As we touched on last week, Delta Airlines (click ticker for report: ) acquired a 49% stake in Virgin Atlantic Airways from Singapore Airlines for approximately $360 million. The deal seems to make sense for both parties, as it gives Virgin better access on US routes and Delta access to London’s Heathrow airport. The valuation, a haircut from what Singapore paid, doesn’t seem unreasonable, in our view. Given Delta’s semi-decent balance sheet, we doubt the deal will materially impact financial standing.
One would think the market really likes the deal, given that shares of Delta are up more than 6%. However, we believe the airline market is rallying on reports that the rumored merger between AMR Corp (American Airlines) and US Airways (click ticker for report: ) is inching closer. In fact, air carriers across the industry are welcoming the potential deal. Consolidation could improve overall industry profitability to some degree, though historically, the structural impediments of the industry have made it un-investible. Depending on how consolidation shapes up and the direction of the price of oil, commercial flight could become a viable industry (one without serial bankruptcies)—but we won’t be betting on it. Here’s why.