Delta Air Lines Inc. (DAL:US) rose the most in five months after agreeing to buy a 49 percent stake in Richard Branson’s Virgin Atlantic Airways Ltd. for $360 million to boost its share of the lucrative trans-Atlantic market.
The carriers will begin a joint venture on 31 daily round- trip flights between North America and the U.K. as they use Virgin Atlantic’s base at London’s Heathrow airport, Europe’s busiest, according to a statement today. The Virgin Atlantic stake has been held by Singapore Airlines Ltd. (SIA) since 1999.
The deal positions Atlanta-based Delta and Virgin Atlantic to grab a bigger slice of flights across the North Atlantic, the world’s richest lode of premium passengers. British Airways (IAG) and AMR Corp.’s American Airlines, the leaders of the Oneworld alliance, now control more than half of that service.
“It gives Delta the bulk between New York and Heathrow to compete effectively for the high-yielding business traveler,” said Jeff Straebler, an analyst at John Hancock Financial Services in Boston. “Delta is filling a gap in its route network that will pay off for years to come.”
Delta gained 5.1 percent to $10.66 at the close in New York for the biggest advance since June 26. Singapore Airlines closed 0.7 percent higher at S$10.75.
The U.S. carrier’s 10 daily nonstop flights to the U.K. would be added to the 21 that Crawley, England-based Virgin Atlantic plans to operate under its summer 2013 schedule.
While the Virgin Atlantic brand will remain and founder Branson will retain control, the deal marks the end of a go-it- alone strategy for the airline the 62-year-old U.K. billionaire established almost three decades ago.
Delta and Virgin Atlantic said they will seek antitrust immunity from regulators, letting them coordinate schedules and pricing and share costs and revenue from joint-venture flights regardless of whose plane operates the route. They also will offer reciprocal frequent-flier benefits and allow elite-level loyalty-program members to use each other’s airport lounges.
“Virgin Atlantic and Delta will have the No. 2 market position in the U.K.-to-U.S. marketplace, and that positions us well given our large presence in New York,” Delta Chief Executive Officer Richard Anderson said in an interview on Bloomberg Television.
Delta’s current share of U.S.-U.K. flying is about 8 percent, and the venture would have 25 percent, Anderson said on a conference call. British Airways and American, which have an immunized joint venture, control about 60 percent of the market, Anderson said.
By linking itself with Virgin Atlantic, Delta is targeting North Atlantic flights that generate roughly one-quarter of all global revenue from first- and business-class fares -- more than twice as much as second-place trans-Pacific routes, according to the International Air Transport Association.
Nine daily flights covered by the agreement will be from Heathrow to New York’s John F. Kennedy International Airport and New Jersey’s Newark Liberty International Airport, targeting the busiest airline route between Europe and the U.S. Delta now has three daily flights between Kennedy and Heathrow.
Newark service will let Delta and Virgin Atlantic reach business travelers who live closer to an airport dominated by United Continental Holdings Inc. (UAL:US), the world’s largest airline.
“Those are important, well-to-do areas in northern and central New Jersey where Delta has almost zero presence,” said Henry Harteveldt, a travel analyst at Hudson Crossing in San Francisco. “North America is Virgin Atlantic’s most important long-haul market, and culturally the two airlines will mesh better.”
“Expedited approval” for the trans-Atlantic joint venture plan is anticipated by the end of 2013, the companies said.
There is “quite a lot of potential” for Virgin Atlantic and Delta to move aircraft around or add service to new U.S. cities in the future, Virgin Atlantic CEO Steve Ridgway said today in an interview on Bloomberg Television. He didn’t identify any of those markets.
Chief Commercial Officer Julie Southern said on the call that Virgin Atlantic has been in discussions about possibly joining the SkyTeam alliance, which is led by Delta and Air France-KLM (AF) Group.
“We’re engaged in that work and think we’ll reach a conclusion in the next several months,” Southern said.
Delta will gain three seats on Virgin Atlantic’s board in a transaction with a price less than half of the 600.3 million pounds, or $967 million now, that Singapore Airlines paid for the stake 13 years ago. Singapore Airlines has said it has written down about 96 percent of goodwill from the deal.
Virgin Atlantic had an 80.2 million-pound loss in the year ended Feb. 29 amid high fuel prices and intensified competition from the British Airways-American (AAMRQ:US) alliance. The rise of Middle Eastern carriers such as Qatar Airways Ltd. has also diverted traffic.
Branson began to review Virgin Atlantic’s alliance options as long ago as 2010 and said earlier this year the company was in advanced talks to join one of the three global groups.
Singapore Airlines said today that it had been evaluating the position for some time and that its Virgin Atlantic investment “has not performed to expectations and the synergies the parties originally hoped for have not materialized.”
The Virgin Atlantic accord marks the third stake in a foreign carrier Delta has made in the past two years.
Delta agreed to buy 3 percent of Brazil’s Gol Linhas Aereas Inteligentes SA (GOL:US) for $100 million in 2011 and this year completed a $65 million investment in Grupo Aeromexico SAB.
Delta was advised by Goldman Sachs and its legal firm was Cravath, Swaine & Moore LLP. Deutsche Bank AG advised Singapore Airlines. Simpson Thacher & Bartlett LLP served as Virgin Atlantic’s U.S. antitrust counsel on the transaction.
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