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Reportedly, Delta Air Lines (DAL - Analyst Report) is eyeing the 49% stake in British carrier Virgin Atlantic that is currently with Singapore Airlines. Presently, Singapore Airlines is in talks with interested buyers for the sale of the stake but did not reveal any names. Virgin Atlantic was founded in 1984 by Richard Branson, who controls the remaining 51% interest in the airline.
Singapore Airlines, which bought the 49% stake in Virgin Atlantic in 1999 for £600.3 million or $962 million, has been attempting to sell it off since mid-2011. Currently, Virgin Atlantic –– battered by the effects of high fuel costs and European debt market crisis –– has been largely unprofitable.
On the other hand, over the past two years, Delta Air Lines has been trying to buy a stake in Virgin Atlantic with the aim to expand its wings in London's Heathrow airport. However, none of the previous negotiations matured due to financial and other issues. There is also no guarantee that this recent business talk would show positive results.
Moreover, as per the European Union, all airlines in Europe should be under the control of Europe-based companies. This implies that Delta Air Lines will have to collaborate with a European airline firm to hold a majority control over Virgin Atlantic.
According to sources, Delta Air Lines has approached Air France-KLM to acquire a small portion of Virgin’s interest. With this move, Richard Branson will no longer remain the major shareholder of Virgin Atlantic, although the company will still be under European control.
Delta Air Lines –– the second-biggest U.S. airline by operating revenue following United Continental Holdings (UAL - Analyst Report) –– is eager to boost its trans-Atlantic business services and this Heathrow-Virgin Atlantic combination would provide a lucrative opportunity. Virgin Atlantic –– the next big carrier at Heathrow after International Consolidated Airlines Group’s British Airways –– was awarded all the Heathrow takeoff and landing slots that were given up by British Airways, post the acquisition of a small UK airline company BMI.
Moreover, Delta Air Lines partners Virgin Atlantic in Australia and has tie-ups with Air France-KLM as a part of the Sky Team alliance.
We believe that with the success of this deal, Delta Air Lines will have greater access to one of the most important global gateway –– Heathrow airport. The company will also be able to broaden its sphere of international travel.
Delta Air Lines currently retains a Zacks #3 Rank, implying a short-term Hold rating for a period of one to three months. We also maintain a long-term Neutral recommendation on the stock.
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