rucksack

You're making quite a few blanket statements without substantiating any of them.

I'd argue that Delta's investment in VS is a very good strategy. Delta was weak in the US-UK market, and it made more sense for them to "buy" the capability and pool risk than to "build" and risk a ton of capital expanding capacity.

Your statement that Delta needs to be focused on improving their own airline before they go investing in others also confounds me. First, Delta is one of the top U.S. airlines by nearly any quality metric (on-time, satisfaction, cancellations, awards/rankings). Second, partnering with VS frees Delta to focus on improvements in the domestic market rather than expanding their capabilities in a foreign market, which would be both expensive and time-consuming.

readywhenyouare

If you are going to criticize me then you should at least respond to ALL of my post. Don't pick and choose just to try and bolster your point of view.

What happens when DL is cash strapped and no one wants to buy their 49% stake in VS? There was nothing stopping a joint venture between DL/VS much the same as DL/AF have a joint venture. What was the point of buying half the airline? There was zero reason to purchase ASA and Comair and it came back to bite DL in the rear.

Sez_Who

People are responding to YOUR comments. If that makes it personal to you, so be it.

It is one thing to question an airline’s strategy, it is another when you seem to feel that you know more than their mgmt teams who deal with strategy on a daily basis. Instead of dumping on DL, look at the industry. Yes, some of them make mistakes at times but their decisions are based on far more data than you or I or anyone else will ever have.

DL’s bktcy is a red herring that has nothing to do with this thread. I know you like to point out DL’s faults but that was a different time. And I say again, it was a different time for the industry, not simply one airline.

readywhenyouare

No, you implied that I am uneducated and told me to take a business class. You seem to think that every business professional would support the decision to purchase VS. That is just simply incorrect. I would wager that I know a great deal more about airline history than you do and that is exactly what I'm basing my opinion on. Pan Am owned lots of outside business and it most certainly contributed to their demise. We don't live in a perfect world and it's a big risk that DL could lose their shirt on this investment. I think a joint venture would have been perfectly adequate.

rucksack

Let me be clear: I wasn't criticizing you, I was criticizing your argument, which to paraphrase in my own words, was:

"Delta made investments in two other airlines in the past, which turned out to be poor decisions. Therefore, all investments in other airlines are bad and Delta would be better off investing their money internally."

Do you see the problems with that argument? First, you're assuming that all investment opportunities are the same, which obviously isn't true. Second, you're assuming it's always better for Delta to reinvest in themselves to build a capability rather than invest in others to buy the capability.

To break down your arguments a bit more granularly:

Nice thesis, but where's the evidence?

You're implicitly arguing that all investment opportunities are the same.

By introducing VS into your argument, you're now implicitly comparing a complete acquisition of a regional carrier with a joint venture with an international airline. I think it's fair to say these are two fundamentally different investments.

First you're implying that Delta needs improvement (which compared to its peers I would disagree, but of course any company can always improve), and then you're arguing that it's better for Delta to reinvest in themselves to build/expand capabilities rather than invest in others to acquire capabilities. This might be true, but I don't think you can make a blanket build vs. buy recommendation without reviewing the particulars.

What are the specific reasons Delta's JV with Virgin Atlantic is like their investment in Conair or ASA? What are the specific reasons Delta's JV with Virgin Atlantic is a bad investment?

Sez_Who

sorry, dup

Sez_Who

To the extent your sensitive feelings made you feel uneducated, I apologize. Not my intent at all, only to AGAIN point out that you have very limited info to base your beliefs. Trust me, save your wager.

However, I will agree that DL took a risk on VS but IMO, that's no different than the airline deciding to purchase a refinery. Of course these are risky but I would bet they are far more calculated than you are willing to give them credit for.

Again please don't take sensitive offense but just because you believe a JV would have been perfectly adequate, you may be missing lots of information and data. For all we know, maybe Sir Richard would not agree to a JV. Maybe the use of cash had something to do with the decision. Maybe... maybe... maybe...

I admit I don't know. Can you do the same now?

readywhenyouare

There you go again. If you knew me you would know better than to call me sensitive. A brief look at my FT history would clear that up. If you have a problem with my point of view then fine but let's not speculate about one another.

I could be wrong and for the welfare of the company I hope I am. But why are you getting so bent of shape when I bring up Delta's history of purchasing outside assets? I've already mentioned ASA and Comair but Delta also gave Pan Am a huge cash infusion to try and keep them flying. Pan Am burned through that cash in a matter of weeks and it really hurt DL. They also overpaid for the TATL assets that they purchased from Pan Am.

Yes, I could definitely be wrong but from what I can see history is on my side. I'm just saying that it's only very recently that DL has been in good financial shape and I'm not sure why they would be so eager to roll the dice.

emrdoc

Well compensated management teams make poor decisions every day.

rucksack

I agree that we should keep this about arguments and not make this personal. Care to address my response above?

readywhenyouare

I've said my piece and you don't agree with me. I'm not sure what good it will do but I will address your points again.

You are only comparing Delta to other U.S. airlines while I am comparing them to all airlines. Delta will never join the likes of Singapore and Emirates unless they invest in their product. You think it's ok to strive for mediocre which is the service level of US carriers. Right now DL is displaying a high and mighty attitude and it just isn't justified by what they have to offer in my opinion. You disagree and that's ok.

Delta and other U.S. carriers have made very bad investments in the past. Is this one a mistake? Who knows, but I hope it isn't. But again, why am I being persecuted for going off of history? Usually past history is a good indicator. The majority of drug addicts exiting recovery will relapse. In my opinion DL isn't learning from past mistakes. You disagree and I hope you are right. I don't want them to fail in this investment but I'm not going to put on the rose colored sunglasses and declare a victory.

If the airlines had a history of making good investments I would have a different opinion. If you were a bank would you extend credit to a business that has repeatedly made poor decisions?

VS is an international airline and Delta will not be able to control much of what happens. At least with Pan Am and the regional carriers they were based in the U.S. and DL had more day of what could be done.

None of us have a crystal ball and for me I look at past decisions to predict what could happen in the future.

ND76

1. As for VS, Singapore Airlines was the 49% partner of Sir Richard Branson's group. DL needed into LHR in a major way; by acquiring Singapore's position in VS (it was an all or nothing sale--DL could not have negotiated for, say, 10%) and then reaching a JV with Branson, DL got a controlling position in VS's landing and takeoff authorities at LHR. The purchase price was $360,000,000. To put this in perspective, DL's adjusted net income in the calendar quarter ending March 31, 2015 was $372,000,000. Their consolidated revenues for the same quarter were $7.932 billion. So, while the numbers seem astronomical, as a relative matter DL's monetary investment was small in relation to their overall picture. Delta is in a battle for control of New York with AA/BA/One World. AA's website shows that this combine will operate 10 departures eastbound on Sunday 5/17/15: 3 by AA; and 7 by BA. Delta needed to match this operation, and by and large it has.

2. I think there probably are strategic reasons for owning a regional airline, such as owning slots at capacity controlled airports and for coordinating schedules. Delta shuttered Comair because of the downsizing of their CVG hub and because of labor and legal issues that they couldn't overcome. Delta now owns Endeavor Air, which operates 150 regional jets and 850 flights per day.

http://www.endeavorair.com/

As for Endeavor Air, I was on one of their planes this past week, DCA-JFK. I'm about 99% certain that I had seen my flight attendant before, and now I am about 99% certain that she worked for Comair.

Also, some of the the DCA-JFK flights are going mainline in June, with a DL 717 replacing a CRJ-900 on at least the 0600 departure.

hfly

ASA? Comair? Pan Am?

Let's start with the last bit, your claims about Pan Am and Delta. Delta got THEDEAL OF A LIFETIME with Pan Am. They were able to take over the biggest Transatlantic operation.............OVERNIGHT, without assuming and risks or liabilities, which Pan Am had plenty of. In the process they turned themselves from a middle of the road domestic US carrier (yeah they had a few int'l flights, but they were flotsam, MCO-FRA? ATL-LGW? and a couple of others? They picked up the entire operation for LESS than UA or AA spent just taking over LHR slots from Pan Am and TWA (more on that in a minute as it has something to do with the VS acquisition). The DL- Pan Am deal while INCREDIBLY bad for Pan Am at the end, was a masterstroke, and a game changer for Delta and the entire industry.

IIRC, Delta picked up over 50 route authorities to Europe, 42 of which were active, a fleet of 45 planes, many of which were owned, bought and paid for, and paid a bit more than $800 million for it. The big ticket number was about $1.4 billion, but much of that had to do with employees they absorbed, which came over to the airlines, and liabilities that they never had to pay for when Pan Am 2 went bust. There was an additional $200 million in cash that they provided Pan Am up front and as working capital for Pan Am 2. When that was gone, DL pulled out, as they had always planned to and that was the end of it.

Oh yeah, they also got the East Coast Shuttle, at that time the Eastern/Continental/Trump/US Air shuttle was trading at $400-500 million each time it changed hands. They also realized about $200-300 million over the next few years selling non essential routes (for them) to other airlines, such as Detroit routes to NW, etc...........

So let's see...........They committed a total of $1.4 billion, Only ever had to reach in their pockets for about $800 million. That $800 million was covered by the value of the shuttle at the time and the non essential route sales. So for free they essentially got 45 aircraft, route authorities that were probably worth $2 billion plus at the time and which had they ever tried to get them themselves could have taken 40 years to amass, made them the number 3 airline in the World and propelled them into an International carrier and a prime position in NY, when previously their prime positions were ATL, MCO and DFW, let alone a national carrier as they were pretty much nothing in the Northeast of the United States, you know, the most important business area IN THE WORLD, and from which maybe 30% of their current revenue is based (Of a total revenue of about $38 Billion and a profit of about $10 Billion)

But you think it was a bad deal.

BTW, Almost all of PAN AM's "other businesses" were huge money makers, it was the airline which had huge problems, and I could go on with pages of history of where they screwed that up, or where deregulation, or rather Pan Am's huge mistakes in the era of deregulation killed the airline. The problem in fact was that Pan Am kept selling (or even dumping) their "other businesses" to generate cash to dump into the airline, not the other way around.

ASA and Comair? They sold ASA. Comair was a victim of a lot of things. The abandonment of CVG as a terminal, the general upgauging of aircraft from 50 seater to 70 or 100 seaters throughout the US, the way that pilot contracts have evolved at the big carriers over the last 2 decades in regards to how commuter carriers and smaller planes are handled, 9/11, a bad crash, and a bunch of other matters. DL made enough money from its Comair subsidiary once upon a time, that time passed and they shut it down. And????

Back to Virgin

49% of VS on the other hand, for LESS THAN THE LIST PRICE of two long haul aircraft, at a 70% discount to what SQ had paid for it, was again the steal of the century. When one considers that in very recent memory airlines have paid over $30 million for a slot pair (AA from Cyprus for $31 million last year) or when CO bought four slot pairs in 2008 for over $200 million. When one considers that since the deal happened, it has probably added $200 million PER YEAR to Delta's profits (more than paying for the original investment already) and the fact that the new strategy has turned VS around, posting a profit of over $20 million last year, and looking like over $50 million this year,and projected to be $150 million a year in 2018. This looks like potentially one of the best investments/JV's in the history of aviation. So what exactly is the problem?

DavidDTW

IIRC, NW had about about a 10% stake in KLM back then.

readywhenyouare

I'm glad you all set me straight. DL has run an A+ operation from the moment they started crop dusting. You win.

And don't kid yourself. Comair's fate was sealed the day the pilots went on strike. It had nothing to do with the downsizing of CVG as DL was trying to spin it off well before the merger.