Delta's Interest in Virgin Turns Off Investors

ATLANTA (TheStreet) -- It's good to have as much access as possible to London's Heathrow Airport, isn't it?

Investors aren't so sure, apparently. News of Delta's (DAL) interest in ownership in Virgin Atlantic Airways, widely reported over the weekend, was followed by a 4% decline in Delta's share price on Monday. The shares closed Friday at $10, closed Monday at $9.62 and then recovered slightly to close Wednesday at $9.71.

Virgin hold 44 daily long-haul slot pairs at Heathrow, as well as 12 daily short-haul slot pairs. Delta could potentially gain access to the long-haul slots if it is successful in talks with Singapore Air, which holds 49% of Virgin. Still, in a note issued Tuesday, JP Morgan analyst Jamie Baker wrote: "We broadly share the market's concern regarding a potential investment in Virgin Atlantic by Delta." He said Virgin's financial results "are uninspiring and the business seems geared more towards brand than profit."

Delta shareholders worry that the carrier's interest "represented a departure from its current, capitally-prudent deleveraging strategy -- a potentially reckless reversion to the more swashbuckling airline days of yore," Baker wrote. "Most stakeholders broadly assume (as do we) that dividends, share buybacks or some sort of further debt reduction (pension funding, perhaps?) should continue to occupy the top of management's capital allocation wish list once the company achieves its $10 billion net debt target next year."

At the same time, Baker said, "Delta's limited Heathrow access is a corporate disadvantage (and) Singapore appears eager to sell." He valued Virgin's long-haul slots at between $660 million and $880 million and said he would look favorably on an investment up to $350 million in Singapore. "Delta has an admirable track record for capital prudence," based on its recent strategies of eschewing new aircraft purchases, acquiring a refinery and making select investments in Latin American carriers, he said. He ranks Delta shares overweight.