, and could spur more airline consolidation

By Carol Matlack

Most of the world's major airlines cozied up long ago in alliances to improve efficiency and expand their route networks. But Air France-KLM (AIRF.PA) and Delta (DAL), partners in the SkyTeam alliance, significantly tightened their embrace on May 20 as they sealed the creation of a $12 billion-a-year joint venture that will become the biggest operator of flights between the U.S. and Europe.

The joint venture will take over all North Atlantic flights now run by the two carriers, including those operated by a KLM-Northwest Airlines joint venture before Northwest's 2008 merger with Delta. All told, the new JV will handle about 50,000 passengers a day, or 25% of all North Atlantic traffic.

Air France-KLM and Delta will share equally in revenues and profits from those operations, which will enjoy antitrust immunity. Combining the operations should reduce service redundancies and let the carriers more easily tailor capacity to passenger loads. For instance, if Air France-KLM and Delta each have a daily flight on a certain route but the planes are flying with empty seats, they might now combine the two onto a single, larger aircraft. They will also save costs because ticketing, marketing, and host of back-end services will be performed jointly.

The resulting improvements in income are likely to be substantial: Earlier transatlantic tieups, including the joint venture started in 1997 by KLM and Northwest, have been "among the most profitable airline operations in the world," Delta Chief Executive Richard Anderson said at a Paris press conference.

Antidote for Tough Times

What's more, Air France boss Pierre-Henri Gourgeon said the deal would yield an estimated $300 million in cost savings within two years. "This joint venture will help us weather the current economic situation and protect our product offering," he said. Indeed, Air France-KLM's vulnerability to the economic crisis was underscored on May 19 when it posted a $686 million quarterly loss, its worst ever since the French and Dutch carriers merged in 2003.

Creation of the joint venture will yield "very significant benefits" beyond the efficiencies that both carriers already reap from offering code-shared flights across the Atlantic, says Andrew Lobbenberg, a London-based analyst with ABN Amro. "The prospect of being able to cooperate on capacity [expansion], marketing, and pricing is a very big deal."

Within a few years, nearly all transatlantic routes are likely to be operated by such ventures. British Airways (BAY.L), American Airlines (AMR), and Iberia (IBL.F) are awaiting a decision by Oct. 31 from U.S. regulators on their application to form a similar joint venture, with action by European authorities expected by yearend. Lufthansa (LHAG.DE), United (UAUA), and Continental (CAL) are working on a similar transatlantic tieup. Who'll be left? Richard Branson's Virgin Atlantic Airways, for one. "They're left looking very exposed," Lobbenberg says.

Matlack is BusinessWeek's Paris bureau chief.

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