Virgin Atlantic no longer wants Air France-KLM

While Air France was supposed to take a 31% stake in Virgin Atlantic in the coming months in a three-way game involving Delta Airlines and China Easter, Richard Branson has just announced that he is no longer selling.

Why such a turnaround? What are the impacts for Air France-KLM?

In this article:

The story of a three-way marriage between Virgin, Delta and Air France-KLM
Branson wants to remain a majority shareholder and says no to Air France-KLM
The reasons for a withdrawal
A good news for Air France-KLM
A breakup with the Brexit in mind
Reasons for Delta and China Eastern to be unhappy
Air France-KLM remains in control

The story of a three-way marriage between Virgin, Delta and Air France-KLM

The original announcement actually dates back to 2017.

At this time Delta already owns 49% of Virgin Atlantic since 2012 and can not legally increase its presence in the capital of a European airline.

Delta is also involved in two transatlantic joint ventures. The first with Air France-KLM and Alitalia, the second with Virgin Atlantic.

The 2017 announcement therefore stated that:

Air France-KLM buys 31% of Virgin Atlantic
Delta will take a 10% stake in Air France-KLM through a capital increase.
China Eastern will take a 10% stake in Air France-KLM as part of the same capital increase.

The acquisition of shares by Delta and China Eastern, both partners of Air France-KLM in Skyteam, allowed the Franco-Dutch group to reduce its debt (according to its own statements), but above all to finance the acquisition of a stake in Virgin, allowing Delta to indirectly take control.

From an operational point of view, the two joint ventures should merge, with codeshare agreements in place between Air France-KLM and Virgin Atlantic (for Delta this is already done) and Virgin possibly joining SkyTeam without this being a major point of the dossier.

To date Delta and China Eastern have taken a stake in Air France-KLM, the codeshares set up, the competition authorities have approved the dealA few weeks ago, these same authorities approved the merger of the joint ventures to create a joint venture that would “own” 25% of the traffic between Europe and the United States.

So far so good.

Branson wants to remain a majority shareholder and says no to Air France-KLM

Last week, Richard Branson, the CEO of Virgin Atlantic revealed on his blog a letter to its employees in which he announces that he no longer wishes to sell 31% of Virgin Atlantic to Air France-KLM (in the deal he lost the majority of the capital but kept the presidency and Virgin Atlantic remained a British airline) and therefore wanted to remain the majority with his 51%.

On the other hand, this does not in any way put off the commercial dimension of the deal: joint-venture, codeshare and revenue sharing are still and will remain on the agenda.

An agreement is being negotiated with Air France-KLM which should lead to something concrete in the coming weeks.

The reasons for a withdrawal

The “small” Virgin Atlantic has faced fierce local competition since its birth in the shadow of the big British Airways. It had to fight for its survival, fight the merger between British Airways and American Airlines and find partners to ensure both its survival and its independence. That’s the whole point of the 2012 deal with Delta that gave it a partnership with a major airline while still leaving it in control.

The deal with Air France-KLM was part of the same logic, but perhaps the context of uncertainty that prevailed at the time convinced Branson to give up ownership of the airline. The weight of Delta surely counted on the tone of “let’s go further together and if we can’t do it directly then let’s do it indirectly.

And then things changed:

Virgin Atlantic has received its first A350-1000s, which are much more efficient than its current fleet.
Virgin Atlantic has acquired Flybe which will fly again under the name Virgin Connect.
With the planned expansion of Heathrow, Virgin Atlantic expects to gain access to a significant number of slots that will promote its development from the largest British airport.
And finally….no we will talk about this point later.

All these arguments made Branson say that as long as the commercial partnerships were in the process of being established, he did not need to give up the capital of his company.

A good news for Air France-KLM

Believe it or not, sometimes it feels good to be dumped a few days before a wedding! Because at TravelGuys and even if Air France-KLM has not yet commented on the situation (even if it has of course been discussed internally) we think it is good news.

As we said about Air France’s strategy and the programmed attrition of its medium-haul network, Air France-KLM absolutely needs cash and therefore to improve its profitability.

If this deal did not go through, 258 million euros would remain in the airline’s coffers and could be used to purchase aircraft or accelerate the necessary rejuvenation of aging cabins.

And insofar as the codeshare agreements are not called into question and the joint venture has been cleared by the antitrust authorities what is the need to invest in Virgin Atlantic? None. As we said, we might as well invest in the fleet, in the product or position on a takeover that would make more sense, like Alitalia (although this is not a good idea) or Air Europa (if the takeover by IAG was not done for competition reasons).

A breakup with the Brexit in mind

And this is the point I mentioned above: we must not forget the uncertainty of the Brexit that hangs over our heads and therefore the consequences are still uncertain.

Has Branson told himself that in the event of a hard Brexit the benefits would be less for Virgin Atlantic? Maybe.

In the end, isn’t Air France-KLM unhappy about not joining an airline that would have retained its British nationality, with all that that would imply in the event of a no-deal Brexit? This is much more certain, especially since a “Brexit” clause allowed the Franco-Dutch group to leave Virgin in the event of a hard Brexit.

Reasons for Delta and China Eastern to be unhappy

However, it is not certain that Delta Airlines and China Eastern see things in the same way. In accordance with their engagements, the two airlines have participated in the Air France-KLM capital increase

So of course the two Skyteam airlines were certainly very happy to help their European ally to get out of debt.

But it is safe to assume that they also did it to secure the takeover of Virgin Atlantic and not to help Air France-KLM renew its fleet and cabins.

Moreover, we know that Delta likes to be dominant in its partnerships, as can be seen in the Alitalia case, in its criticism of Skyteam, and even in its acquisition of a stake in LATAM. It is not certain that having invested in Air France-KLM with the aim of indirectly controlling Virgin Atlantic and seeing the plan fail will make Ed Bastian, the CEO of the American airline, smile.

Air France-KLM remains in control

However, Air France-KLM remains in control. If an agreement is being negotiated to cancel the previous agreement, if the airlines could not find common ground Air France-KLM is therefore fully entitled to buy 31% of Virgin Atlantic and Branson obliged to sell.

In the meantime, some people are wondering how much Branson will have to pay for this resignation. If, as we mentioned above, everyone thinks they will come out of this “no deal” as a winner, there is a good chance that it will not be too high.

Air France says it is aware of this

Interviewed by TravelGuys on Wednesday morning, December 4, Air France says it is “currently discussing an agreement that Air France-KLM will not take a stake in Virgin Atlantic, without impacting Air France-KLM’s position in the commercial joint venture between Delta Air Lines, Virgin Atlantic and Air France-KLM”, implying that the French-Dutch company was involved in the decision. Duly noted.

Photo : B747 Virgin Atlantic by EQRoy via Shutterstock