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Analysis: Delta and Korean Air Have Agreed to a Joint Venture

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Analysis: Delta and Korean Air Have Agreed to a Joint Venture

Analysis: Delta and Korean Air Have Agreed to a Joint Venture
March 30
09:23 2017

MIAMI – Delta Air Lines and Korean Air have officially signed a memorandum of understanding (MoU) to implement a joint venture (JV) agreement on flights across the Pacific, taking the first step in creating “a fully integrated trans-Pacific joint venture arrangement, with both airlines sharing the costs and revenues on flights and coordinating schedules for seamless, convenient connections.”

Delta and Korean Air will also enhance reciprocal frequent flyer program benefits, allowing customers of both airlines the ability to earn miles when flying the other carrier. The launch of the joint venture is subject to regulatory approval by both the US and Korean governments.

All told, the joint venture will encompass a combined network of more than 290 destinations in the Americas (primarily the US and Canada) and 80 in Asia.

Most important Asian destinations such as Tokyo, Taipei, Hong Kong, and Singapore will be covered by the JV, but China (the world’s second-largest air travel market) will not be covered, as China does not have an OpenSkies agreement with the United States (OpenSkies agreements allow for free entry and exit of airlines from both countries without bilateral constraints).

Still, this agreement easily covers 70% of US-Asia air traffic, and that alone creates a massive economic upside in one of the world’s fastest growing long haul sectors.

A joint venture partnership is the final culmination of a more than decade-long process for the two SkyTeam partners to build a joint business that could compete with the Japan-based ones of OneWorld (American – Japan Airlines), and Star Alliance (United – ANA). Delta and Korean Air were granted anti-trust immunity (ATI -which allowed them to hold discussions about capacity and pricing without triggering antitrust review) all the way back in 2002 before Delta even merged with Northwest and inherited its Tokyo hub.

In most cases, ATI is almost immediately followed up with a JV, but in Delta and Korean Air’s case, it took another 15 years.

The JV finally gives SkyTeam a viable trans-Pacific competitor

For years now, SkyTeam and Delta, in particular, have been weaker than they would like in the Trans-Pacific marketplace for lack of a viable joint venture partner, as has Korean Air.

Generally speaking, a JV is valuable in an international market because each country or region’s airline struggles to attract customers whose point of origin is the other country or region. So US airlines will struggle to capture Asian point of sale traffic and vice versa.

An unaligned carrier will also struggle to send its own passengers to secondary and tertiary destinations in the opposing region while retaining that passengers revenue (which is not possible with a code share).

So Delta can’t send passengers from Cleveland to Busan easily while benefiting economically from the entire journey, and Korean can’t do the same for passengers traveling from Osaka to Austin. And so for a long time now, Korean has been at a disadvantage relative to ANA and Japan Airlines, and Delta has been at a disadvantage relative to American and United. So the JV has made logical sense for more than a decade. But the challenge was that a JV would require both carriers to work together and jointly plan capacity and pricing.

Korean Air was more of a growth oriented airline that expanded its trans-Pacific network sharply whereas Delta got caught up in the wave of capacity discipline in the US.

Delta also merged with Northwest during this period, and acquired its own hub at Tokyo, and even made a run at Japan Airlines in 2009. Through this period, Korean Air was hesitant to tie up with Delta for fear of being constrained in its growth.

There were also (mostly unsubstantiated) rumblings that ex-Delta CEO Richard Anderson had a tense and often combative relationship with Korean Air, which prevented the partnership from moving faster.

The death knell for the Tokyo hub, but what does it mean for Seattle?

So moving forward, Delta will have service from Detroit, Seattle-Tacoma, and (starting in June) Atlanta to Seoul, while Korean Air will fly from Seoul to Atlanta, Chicago O’Hare, Dallas-Fort Worth, Honolulu, Houston, Las Vegas, Los Angeles, New York JFK, San Francisco, Toronto, Vancouver, and Washington Dulles.

Delta will also bring its US-Tokyo flights (Atlanta, Detroit, Honolulu, Portland, and Seattle to Narita and Los Angeles and Minneapolis to Haneda) and its other non-China US-Asia nonstop flights (Detroit-Nagoya, Osaka-Honolulu, Nagoya-Honolulu, Fukuoka – Honolulu, and Seattle-Hong Kong).

Delta’s Tokyo hub let, which still has flights to Manila, Singapore, Taipei, Hong Kong, and Bangkok will technically remain a part of the JV for now, but in all likelihood, those five flights will be rapidly axed and have their traffic instead flow across Seoul Incheon.

The Tokyo – Hawaii flying is mainly based on Japan origin and destination (O&D) traffic so it will likely survive, as will the Guam and Saipan flights.

The real interesting question is what happens to the US-Tokyo flights from Delta. New York – Tokyo is already gone, while Los Angeles and Minneapolis are tied to the Haneda slots (which Delta cannot walk away from).

But conceivably without the connections beyond Tokyo, Portland-Tokyo may not be long for this world, and even Atlanta-Tokyo (which is mostly connections) could go away in the long run in favor of more Seoul service.

Detroit has unique and specific O&D to and from Japan thanks to the auto industry so that is probably safe, and Seattle needs a Tokyo link if it is to be a credible Pacific gateway for Delta.

The impact of this deal on Seattle is also an interesting question, while the existing Japan and China flights are probably safe, this throws cold water on the notion of Delta adding nonstop service to secondary Asia destinations like Taipei (probably the best chance), Manila, Bangkok, or Singapore (longshots).

It still leaves open the possibility of secondary destinations in China and/or more service to Seoul, the trajectory of the Seattle hub is undoubtedly changed. The good news is that this may make new nonstop service to Seoul from various US destinations including Salt Lake City and Minneapolis (on Delta metal) or a return to Boston for Korean Air possible.


About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. @TheABVinay

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  1. Ben Stampfl
    Ben Stampfl March 30, 20:19

    Interesting and insightful analysis as always, Vinay. I just wanted to let you know that the statement “Delta’s Tokyo hub let, which still has flights to Manila, Singapore, Taipei, Hong Kong, and Bangkok” is partially incorrect.

    Delta stopped serving Narita-Hong Kong on October 26, 2014. The airline stopped serving Narita-Bangkok on October 30, 2016. Additionally, Delta will stop serving Narita-Taipei on May 24, 2017.

    Thus, after May 24, Delta will only serve two of the five routes you mentioned in that sentence: Narita-Manila and Narita-Singapore.

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