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 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?
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