Delta, Air France-KLM, Virgin rejig Atlantic alliances

By Victoria Bryan, Tim Hepher and Alana Wise

PARIS/NEW YORK (Reuters) - Delta Air Lines (DAL.N), Air France-KLM (AIRF.PA) and Virgin Atlantic unveiled plans on Thursday to combine two overlapping transatlantic joint-ventures, supported by equity deals worth $1 billion, as airlines brace for more competition.

The shake-up is designed to strengthen carriers on the lucrative North Atlantic, where low-cost entrants have shaken up the market, and comes as Britain negotiates to leave the European Union, creating a tangle over Heathrow access.

The realignment coincides with a deal for Air France-KLM to deepen its commercial ties with China Eastern to build what it described as the European leg of a global network.

The new 15-year partnership combines existing joint-ventures between firstly Air France-KLM, Delta and Alitalia, and secondly between Delta and Virgin Atlantic, Air France-KLM said.

"What it does is brings together the missing piece of that triangle: the missing link between Air France-KLM and Virgin Atlantic," Atmosphere Research Group analyst Henry Harteveldt said, noting Delta's existing ventures with both carriers.

Airlines have few options for traditional cross-border consolidation because of complex national ownership rules.

The role of Alitalia in the new alliance is dependent on what will happen in the months to come, with an administrator currently seeking offers for the struggling carrier.

Air France-KLM said one option could be for Alitalia to cooperate as an associate partner.

At the same time as forging the expanded alliance, Air France-KLM will buy 31 percent of Virgin Atlantic [VA.UL] from Richard Branson's Virgin Group for around 220 million pounds ($287 million).

Delta and China Eastern will each acquire a 10 percent stake in Air France-KLM by subscribing to new shares through reserved capital increases totalling 751 million euros ($877 million).

Delta shares traded down just under 1 percent, weighed by disappointing third-quarter outlooks by rival U.S. carriers.

ANTITRUST CONCERNS

The deal - which is subject to regulatory approval - would give the partners a stronger position on the North Atlantic market with a combined 27 percent of capacity, ahead of rivals, according to Flightglobal Schedules data.

"What it gives the ability to do is manage capacity and pricing more broadly on the Atlantic, assuming they get anti-trust immunity," Robert Mann, analyst at R.W. Mann & Co, said.

But James Halstead, a managing partner at Aviation Strategy, said the deal raised questions about Virgin Atlantic's traffic rights from the UK after Britain's planned exit from the European Union, since it would no longer be a mainly UK firm.

The deal makes Air France-KLM the second largest shareholder in Virgin Atlantic after Delta, which owns a 49 percent stake, and reduces Virgin Group's stake to 20 percent.

"The rules in front of us today are European; this (deal) complies with those. We will deal with any changes when they come," Virgin Atlantic chief commercial officer Shai Weiss said.

The Brexit vote has left the region's carriers looking for ways to protect traffic rights and shareholder structures even though the outcome of future negotiations is unclear.

John Grant of JG Aviation Consultants said the deal could prompt other "creative solutions in ownership structures and equity shares in the coming months."

(Additional reporting by Alana Wise, Cyril Altmeyer; Editing by Andrew Callus and Elaine Hardcastle)