MIAMI — Delta Airlines and Virgin Atlantic received antitrust immunity from the US Department of Transportation (DOT) yesterday, thereby enabling the two carriers to implement a joint venture on flights between the UK and North America. A joint venture (JV) allows two carriers will functionally operate as one on a certain segment of routes or between certain regions; in this case between the UK and North America.
They’ll share airplanes, expenses, revenues, and profits in a bid to become more viable against competitors. Though in many respects they will operate these routes as one carrier, both will continue to retain their respective corporate identities, products, and service. While Delta and Virgin’s JV applies to all transatlantic travel on the two carriers, the focus of this arrangement has always been about improving access to the highly coveted and highly lucrative New York-London market, so we’re going to focus on that. Again, the key to understanding is that a JV treats the arrangement as though they might as well be the same airline, which means that as far as DL/VS are concerned, it doesn’t matter which of the two you fly on: if you fly on one you’ve purchased from both.
Delta, presently one of the largest airlines in the world, flies millions of passengers around the world each year, many of which want to go to London. Since taking over Pan Am’s European routes in 1991, Delta is the overall number 1 U.S. airline to Europe. Yet Delta isn’t terribly well represented in the popular NYC-London Heathrow market.
Delta didn’t even serve London Heathrow until March 2008 the Open Skies agreement was enacted, which allowed other airlines beyond American and United into the strained airport. They only fly three roundtrips between the two cities with their airplanes, representing about 10% of the market. You might think that they could’ve simply added more flights to increase their presence, but that’s not how it works at London Heathrow (LHR). Heathrow is slot constrained, which means that airlines have to purchase/swap/trade/barter/kill for landing and takeoff times. Since no one usually willfully gives up slots at one of the most lucrative routes on the planet, Delta was left with a problem: demand for London without the ability to create more supply (known in the biz as ‘capacity’).
Virgin, meanwhile, has had trouble filling airplanes and feeder traffic. Unlike regional competitors such as neighboring British Airways (BA) and Air France, which developed both short haul and long haul service, Virgin has only flown long haul routes until very recently; and only from London (leaving it more vulnerable to seasonal market swings).
This has created a persistent problem with connecting passengers seamlessly into the airplanes. For years Virgin obviously opposed any BA/AA joint-venture, going so far as to plant the words “No Way BA/AA” on the fuselages of their airplanes. But Virgin under the adage “If you can’t beat ’em, join ’em” had to follow suit and find a dance partner. As competition from the likes of the BA/American Airlines joint venture (also antitrust-immune, more on them soon) rose in tandem with fuel costs Virgin has been left struggling. They lost $123 million in the 2012 fiscal year and have only recently begun working more aggressively to stem their mounting losses. Despite its struggles, however, Virgin controls a modest chunk of the New York-London market.
They operate a total of six flights per day (four out of JFK, two out of Newark), representing 15% of the market. Virgin actually launched nearly 30 years ago its first flight – its lone 747-100 operated between LGW-EWR. So let’s recap: Delta has demand for NYC-London, but basically has zero leverage to increase supply. Delta also has the weakest Heathrow operation of the three major US carriers. Virgin has supply, but has been having trouble creating demand. A joint venture, simplified, allows any two carriers to merge operations under a limited and well defined scope. The table below shows carrier-wise market share in the USA – London market.
|Carrier||Frequency Share*||Market Share*|
Thus the two carriers decided to wage a path of joint venture-ship in the hopes that they can both provide something the other needs. Looking externally, however, both carriers are looking to slay the behemoth dragon that has been the AA/BA joint venture.
The partnership between London and New York carried a whopping 55.2% of the market with 104 weekly roundtrips in 2012 (just to compare, DL had 9.7% and VS 22.2% in 2012). The DOT’s decision to grant the DL/VS venture its blessing was due in no small part to wanting to create a viable competitor to AA/BA. Now that the carriers have received the DOT’s blessing, the combined AA/BA and DL/VS joint ventures (all immune from antitrust suits) will account for 77.1% of all NYC-London Heathrow traffic.
The next closest carrier would be United, which would be pulling up the rear with a paltry 11.4% (based on 2012 DOT stats). United does have its advantage, however of being the only U.S. carrier to fly between Newark and London. BA and Virgin do this as well. So what does this all mean for the average consumer? First, the JV allows DL and VS to cooperate on schedule.
They’ve already rolled out plans for what amounts to an evening shuttle service from JFK, running every 30 minutes for several hours before going hourly up through 10:30PM. Second, frequent fliers on both have the ability to ‘earn and burn’ mileage points on either carrier for transatlantic routes as well as take advantage of Delta Sky Club and Virgin Atlantic Clubhouse lounges. The increased flexibility offer more flights and more perks to more people is likely to start chipping away at the AA/BA hegemon over time as the shuttle-like frequency gains in popularity with business travelers.