Delta builds a global alliance with Air France

Delta Air Lines Inc., China Eastern Airlines Corp. and Air France-KLM Group are reaching for their checkbooks to forge a deeper global alliance.

The U.S. and Chinese carriers will each buy a 10 percent holding in Europe’s biggest airline. At the same time, Air France-KLM will take a 31 percent stake in the U.K.’s Virgin Atlantic Airways Ltd., in which Delta is a major investor.

The interlocking ties will provide the closest bonds yet between major airlines from different continents in an industry where scope for outright mergers is limited by state-imposed ownership caps. At the same time, an expanded 15-year trans-Atlantic joint-venture should allow the U.S. and European carriers plus Italy’s Alitalia SpA to coordinate timetables and fares on some routes while combining frequent-flyer programs and co-locating airport facilities.

“With Delta and Virgin we are reinforcing our trans-Atlantic alliance, making us the No. 1 alliance between Europe and the U.S. in terms of traffic,” Air France-KLM Chief Executive Officer Jean-Marc Janaillac said in a statement after European markets closed Thursday. “With China Eastern, we are consolidating our position in a high-growth market.”

Air France-KLM rose as much as 4.2 percent at the open Friday before trading 2.6 percent higher at 12.41 euros as of 8:29 a.m. in Paris after the company reported a 56 percent jump in second-quarter operating profit. Delta closed 2.1 percent lower in New York Thursday, while Virgin Atlantic isn’t listed.

Capital Increase

The U.S. and Chinese holdings in Air France-KLM will be acquired via a capital increase totaling 751 million euros, while the Paris-based group will buy the Virgin Atlantic holding for about 220 million pounds ($287 million), the four companies said.

Air France-KLM Chief Financial Officer Frederic Gagey said in a phone briefing that the Delta investment is “highly comfortable and securing” from a strategic point of view in cementing the alliance and that his company doesn’t need the cash injection for financial reasons.

Delta, Air France-KLM, Virgin and Alitalia will forge a single commercial venture out of two existing partnerships, while Air France-KLM and China Eastern will expand their own tie-up. Delta owns 3.2 percent of China Eastern and 49 percent of Virgin Atlantic, where billionaire founder Richard Branson’s stake will be cut to 20 percent following the Air France deal.

Under current arrangements, Air France-KLM, Delta and Alitalia have one joint venture and Delta and Virgin Atlantic are tied together via another. The new structure will provide some certainty following the Italian company’s recent bankruptcy filing, Air France’s Gagey said.

Branson, 67, said in a letter posted on the Virgin Atlantic website that cooperation with Air France-KLM will help provide feeder traffic from mainland Europe together with onward routes there.

‘Building Blocks’

“As I get a little older, I want to be certain that all the necessary building blocks are in place for Virgin Atlantic to continue to prosper and grow for the next 50 years,” he said.

Delta will take a seat on the board of Air France-KLM, Europe’s biggest airline by passenger traffic, which will see the French government’s holding diluted from the current 18 percent. The U.S. giant also plans to pursue a joint venture with China Eastern on trans-Pacific routes, should a U.S.-China open skies accord be negotiated.

Delta is in the process of acquiring a 49 percent stake in Grupo Aeromexico SAB, building on a smaller holding, and said the Mexican operator is a candidate for inclusion in the expanded trans-Atlantic alliance. Aeromexico declined to comment. Delta also has a 9.5 percent holding in Brazilian carrier Gol Linhas Aereas Inteligentes SA.

‘More Influence’

The new arrangements should be concluded next year, assuming they clear antitrust hurdles, allowing them to be implemented from 2019 at the latest.

The tighter-knit alliance strengthens Delta’s globe-straddling partnerships amid new concern over airline pricing power in the U.S. With the deal, it will be able to offer customers access to European capitals on traditional carriers as well as a hipper company in Virgin Atlantic, said Peter van der Lende, a former director of global alliances at Delta. Previously, the U.S. airline also needed separate sales staff for each of its trans-Atlantic ventures.

“Delta will demand and will have more influence over Air France and KLM,” said van der Lende, who also used to work at KLM. “That is what Delta wants. They don’t want to have marketing alliances and hope for the best.”

Air France-KLM’s quarterly earnings rose to 496 million euros as unit revenue, a measure of fares, advanced 4.4 percent at constant currencies in first and business class, with gains strongest on routes to Asia and Latin America.

With four-month long-haul bookings currently higher than a year ago, prices should be “slightly up” in the second half, the carrier said. It’s also targeting positive free cash flow and a further reduction in net debt.

Report courtesy Bloomberg