WOW: Branson Backtracks On Virgin Atlantic Sale To Air France-KLM

Filed Under: Air France/KLM, Delta

This sure is interesting. For the past couple of years it has looked like Air France-KLM would buy a stake in Virgin Atlantic, but that’s apparently no longer happening.

The Virgin Atlantic & Air France-KLM Deal

In 2012 Delta bought a 49% stake in Virgin Atlantic, leading to the two airlines forming a joint venture across the Atlantic. This would be separate from Delta’s transatlantic joint venture with Air France-KLM.

Then in 2017 two more deals were announced at once. It was revealed that:

  • Delta would be buying a 10% stake in Air France-KLM, at a cost of 375 million EUR
  • Air France-KLM would be buying a 31% stake in Virgin Atlantic, at a cost of 220 million GBP

Talk about a fascinating setup. In a way, this deal would mean that Delta would indirectly control more than a 50% stake in Virgin Atlantic, a way to circumvent foreign ownership rules.

This Led To A New Mega-Joint Venture

Air France-KLM investing in Virgin Atlantic may seem random, since the airlines used to have no relationship. They had Delta in common, but that was it — Air France-KLM and Virgin Atlantic had separate joint ventures with Delta.

Over the past year or so we’ve seen this vision played out. Just recently a new mega joint venture was approved between Delta, Air France-KLM, and Virgin Atlantic. With this approved, we’re seeing a new powerhouse transatlantic joint venture, and the investments all started to make sense.

Richard Branson No Longer Wants To Sell His Stake

Apparently Richard Branson has reached a deal to ditch the plan to sell a 31% stake in the airline to Air France-KLM. If the deal went through, his stake in Virgin Atlantic would have been reduced from 51% to 20%.

However, with Branson retaining the 31% stake he was going to sell, he will still own 51% of Virgin Atlantic.

It’s being reported that a final agreement should be reached in the next few weeks — I’m curious how expensive this deal was to call off.

Why Did Branson Change His Mind?

This seems like a pretty big deal to call off, so what’s Branson’s motivation here? Clearly he thinks the airline is moving in the right direction, and sees more long-term value.

When Branson had agreed to the deal he said that the decision came because he felt it was necessary to safeguard the future of the airline in an industry dominated by just a few airline groups.

Clearly his perspective on that has changed. The airline has been making some significant adjustments:

Branson also specifically notes that he plans to campaign to secure enough slots at an expanded Heathrow Airport that Virgin Atlantic can become a second flag carrier.

London Heathrow is expected to get a third runway at some point in the future, and Virgin Atlantic has proposed a really optimistic plan for expansion there, which seems unlikely to actually happen.

Bottom Line

It’s surprising to see Branson call off this deal two years after it was first announced. I wonder how costly it was for him to get out of this deal, and I also wonder if there’s any bad blood. I can’t imagine Delta is too happy about this, given that they love to be the dominant airline in partnerships, and this would have given them even more control of Virgin Atlantic (indirectly).

It also seems optimistic of Branson to see such a bright future for Virgin Atlantic. Historically the airline hasn’t been particularly profitable (at least compared to IAG), though Branson seems to be betting on Virgin Atlantic coming out ahead at an expanded Heathrow…

What do you make of this move?

  1. Bloomberg is reporting that the terms of the agreement to call off the deal include remaining a part of the revenue-sharing JV With AF-KLM and Delta, which seems almost too good to be true for Virgin… I am guessing this will be costing Branson an absolute fortune – perhaps a significant portion of the original deal price, in order to retain his place in the “mega joint venture” and avoid bad blood.

  2. Perhaps Branson saw what Alaska did with with Virgin America, and couldn’t stomach the same fate for Virgin Atlantic.

  3. I imagine it was because under AF/KL/DL control, VS would be effectively shut down minus a few lucrative O/D routes to/from LHR with most slots transferred to AF/KL/DL or sold and they were not on board with Branson’s plan to turn VS into a 2nd UK flag carrier, thus he had to do something to retain enough control to pursue that vision.

  4. The operative language is that “Richard Branson reached a deal” to terminate the planned sale.

    In other words, he ponied up more cash and affirmed that he wants VS to be part of the DL/AF/KL joint venture.

    It’s an ownership thing. He sees what Delta’s management has done in helping turn around VS; they do have multiple seats on the board.

    VS has a future which is why DL has spent a lot of money to fix them up; for a price, Branson was willing to keep VS closer to the vest. I am sure for the right amount of money, DL and AF/KL were happy to have renegotiated the contract to ensure that the benefits of the joint venture accrue to the airlines that worked to get the joint venture approved and would have benefitted to an even greater degree from their equity position.

    AF/KL will still benefit from the joint venture because Branson could not have gained the benefit to VS any other way. Now they will just benefit other than through equity.

  5. With less control from Delta Virgin have much more hope of a large Heathrow expansion.

    It actually makes more sense for both BA and Virgin if Virgin’s expansion is approved. It firmly shuts the door on easyJet who have been planning to open up a Heathrow base if the third runway gets the go ahead. So as much as BA would hate Virgin becoming a much bigger carrier it would play out to their advantage in the end. They’d still be the most dominant carrier but they’d have a competitor on equal terms, not one that would undercut them on price and cripple their European short haul routes.

  6. @Robert you’re SOOOO right. Its not an altruistic streak in Branson who has always been about the $$$. Hope AF/KL & DL take hm to the cleansers. My guess is that they will offer the shares at a discount to his original price.

  7. @Tim Dunn what money has DL spent on VS to ‘fix them up’ ?

    The DL 49% share holding came from SQ. They didn’t put any cash into VS.

    The share sale was conditional on the JV being approved but both VS and AF-KL had break clauses. There was also a clause that AF-KL could still force the sale to them through if they wanted. it’s clear they don’t want to to that.

    However this change appears to have been an amicable one.

    A lot has happened in the last couple of years and it’s clear there has been a reprioritisation at AF-KL on what they want to spend their cash on – fleet renewals etc.

    I don’t see their being any huge cancellation fee here (unlike the (I think) €50m Iberia has to lay Air Europa if that sale falls through). If the JV is successful they will actually make more money in the longer term.

    This is the letter Sir Richard sent to VS staff –

    And whoever mentioned flags – all VS planes have the Union Flag on them.

  8. Yes there is money in this. Honestly, I suspect some emotion, too. VA is the last of the ‘original’ Virgin businesses either alive or that he has a stake in. I suspect there is a bit of attachment here that means the price needs to be mega high to be any sort of attraction at this stage [in his life] for Branson.

  9. skedguy – AF/KLM don’t own any VS shares yet, so how on Earth can they “offer them back at a lower price”?

    As usual, most of the analysis on here is dreadful. There’s little benefit in AF/KLM owning a third of Virgin when all their goals – a strong transatlantic joint venture – are now happening anyway. I’d be willing to wager that they responded very positively to the request to cancel the sale and any break fees are minimal/waived.

  10. No surprises at all, this is the Virgin modus operandi, generate publicity by any means possible so they generate it with the sale and then generate a bit more by calling the sale off.

    Delta didn’t see them coming, the share Delta has was owned by Singapore Airlines for years who just longed to be rid of their difficult acquisition and unloaded it to Delta willingly because SIA found Virgin impossible to work with. Delta are now stuck with that share of Virgin which doesn’t allow them due influence, SIA walked away happy and Branson has his publicity. He wins, Delta loses and AF/KLM are well out of it.

    Remember at all levels the Virgin empire be it the airline, the gyms, Virgin Care, money or phones are built on over promise and under delivery. No one with sense touches the brand.

  11. @ChrisC
    You are kidding yourself if you don’t think that Delta has poured an enormous amount of money into VS, far beyond the ownership stake.
    VS now runs off of DL’s in-house res system, DL maintains many of their planes, DL has spent thousands of hours trying to help VS restructure its network for the benefit of both – but VS has most definitely gained a benefit in the process.
    Some of those things are typical in joint ventures but some are unique to DL and its equity position- and they may or may not have assumed that the full cost would have been offset by increased ownership by DL and AF/KL – or not.

    And I’m still not sure why you or anyone is trying to minimize the partnership that DL and VS have built. Branson may be brazen but he is smart and he knows that DL was the best thing that happened to VS. He isn’t about to walk away from one centimeter of the relationship and welcomes the deeper relationship with AF/KL that will undoubtedly further increase the value of VS. Branson absolutely wants continued DL’s presence on VS’ board. And AF/KL will help VS succeed at regaining some of the eastward focus on its network for the same reason that DL has succeeded in helping VS excel to the west.

    And, most importantly, Branson RENEGOTIATED an agreement w/ DL and AF/KL. There is no charity on either side. Branson paid something of value to retain control and rework what was obviously a valid contract.

    Both sides will do fine. DL will have 49% of VS – which is comparable to AM and much higher than with most other partners.

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