Travel

12.03.12

Delta Airlines Seeks to Buy Stake in Richard Branson’s Virgin Atlantic

The next move in airline consolidation may bring together a stodgy American brand with a sexy British one. Will it make the skies more friendly?

When Richard Branson gatecrashed the airline business in 1984, flying one leased 747 between London and New York (no flights on Tuesdays), it seemed like a frivolous act. Yet from that beginning Branson has built Virgin Atlantic into one of the strongest airline brands, with the help of his own piratical character. (Here’s a short history.)

But the international airline business has changed. Only the big guys can survive, and Virgin, which serves 34 destinations, is simply not big enough. (It ranks only eighth in the volume of seats on its most lucrative market, from London to North America.) In a capital-intensive business, Virgin Atlantic has been kept aloft in part by Singapore Airlines, which owns 49 percent of the company.

Meanwhile, the big players are always looking to get bigger. Early in 2011 Delta, and its European partner Air France-KLM, decided to see whether it made sense to buy Singapore’s piece of Virgin, and hired Goldman Sachs to advise them. That bid is now being made.

In fact, the writing was on the wall for Virgin from the moment British Airways was given the green light to make a code-sharing agreement with American Airlines. For passengers, code-sharing agreements are largely invisible—these arrangements are not mergers between airlines. But they do allow airlines to act jointly in selling seats on the same routes. And so, in competitive terms, it meant that on the London to U.S. routes Virgin was competing not just with its most aggressive local rival, BA, but with an American heavyweight.

Delta already has the largest slice of the market between North America and Europe. If you add its partner under the Sky Team alliance, Air France-KLM, which ranks seventh in volume of seats, just above Virgin, they have a dominant position. (Alliances, again, are not mergers but the combining and sharing of routes to build larger networks—the other main alliances are Oneworld and Star.)

But it’s not just the numbers that must appeal to Delta. Virgin has something that just isn’t in the DNA of Delta. In terms of branding, Delta is analog and Virgin is digital. Virgin has an eye tuned to the tastes of a valuable market, the regular high-end pond-crossers in the media, fashion, and tech businesses. This has always reflected Branson’s own brilliance in playing the role of a business insurgent who offers an alternative to the soul-less service of the big carriers—sassy flight attendants and sexy business-class cabins loaded with gizmos and executive lounges to match.

Virgin loyalists, a clubbish bunch, are already quaking at the prospect of Delta having an influence on this niche market.

Virgin loyalists, a clubbish bunch, are already quaking at the prospect of Delta having an influence on this niche market. (They are worried, too, that Branson might sell his controlling interest, although that seems unlikely.) But there is cause for concern for other travelers, too. Take the code sharing between BA and American—when you book a flight between the U.S. and London on either airline’s websites, both airlines’ flights show up in chronological order according to departure times and you have to be careful to check which one you choose. Not only do the fares vary, but BA’s service is infinitely better, particularly in its business and premium economy cabins.

Creating a monster combining Delta (which itself swallowed Northwest), Air France-KLM, and Virgin is bad enough. But apart from BA/American the main competition across the Atlantic is United, which, since its merger with Continental, has had an appalling record of delays, cancelations, and crashed computers at its Newark base. Big just isn’t better. Or, at least, no airline has yet proved it to be so.