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It seems that we could see some major changes coming to the transatlantic market after various ownership announcements with Delta, Air France, and partner airlines. First, Delta announced that they would be taking a 10% stake in Air France KLM for €375 million. Second, Air France-KLM announced they were buying a 31% stake in Virgin Atlantic for £220 million. And last, China Eastern is buying a 10% stake in Air France-KLM for €375 million. So where could all these changes lead?
The Current Situation and Coming Changes
The new ownership shares are bound to make a difference, since as things stand the following relationships exist:
- Delta has a 49% stake in Virgin Atlantic, but cannot increase its stake due to foreign ownership rules
- Delta has a transatlantic joint venture with Virgin Atlantic
- Delta also has a 3.2% stake in China Eastern
- Delta has a transatlantic joint venture with Air France KLM
- Virgin Atlantic is controlled by Richard Branson/Virgin Group who owns a 51% stake.
After the round of share purchases, things will change dramatically especially for Richard Branson and the Virgin Group, who will lose control of Virgin Atlantic, the second airline they have lost control over in less than a year after the sale of Virgin America to Alaska. The new picture will look something like this:
- Delta and Air France own 49% and 31% of Virgin Atlantic respectively
- Delta and China Eastern own 10% each of Air France-KLM
- Delta still owns 3.2% of China Eastern
- Delta has a transatlantic joint venture with Virgin Atlantic
- Delta has a transatlantic joint venture with Air France-KLM
Where Will This Lead?
Multiple options are now on the horizon. There is the chance that Virgin Atlantic will be pulled into SkyTeam now that 80% of it is owned by two founding SkyTeam members. However, it could be more advantageous for Delta/Air France KLM to leave Virgin Atlantic out of SkyTeam.
The second option open is to combine the Delta/Virgin Atlantic joint venture and the Delta/Air France-KLM joint venture into one big overarching joint venture — which is exactly what Delta is planning to do. Not only that, they are planning on including Alitalia in the joint venture. According to Delta’s CEO, “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.”
Unfortunately, joint ventures, even expanding existing ones, require regulatory approval, since they tend to eliminate competition by aligning pricing strategies and reducing options. Whether Delta would get approval for such a new expanded joint venture remains to be seen.
Overall
Whichever way this situation develops one thing is crystal clear, Delta has put itself in an incredibly powerful position. The airline has reached a dominant position in the transatlantic market. It will be interesting to see how the scenario develops over time, and how consumers react especially if it means higher prices due to reduced competition.
Source: One Mile At A Time
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Sir Richard Branson is a clever person. Selling out at the peak of the market?
He still owns Virgin Galatic though?
Lucky at Onemileatatime doesn’t see Virgin Atlantic being included in Skyteam
I certainly hope that doesn’t happen – we now have Delta with a very strong position in London and American/BA has theirs — what will come of United? Perhaps they’ll cede a major stake in London and continue to leverage the rest of their strong European partner network.
I hope that Virgin Atlantic is kept separate. Delta is one of the least trustworthy airlines in existence.
I had no idea that airlines had financial stakes in other airlines. I guess they can literally partially own their competition. Sounds like an oligopoly to me.
Sorry, didn’t follow: why would it be more advantageous for Delta to keep Virgin *out* of SkyTeam?
Potentially a significant amount of less regulatory issues. I don’t claim to be an airline legal expert, but that is what my gut says.
Howie, any concerns about the ongoing viability of Alitalia?
Are they a viable airline? Pretty sure they’re toast without the Italian government. I’d personally avoid booking anything on their ticket stock down the road, but for an immediate booking I’d be ok with it.
I’d rather a LCC take over Alitalia!
Sky Team is the weakest of the three alliances, but it is more appealing to fly with an airline in an alliance than one outside if you are looking to build status in a frequent flyer program.
Where will this leave the frequent flyer side of things? I’ve got a stack of VS miles … and I avoid Skyteam like the plague!
Not looking good for me 🙁
I think American, Delta, and United are all not trustworthy. I am not able to find premium saver awards to Oceania.
You’re looking for awards arguably the most difficult destination. High demand and low capacity. United is probably going to be your best bet with their partner network or Delta with their partnership with Korean.
not sure what it means for frequent flyer program
Like with all partnerships or alliances there always going to be good and bad spots. I wonder what’s Branson’s final goal selling chunks of his companies is?
Agree, United will be your best bet for availability and associated partners.
I wonder how the European market will look in 5 years.
It will look like the Middle East
We expect these changes to be positive for passengers, with cheaper fares and more comfort.
I don’t see much improvement for my points/miles though
Just looking like a workaround to increase stakes in other airlines to get by foreign ownership rules. From a FF standpoint, less airlines usually means its easier for the remaining ones to devalue their points since there are less upstarts to switch to with newer/better programs.
Sigh. Another anti-competitive merger (in the guise of another name) will lead to market share concentration, reduced competition, higher prices and less value for consumers. The legacy carriers (including the state-owned carriers) are trying to fend off the recent, low-cost market entrants with increased network power and market domination. The Europeans need an American legacy carrier to feed passengers from domestic networks to transatlantic flights and into their European networks. Expect the newer carriers to continue to pick off high volume point to point trans-Atlantic traffic when it is profitable. The legacy carriers will be forced to cut costs and service in response. Expect smaller seats, ever more crowded flights, reduced feeder flights and a hard court press to reduce costs (bad for unionized labor). Of course, the value of Frequent Flyer miles will diminish over time! The only thing that can save these legacy giants is their stranglehold on the gates in the largest airports where flights are volume restricted (Read JFK, LGA, LAX, etc.). Eventually (when the airport operators start to recognize the true value of their limited gate capacity) even that advantage will disappear. The only true, long term winners in this battle will be fuel suppliers (low margin, volume based businesses) and aircraft makers (who have pricing power over all buyers), both of whom will profit from an increase in air traffic brought about by continuing low air fares. Lower fares and worsening service is just an example of the ‘race to the bottom’ caused carriers being unable to effectively differentiate their product from the new entrants. Maybe if the legacy carriers tried to focus on service improvements instead of lowering costs, they might stand a chance. If not, then this Delta/KLM/AF deal looks a lot like Sears buying Kmart in order to compete with Walmart. Didn’t work then, won’t work now.
Ron, excellent points and appreciate your perspective here. I certainly hope we as consumers don’t all lose out but as you’ve laid it out, which seems highly viable, doesn’t paint a pretty picture for us.
Can you already book Virginn Atlantic flights with Flying Blue and SkyMiles miles?
If yes, it is not really a big issue if Virgin Atlantic will not enter in SkyTeam.
Currently, you can with Delta SkyMiles but not with Flying Blue.
Nice article. I don’t see this as being positive long term for consumers. Too many cooperation makes for legal price fixing on routes. Hopefully EU regulators can help dial this down before it is too late.
Might be a good time to get the Virgin Atlantic credit card with the 90k bonus now offered