Delta, Virgin to Operate Trans-Atlantic Venture With 31 Daily Flights

ATLANTA ( TheStreet) -- Wealthy, strategic Delta ( DAL) said it will invest $360 million to acquire 49% of faltering Virgin Atlantic Airways, creating a trans-Atlantic joint venture that will operate up to 31 daily round-trip flights.

The flights will include nine daily round trips to London Heathrow from Newark and New York Kennedy airports, mounting a challenge to a route American Airlines ( AAMRQ.PK) and partner British Airways have long dominated, with near-hourly service. Joint venture flights will also serve Atlanta and other key Delta cities.

"The partnership allows both carriers to offer a greatly expanded network at Heathrow and to overcome slot constraints, which have limited the growth and competitive capability of both airlines," said Delta and Virgin, in a joint statement. Their 31 daily round-trip flights will include 23 at London Heathrow.

"Our new partnership with Virgin Atlantic will strengthen both airlines and provide a more effective competitor between North America and the U.K., particularly on the New York-London route, which is the largest airline route between the U.S. and Europe," said Delta CEO Richard Anderson, in a prepared statement.

The joint venture will operate on a "metal neutral" basis with both airlines sharing the costs and revenue from all fights. Passengers will receive reciprocal frequent flyer benefits and shared access to clubs.

The airlines will file an application with the U.S. Department of Transportation for antitrust immunity, which would allow a closer relationship and coordination on schedules and operations. The transaction would be reviewed by the U.S. Department of Justice and the European Union's competition regulator and other relevant authorities. Implementation is expected by the end of 2013.

Branson was a longtime opponent of a similar arrangement between American and British Airways, and his opposition has been credited with delaying their implementation for years.

It is likely that Virgin Atlantic's quirky, Branson-obsessed image may become a casualty of operating in a partnership with the leading U.S. airline. "We have always been known for our innovation and service and have punched above our weight for 28 years," Branson said, in a prepared statement. "That is why our customers love us so much. We will retain that independent spirit but move forward in a strengthened partnership with Delta."

The carriers say they will invest $3 billion in upgrades including airport facilities and on-board product such as flat-bed seats in the BusinessElite cabin and extra legroom in Economy Comfort.

Analysts have generally been positive as word of the Delta/Virgin deal leaked out last week. S&P Capital IQ analyst Jim Corridore wrote Tuesday in a note that Delta's investment "will pay off in terms of greater European market share and improved unit revenues.

"We think EU and U.S. regulatory approval is likely, but not certain," Corridore wrote. "This deal, along with DAL's refinery purchase, highlights DAL's stategic vision." He maintained a buy rating.

In a report issued a week ago, JP Morgan analyst Jamie Baker noted that investors sold off Delta shares when word of the detail began to leak out. Baker said, however, that "we would look favorably on an investment up to $350 million." It appears that somebody may have been reading Baker's report.

Delta shares lost 4% on Monday, Dec. 3, the first trading day after media reports of the Virgin deal surfaced. On that day, shares fell from $10 to $9.62. On Monday, Dec. 10, Delta shares closed at $10.14. In premarket trading Tuesday, shares were gaining 14 cents to $10.28.

-- Written by Ted Reed in Charlotte, N.C.