SkyTeam/Delta Plans To Reduce Winter Transatlantic Capacity By 15%

Delta Air Lines today announced plans to reduce the transatlantic capacity by 15% during winter. Delta’s President Edward H. Bastian made this announcement during the presentation in Bank of America Merrill Lynch Investor Conference. This is in contrast to the original plans to increase the capacity. Delta itself will reduce the transatlantic capacity by 10–12 % (against the original plan to increase the capacity by 3–4 %). The JV partners will reduce the capacity by 7–9 % (against the original plan to increase it by 7–8 %).

Transatlantic business has been the weakest link during the March quarter and almost entirely contributed to the year-over-year profit decline. Delta is planning to align its revenue, capacity and structure to build a sustainable business model at $3+ per gallon jet fuel. Delta anticipates the jet fuel price to be $3.20 for the June quarter and $3.10 for the September quarter. Because of the additional expenses due to fuel, Delta plans to keep other costs flat by reducing capacity, retiring more aircraft.

Memphis hub reduced: Delta already indicated that it would reduce the departures from Memphis by 25%. Even though Delta claims that the reduction in departures will not significantly reduce the ASM, I do not believe it. Would Memphis be next Cincinnati? Would it cut the daily Memphis – Amsterdam service? It is possible.

New York and Atlanta will have minimal impacts: New York JFK and Atlanta would retain most of its routes as JFK has the best O&D traffic and ATL is the world’s largest connecting airport. But expect frequencies to be trimmed on many sectors, especially from ATL.

Jet Airways talking to Delta, Air France and KLM – A gain for SkyTeam?

Jet Airways is reportedly in talks with Delta Air Lines, Air France, KLM and Alitalia to form a transatlantic joint venture with SkyTeam. As India’s largest and most respected airline, currently Jet does not belong to any of the major alliances. It has code sharing pacts with many airlines from different alliances.

Jet Airways Boeing 777 - Courtesy: Jet Airways

Jet Airways Boeing 777 - Courtesy: Jet Airways

Why considering a Joint Venture with SkyTeam now?

Ideally, Jet would like to join Star Alliance. It has strong relationship with Star through its code share pacts with Brussels Airlines, United, US Airways, Air Canada, and ANA. Majority of Jet’s European traffic is routed through Brussels Airlines. Jet uses Brussels Airport as a transfer point for connecting passengers between India and North America. It also has strong ties with Oneworld carriers through code share pacts with American Airlines and Qantas. Jet has no code share partner from SkyTeam, except with Alitalia through its recently launched Delhi – Milan Malpensa route.

SkyTeam Partners - Courtesy: SkyTeam

SkyTeam Partners - Courtesy: SkyTeam

So, why Jet would consider the option of joining SkyTeam or a JV? With Air India joining Star and Kingfisher Airlines joining Oneworld, Jet is running out of options. It has been reported that the Indian government was against Jet joining Star as it might dislodge Air India as a second tier partner. SkyTeam does not have any major airline from India in its kitty. So, the deal could be mutually attractive.

Is it good for Jet?

Jet Airways has built a nice little operation at Brussels Airport. It is an efficient operation with all flights arriving and departing within the same short window of time. This makes transfers easy. Brussels Airport, being small compared to other European hubs and a one-terminal facility, also helps (but, I have heard few complaints about passport control and security scrambling to handle high passenger volumes in short window of time). Code share partner Brussels Airlines (now part of the Lufthansa group) provides decent connections throughout Western Europe and Africa. Jet Airways can keep the revenue from lucrative North American traffic to itself as the later does not have flights across the Atlantic.

Joining an alliance with SkyTeam would involve Jet transferring its hub from Brussels to Amsterdam’s Schiphol airport, where KLM operates a mega hub. KLM offers much better connections throughout Europe, Africa and North America than Brussels Airlines. Delta Air Lines also has significant operations at Schiphol. This greatly expands Jet’s ability to offer connections. If Jet starts a flight to Atlanta, it would virtually put the entire North America under its map through Delta’s network.

But, the downside is that Schiphol has a much better transatlantic connectivity and competition than Brussels and how much control would Jet get on the transatlantic routes from there. Media reports suggest that SkyTeam is willing to allow Jet to takeover only one route from Amsterdam. Currently Jet Airways operates its own metal on Chennai – New York JFK, Mumbai – Newark, and Delhi – Toronto sectors, all routed through Brussels. It has plans to add more North American destinations in future. If Jet has to shift the hub to Amsterdam, would it be able to offer these routes? KLM serves to Delhi and Delta servers to Mumbai currently. From Schiphol, KLM and Delta pretty much cover the entire North and South American continents. Under these circumstances, what could Jet offer using its own metal? How the revenue would be shared? What would happen to Jet’s existing code share agreement with American Airlines? All these questions need to be answered.

A win for SkyTeam and a loss for Star Alliance

If this happens, it would be a major win for SkyTeam.  It was scrambling to find a partner in India. It could not ask for a better one than Jet Airways. Jet connects the length and breadth of India. SkyTeam instantly gains access to the second fastest growing economy in the world.

It would be a major loss for the Star Alliance. Star would be better served with the inclusion of Jet than the current proposed partner in Air India. The government owned Air India is in survival mode and it’s joining the alliance has been delayed due to several operational reasons. Air India is also financially bleeding, with massive debt and labor issues and it is steadily losing market share in both domestic and international routes. I don’t know why Star, especially Lufthansa, preferred Air India over Jet. One reason could be that, Lufthansa has a major presence in India and did not want a stronger carrier that could compete with it.

Virgin Atlantic at the Crossroads: Good Opportunity for Delta and the SkyTeam?

Virgin Atlantic Airways is in a peculiar situation. The airline, promoted by Sir Richard Branson, does not belong to one of the three major alliances (Star, OneWorld, Sky Team). The airline’s viability is now threatened by the industry consolidation, the Open Skies agreement between the European Union and the United States and Anti Trust Immunity (ATI) granted to the airline alliances for the transatlantic services. The ATI for OneWorld partners British Airways, Iberia and American Airlines especially threatens Virgin’s long term ability to compete in the important UK-US aviation market.

Virgin Atlantic A340-600: Courtesy - Virgin Atlantic Airways

Virgin Atlantic A340-600: Courtesy - Virgin Atlantic Airways

Virgin Atlantic has been a long time opponent of any alliance between AA and BA (no wonder its tagline was “No Way BA/AA”). Rumors have been that Virgin is finally evaluating its options and the SkyTeam is trying to come up with a bid to acquire Virgin.

Virgin Atlantic’s strengths

Virgin Atlantic’s important strength is its slots at London’s Heathrow Airport (LHR).  LHR is the biggest international airport in the world and London is the most important transatlantic business market along with New York. Virgin is an important player in that market.

Virgin Atlantic has an excellent product which is consistently ranked as one of the best in the world, well above that of the mainline European and North American airlines. Only carriers like Singapore Airlines and Emirates can challenge Virgin’s product. Virgin’s lounges and airport clubs have been top notch and it has a stellar brand loyalty.

Virgin through its subsidiaries Virgin Blue and V Australia, has a decent footprint in Australia.

Virgin Atlantic’s weaknesses

Virgin’s route network is mostly long haul, point-to-point. Passenger traffic is mostly to O&D. It was setup that way by the management. In this world of alliances and frequent flyer loyalties, it is difficult for Virgin to develop new markets.

Virgin has no flights within the UK except at London (LHR and Gatwick), Manchester and Glasgow. Virgin has no flights to the rest of the Europe as well. This makes Virgin a niche player, making it difficult to expand its market share.

Virgin’s fleet primarily consists of B747s and A340s. Most competitors utilize more efficient B777s and A330s (which are slowly showing up in Virgin’s fleet now). This means Virgin’s operating cost will be higher than its competitors.

Sir Richard has his footprint all over the airline. Even though this is a good thing in general, the industry may view it the other way. He might not be open for outright acquisition and liquidation of Virgin brand.

Opportunity for Delta and SkyTeam

Rumors are on the rounds that Delta, along with its SkyTeam partners Air France-KLM, is preparing a bid to acquire Virgin. This is a great opportunity for Delta and SkyTeam. They can acquire the 49% stake currently held by Singapore Airlines. There are immediate benefits.

Delta and SkyTeam resolve their biggest missing link – a strong foothold in London and UK in general.

Delta gains the new additional slots at LHR. This greatly enhances its ability to serve the busiest transatlantic market: London – New York. Combining Delta’s and Virgin’s flights would give the BA/AA combo a better competition (still BA/AA would be the strongest player in this market for the foreseeable future). It will move Delta to the second place in this market ahead of Continental. Delta will have flights to the top five US-UK air travel markets: New York, Chicago, Los Angeles, Washington, San Francisco. Except New York, Delta does not operate in any of these markets. Combine this with Delta’s growing London – Boston and London – Miami routes, and its dominance at Atlanta and Detroit, the SkyTeam becomes the second biggest players in the US-UK market ahead of Star.

Delta gains a mini hub at San Francisco, thanks to the growing Virgin America operations.

Delta’s fledgling transpacific operation could get a boost from a partnership with V Australia and Virgin Blue.

Upside for Virgin too

Virgin Atlantic has some upsides as well.

It can retain the Virgin brand and its unique product.

Joining the SkyTeam means, it has better chances to gain the connecting traffic in US. Virgin can start services to Atlanta and Detroit using its own metal, paving the way for its UK passengers to connect through these fortress hubs operated by Delta.

Better Pan European connectivity through  Air France and KLM.