Delta Air Lines buys 49 percent of Virgin Atlantic for $360 million

[jetflier]

Next move is Southwest........

 

[GogglesPisano]

Scope

MEC ALERT

December 11, 2012


Delta and Virgin Atlantic Announce Strategic Alliance
-Delta Intends to Purchase a 49% Stake in Virgin Atlantic-
-Carriers Intend to Form Joint Venture-

Today, Delta Air Lines announced its intent to purchase Singapore Airlines’ 49% stake in Virgin Atlantic, a British airline owned by Sir Richard Branson's Virgin Group (51%) and Singapore Airlines (49%). The Company and Virgin Atlantic also announced their intent to form a joint venture.

Rumors of this announcement first surfaced early last week when Reuters and other new agencies reported that Singapore Airlines was interested in selling its 49% stake in Virgin Atlantic. The reports named Delta as an interested party in acquiring Singapore’s stake. In the weeks and months ahead, we can expect a great deal of speculation to take place with respect to the details of the alliance. Keep in mind, however, that it is very early in this yet-to-be written story, so it is premature to predict what the end-state might eventually look like from a pilot perspective.

What we do know is that our industry is a dynamic one and that Delta is often interested in taking advantage of strategic opportunities. Last week’s news reports stated that Delta “has been looking to acquire a stake in Virgin Atlantic for more than two years in an effort to expand its access to London's Heathrow airport.” Heathrow is a slot restricted airport and Delta has publicly expressed an interest in obtaining additional Heathrow slots in the past. Slots are quite expensive; A few years ago, Continental purchased four pairs of Heathrow slots for around $210 million.

It will be senior management’s job to provide additional information as the story unfolds. This is a very complex situation with a lot of moving parts including not only a commercial agreement, but the involvement of several international carriers as well as European Union (EU) and U.S. government regulatory agencies.

European law does not allow a US carrier to buy more than 49% of an EU carrier. Further, Delta would not “control” a foreign carrier (in the PWA legal sense) if it were to buy up to 49% of Virgin Atlantic. Our PWA defines control as ownership of more than 49% of a foreign carrier. There are other contractual provisions in the control definition as well.

We do not yet fully know what Delta’s business plan might ultimately entail with respect to the proposed alliance. According to the joint corporate press release, the alliance will permit “both carriers to offer a greatly expanded network at Heathrow.” The move could also be a defensive maneuver to preempt a similar move by a Middle Eastern carrier. From a PWA contractual standpoint, Delta is free to make the proposed investment and enter into the joint venture. There are, however, contractual issues that could come into play. The airlines announced that they will also file an application with the U.S. Department of Transportation for antitrust immunity (ATI) accompanied by the joint venture application, which “also will be reviewed by the U.S. Department of Justice and the European Union’s competition regulator and other relevant authorities.” In the last few years, the U.S. Department of Transportation (DOT) has granted ATI only in cases where there has also been a “metal neutral” joint venture in place.

If Delta enters into a joint venture with Virgin Atlantic, it must meet the requirements and restrictions of Section 1.E. (Permitted Arrangements with Foreign Air Carriers). We encourage you to review this section of the contract, but some highlights include:

• 1 E.8. In the event the Company or a Company affiliate enters into or maintains a profit/loss sharing agreement with a foreign air carrier, Company flying between the United States and the home country of such foreign air carrier . . . [will] be no less than the Company’s scheduled block hours between the United States and any such country in the same three months of the twelve-month period prior to the month in which such agreement first became effective.

• 1 E.9. Before any such amended or new profit/loss sharing agreement is finalized, the parties will meet for the purposes of negotiating terms applicable to such amended or new profit/loss sharing agreement.



An important point to remember is that the ATI process typically takes 9 to 12 months to complete, so there's plenty of time for discussions between ALPA and Delta to take place if necessary. In short, if the investment in Virgin Atlantic and the joint venture come to fruition, we will enter into negotiations on the terms of a production balance with Delta that protects the careers and addresses the concerns of the Delta pilots, as well as addresses any other issues that might be raised by this strategic alliance.

We view today’s announcement as an opportunity for Delta but also with a degree of caution. The investment represents a large financial stake in a foreign carrier and is an example of further global consolidation that is taking place in our industry. It could place Delta in an advantageous position vis-à-vis other domestic and foreign carriers. Remember, however, that it is very early in this story, and a lot of things must play out favorably for Delta in order for the Company to execute the commercial transaction and any down line agreements. The MEC’s International Affairs and Alliances Committee will remain fully engaged and carefully monitor progress of the proposed transaction and related issues to ensure protection of the careers of Delta pilots. We will keep you updated as the situation develops.

 

[GogglesPisano]

Let's hope the MEC holds the line.

 

[General Lee]

Let's hope the MEC holds the line.

They did for the new contract concerning AF/KL/AZ. But, the flying limits and MINIMUMS need to be enforced. That is what Dalpa needs to do, keep watching and making sure things are enforced.


Bye Bye---General Lee

 

[livin'thesim]

I'm not all that knowledgeable about legacy pilot contracts.

Would this trigger some sort of language about ownership of other airlines? Couldn't a legacy just keep spending profits on buying up other companies otherwise?

Don't some pilot contracts prohibit the purchase of other airlines without requiring some sort of staple or merger?

Since Virgin is not a US airline, does this change the pilot group's say on the matter?

 

[General Lee]

I'm not all that knowledgeable about legacy pilot contracts.

Would this trigger some sort of language about ownership of other airlines? Couldn't a legacy just keep spending profits on buying up other companies otherwise?

Don't some pilot contracts prohibit the purchase of other airlines without requiring some sort of staple or merger?

Since Virgin is not a US airline, does this change the pilot group's say on the matter?

First of all, EU law doesn't allow a US Airline to have more than 49% of a EU airline. So, it's buying a minority stake. Sir Richard Branson controls the other 51%. DL can buy anything they want according to the DL contract (they have recently put millions of $ into GOL (a Brasilian LCC) and Aero Mexico too). If they want to do a Joint Venture, then that has to be approved by the DL pilot union, it is in the contract. (otherwise, no deal) The airlines in the JV usually have to be limited to a certain % of flying, and that is where it can get tricky. There has to be monitoring and enforcement if one airline is flying a higher percentage. It also all has to be approved by the Gov'ts on both sides of the Atlantic.



Bye Bye---General Lee

 

[livin'thesim]

Contractually, is there much difference between a major buying a regional and buying a stake in any other airline?

Theoretically, if DAL had purchased 100% of Virgin, would the DAL pilot group handle that differently?

 

[texman]

Gen! You now have a subsidiary that can do all your international Flying/Expansion! LMAO! You guys just got whipsawed!

 

[Turtle21]

Is Cabotage hiding in there somewhere?

 

[General Lee]

Gen! You now have a subsidiary that can do all your international Flying/Expansion! LMAO! You guys just got whipsawed!

Incorrect. LHR is slot controlled, and Virgin Atlantic doesn't have any additional slots. Neither does DL, there are no more out there to buy. So, if DL wanted to compete against the AA/BA partnership for the largest business route between US and Europe (JFK-LHR), then this was the only way to do it. Also, Dalpa will have the ability to make sure the Joint Venture has flying for BOTH sides, not one sided. The current JV with AF/KLM/Alitalia was expanded for Delta overall in the last contract. So, you're wrong. (again) Good try.... NEXT...


Bye Bye---General Lee