After days of speculation, Delta Air Lines (DAL - Free Report) confirmed its plans to acquire 49% stake in British carrier Virgin Atlantic that is currently with Singapore Airlines. Delta Air Lines will shell out £224 million or $360 million for the purchase and substantially gain more control over one of the hottest air routes across the globe – New York to London.
Singapore Airlines bought the 49% stake in Virgin Atlantic in 1999 for £600.3 million or $962 million, while the remaining 51% interest is controlled by founder Richard Branson. Following the deal, Virgin Atlantic Airways will continue to use its brand name and operating certificate.
Per the joint venture agreement between Delta Air Lines and Virgin Group, both companies will share the expenses and revenues of the flights. The joint venture will place an antitrust immunity application to the U.S. Department of Transportation to decide on the coordination of schedules and operations.
The two companies aim 31 total daily flights both ways between the U.K. and North America during peak season, along with 23 to and from London's Heathrow airport. This will hugely benefit customers with a broader network of flights, enhanced connectivity and suitable booking options.
The acquisition and consequent implementation of the joint venture is slated to take place toward the end of 2013.
Following the partnership, Delta Air Lines and Virgin Atlantic will gain 36% access to the New York-London travel route, second to the 51% control exercised by British Airways and AMR Corp. United Continental Holdings (UAL - Free Report) comes third with 13% of the market share.
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 Heathrow airport. With the acquisition, the company will not only position itself favorably in the London arena but will also get the elite passengers of Virgin Atlantic.
On the other hand, Singapore Airlines, over the last few quarters, had been toying with the idea to sell Virgin Atlantic that had been largely unprofitable, battered by the effects of high fuel costs and European debt market crisis. For the fiscal year that ended on February, this year, Virgin Atlantic posted revenue of £2.74 billion and incurred pre-tax operating loss of £80.2 million.
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.