Last updated: 12:30 PM ET, Tue June 28 2016

The Real Reason Delta Is Worried About Brexit

Airlines & Airports | Delta Air Lines | Josh Lew | June 28, 2016

The Real Reason Delta Is Worried About Brexit

Photo courtesy of Delta Air Lines

On paper, Delta Air Lines appears to be the least exposed of the three major US legacy carriers that serve the UK. However, it could have the most to lose because of its 49 percent stake in British airline Virgin Atlantic. 

Delta’s overseas expansion strategy includes purchasing shares in foreign airlines, with one of its most recent acquisitions being Virgin Atlantic. It is now a minority owner of the airline, but it has created a major joint venture that includes sharing transatlantic routes with Virgin. 

Long-term prospects are still good, but worries about Brexit could hit the airline in the short and mid term. 

Where is the worry coming from?

The current agreement between the U.S. and the EU allows American carriers to fly anywhere on the continent without having to apply for approval. Now that Britain is leaving the EU, it will have to negotiate a new agreement with U.S. authorities. This is something that is likely to happen before the country officially leaves the European Union. However, there is a danger that U.S. airlines could go back to the days before an open skies agreement when airlines flying to the U.K. had to seek government approval for each new route. 

The partnership with Virgin Atlantic makes the uncertainty especially difficult for Delta. After buying its stake (in 2012 from Singapore Airlines), Delta has used its clout to get Virgin to reorganize its operations and change its routes. Before, the British airline was focused on Asia. Delta got it to develop more routes between the UK and North America. 

Recent improvements under threat

Initially, this seemed like a good partnership for both airlines. Virgin was able to increase its prospects of profitability and Delta was able to compete with the American Airlines-British Airways partnership that had previously dominated the U.S.-U.K. market. Virgin posted a profit in 2015 after finishing in the red for each of the last three years. 

Short term worries

The biggest immediate worry for Delta is the falling British pound. It will likely mean that fewer British tourists and business travelers will head to the U.S. This could take a major bite out of Virgin’s passenger pool. 

Read More: Delta and Virgin Atlantic Seek to Dominate US-UK Routes

On the other hand, a cheaper pound could mean more people from the U.S. will be willing to travel to the U.K. That could increase the number of fliers going west to east. The other major worry is business travel. If the U.K. leaves the EU, some American companies could move their European offices from England to the continent. Delta would either have to establish more routes itself or find new partners to serve these newly important business travel routes. 

Why aren’t Delta and Virgin as worried about long term issues surrounding Brexit? 

The upside for U.K.-based airlines is that they can now negotiate their own agreements with the U.S. instead of having to accept whatever treaty the EU has signed. British Airways and Virgin Atlantic can both use their close ties with American carriers to push for a more beneficial deal that could see them getting more rights on transatlantic routes while limiting competition. 

This is important with the rise of long haul low cost carriers. With their own set of rules to fly by, British airlines could be better able to compete with the airlines that are undercutting them on U.S.-U.K. routes. 

Still an international hub?

The one sticking point for this silver lining is that the U.K. might not be the hub that it is today. If it is not part of the EU, Great Britain will not have the same access to airports on the continent that it now enjoys. It will have to renegotiate with Brussels, and, if that doesn’t work, hash out separate treaties with each country in the Union. This could be a problem because failure to secure new agreements would make flights that connect the continent to London (and the transatlantic flights that take off from there) more difficult to operate. 

Delta stands to lose a lot if Virgin Atlantic struggles with Brexit. However, it is a bit premature to worry about the demise of the British air travel industry. Things could turn out badly for Delta and American’s allies, but it could also turn out quite well in the long run, especially after the pound stabilizes and the U.K. signs favorable air travel agreements with the U.S. and the EU. 

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