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Published on : Wednesday, December 23, 2015
By typical industry measures, Delta is the world’s third-largest airline. Yet, as an airline heavily invested in other airlines, Delta is arguably the world’s biggest player by a large margin. No other single airline has such power to shape the industry and spur further consolidation across the globe.
In perhaps the best-known example of how this works, Delta owns 49 percent of Virgin Atlantic Airways. Next year the carrier will assume the same share (PDF) of Grupo Aeromexico; Delta anticipates greater air access to the Mexican market and a joint venture with the Mexican flag carrier, modeled after those it already operates across the Atlantic with Air-France-KLM and Virgin.
Smaller pacts, too, highlight Delta’s unusually vast influence. The month of July, for example, was quite busy. A $450 million deal for 3.6 percent of China Eastern Airlines became Delta’s biggest foreign acquisition yet. The same month saw Delta increase its small stake in Gol Linhas Aereas Inteligentes, one of Brazil’s biggest carriers, to about 10 percent. What would have been Delta’s third deal for the month, an investment in bankrupt Japanese airline Skymark, came undone after creditors supported a rival offer.
Unlike other airlines that invest in foreign carriers, Delta executives are unabashedly hands-on. Even when the company holds only a minority stake, they behave vigorously as board members and show eagerness to hire locally and in Atlanta to help manage Delta’s investment. In 2016, for instance, Virgin Atlantic will operate its reservation systems and other data atop Delta’s technology platform. Delta’s maintenance operation likewise handles the work on Gol’s jet engines.
“We are in the boardroom,” Richard Anderson, Delta chief executive officer, said last week of his airline’s minority investments at the airline’s annual Investor Day. “And instead of them hiring consultants that—candidly—are not going to be able to help them fix their businesses, they get our executive team.” He described the relationship between his company and Virgin, Aeromexico, and Gol as one in which his team can “really run that business the way we run Delta.”
These investments are strategic, with Asia, Brazil, Mexico, and the U.K. framing Delta’s search for future revenue opportunities. Corporate travel to London helped make the British market Delta’s best for international revenue in 2014, slightly ahead of China.
Stakes in foreign carriers also allow Delta, like any portfolio manager, to diversify its financial exposure to any region or currency, minimizing financial risk. Delta is working on further such investments, Anderson said, declining to reveal any details.
According to a recent post in Bloomberg, in all these deals, Delta gained at least a minimal presence in the boardroom to argue its vision of how the carrier should operate. At Virgin Atlantic, one end of the spectrum, Delta holds three board seats. In the case of Shanghai-based China Eastern, Delta holds an “observer” seat.
Delta predicts that travel between the U.S. and Mexico will surge in coming years, fueled by trade and a new Open Skies agreement allowing greater air service between the nations. That’s why Delta will spend $815 million for nearly half of Aeromexico, gaining a seat on its board. Delta will add some of its own employees in Mexico and hire some Mexican nationals to work in Atlanta, Delta President Ed Bastian said. The Mexican flag carrier “has a substantial domestic marketplace that we’ll also be able to get into it and help them improve—Virgin doesn’t have that,” Bastian said. “So that’s going to be an added opportunity.”
The investments in Brazil and China are longer-term financial bets, which Anderson sees as likely to pay off over the next 10 years to 20 years. China “will be the fastest growing international market in the world, by a good measure,” Bastian said.
Delta was in many ways the architect of the massive consolidation that swept the U.S. airline industry after bankruptcy court preoccupied so many. That process has led to soaring profits as the remaining Big Four carriers closely match seat capacity with customer demand. Delta’s many investments abroad help to further its goal of closer coordination among airlines, given the fact that numerous countries forbid outright foreign ownership of airlines. The company can’t fully own a French or British or Chinese airline, but it can definitely make money in those places.
Consider Delta’s $360 million stake in Virgin Atlantic, which it obtained in 2012 from Singapore Airlines. Bastian describes the deal as a resounding success that earns “a minimum 50 percent return on investment.” The two airlines operate a trans-Atlantic joint venture, and one of Delta’s first directives was for Virgin Atlantic to scrap money-losing routes to India and Asia while bulking up its more profitable service to North America. Virgin Atlantic did so and returned to profitability in 2015, aided by a new, more fuel-efficient fleet.
“We make decisions together,” said Chris Rossi, Virgin Atlantic’s senior vice president for North America, “and feel we’ve made the right decisions so far.”