Delta Ponders Acquisition of 49 Percent Stake in Virgin Atlantic

on Dec 3, 2012

Delta Air Lines (NYSE:DAL), the Atlanta-based US carrier, is in talks to buy Singapore Airlines’ (SGX:C6L) stake in Virgin Atlantic according to sources familiar with the matter.

The second-largest US airline by operating revenue is eyeing the landing rights at London’s Heathrow airport, which belong to Virgin Atlantic. This would be a second acquisition attempt by Delta following last year’s talks which backslid due to the asking price.
The Financial Times reported Delta is looking to buy the entire 49 percent stake in Virgin with the company encouraged by a more certain economic outlook and the British carrier’s slots at Heathrow. If the acquisition goes through analysts expect that Air France-KLM, Delta’s partner, will try to buy part of Sir Richard Branson’s 51 percent share, which would allow Delta, a Non-European Union carrier, to control a majority stake in the British airline.

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According to the FT, Sir Branson has been looking to sell down his stake in Virgin since 2010 when he hired Deutsche Bank to look for possible buyers. Virgin’s business has been battered by higher fuel prices and the Eurozone’s crisis – the carrier has not been profitable since at least mid-2011. In its last full year it posted a loss of about £80 million.

“If Virgin is valued on an earnings basis, then it’s hard to see SIA getting a good price. On the other hand, SIA is not desperate for cash and they probably won’t sell it at a fire sale price,” opined Andrew Orchard, a regional airlines analyst at CIMB Research.
!m[The US Carrier Eyes Heathrow Expansion](/uploads/story/945/thumbs/pic1_inline.png)Singapore Airlines (SIA) bought its 49 percent stake in Virgin for about £600 million in 1999 but has been willing to sell its share for two years now for the sum of around $500 to $600 million (£312-£374 million). “When SIA bought Virgin, they expected to be given some approval to fly transatlantic routes out of London, but that was not given,” opined Mr Orchard.

Virgin Atlantic doesn’t belong to an airline alliance – a shortcoming addressed by Sir Branson, who on a recent trip to India said it is essential for the company to become “part of a bigger alliance in the next few months”. Virgin’s key North Atlantic service has been squeezed by American Airlines and British Airways, which formed a joint venture on the US-London route, allowing them to coordinate flights and fares.

Virgin Atlantic was outbid by the International Airlines Group on an acquisition of British Midland International, a small UK carrier. This gave BA and Iberia airlines more than 50 percent of the takeoff and landing slots at Heathrow.
Robert W. Mann, an airline analyst, described the probable purchase by Delta of Singapore Airlines’ 49 percent stake in Virgin as an “exit strategy [for Virgin] in an environment where they are being marginalized by alliances on the Atlantic,”
“We review our investments regularly, but no decision has been made about a divestment of our shareholding in Virgin Atlantic.” said a spokesman for Singapore Airlines. Virgin Atlantic declined to comment on the matter.


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