Airlines hedge against Brexit uncertainty
► Global airline heavyweight pact to act as future shield from Brexit aftermath, budget rivalry
A transatlantic alliance between three global airlines will shore up their positions in the lucrative UK- US market, shielding them from low- cost rivals and the uncertainties of the UK’s exit from the EU.
Delta Air Lines, Air France- KLM and Virgin Atlantic have announced plans for a 15- year partnership on routes between Europe and the US as well as equity deals which will see them take stakes in each other.
The joint venture will see the three carriers share their profits on transatlantic routes.
It will give Air France- KLM greater access to the UK- US market – a market among the most profitable – while the Franco- Dutch group’s short- haul European flights could bring more customers to Virgin’s US- bound flights from London.
The ability to offer customers a host of extra flights could give US carrier Delta an edge against domestic rivals, including American Airlines and United Airlines.
The new alliance also provides each partner with an upper hand in the business travelers market ahead of Brexit, should the UK’s EU departure lead to a consequent drop in air traffic from London.
Global banks have already said they could move thousands of jobs out of the UK to prepare for Brexit, while two major EU regulators are seeking new homes.
“This is a play on Delta’s part to protect itself as Brexit unwinds, should London lose traffic,” said Atmosphere Research Group analyst Henry Harteveldt.
The partnership, expected to come into effect in 2018, will also strengthen the three big players’ positions at a time when low- cost entrants Norwegian Air Shuttle and Wow Air are shaking up the US- Europe market – though their share of flights remains small at present.
It will also allow for better use of the three airlines’ London Heathrow slots, analysts said, allowing them to free up extra short- haul capacity and instead move it to long- haul routes.
‘ Skin in the game’
The partnership, which is subject to regulatory approval, will combine two existing and overlapping transatlantic joint ventures supported by equity deals worth $ 1 billion.
Willie Walsh, CEO of rival airline group IAG, said Air France- KLM’s investment in Virgin Atlantic – of which it plans to take a 31 percent stake – could give it a bigger say in how the UK’s aviation landscape will look post- Brexit.
“It probably represents a positive in terms of Air France’s position in what the rules should be after Brexit... they have skin in the game,” he told analysts.
Most of the transatlantic market is controlled by joint ventures between global airline heavyweights. The new alliance will hold about a 27 percent share of the total transatlantic flights in comparison to the 24 and 22 percent shares for the other two rival groupings. Walsh declined to comment on what the impact could be on IAG’s own transatlantic partnership with American Airlines. He did say, however, that he will remain positive on the future of the transatlantic market, despite the recent increased competition. It is not known which ownership rules will apply after Brexit and whether the UK will remain part of the single European aviation market or the EUUS Open Skies pact. As such, analysts expect carriers to look for creative solutions.
Air France- KLM said that it had agreed on an insurance plan for ownership of Virgin Atlantic, which would see Virgin Group, whose stake is due to drop to 20 percent, regain a majority share should the carrier need to be fully UK- owned after Brexit.
“In terms of influence in the important Heathrow and North Atlantic market, this ticks all the boxes, and with Richard Branson [ founder of Virgin Group] moving to a minority position, it will potentially allow a realignment of usage of Virgin’s Heathrow slot portfolio,” consultant John Strickland said.