Virgin plots a course through crowded airspace
Richard Branson’s Virgin Atlantic airline has consistently punched above its weight since it was founded in 1984, emerging as a formidable competitor to British Airways, as consumers took to Virgin’s quirky brand and customer service.
But analysts say Virgin is now at serious risk of being marginalised – and therefore in need of a new partner – because of a series of quasi-mergers between European and US airlines, and the growth of Gulf carriers.
In December, Virgin suffered a significant setback when International Airlines Group – parent of BA and Iberia – trumped Sir Richard’s airline in the bid battle for BMI British Midland, Lufthansa’s lossmaking UK subsidiary. The deal, if approved by regulators, will enhance BA’s already strong grip on London’s Heathrow airport at Virgin’s expense.
Steve Ridgway, Virgin’s chief executive, insists he is unfazed by the challenges, and rejects suggestions that the airline is struggling to keep up with its competitors.
“I think we were much more marginalised 25 years ago, when we had one or two aircraft, but having the network that we have now, and having the brand that we’ve created, and having the loyalty that we have, I think we’ve still got huge potential,” he says in an interview.
However, Virgin is having to adjust to a much-changed industry landscape. Regulators opened up Heathrow, Virgin’s main home airport, to more US carriers in 2008, but the most negative development has been the formation of a joint venture between BA and American Airlines on routes between the EU and the US.
By co-ordinating their schedules and fares between Heathrow and New York’s JFK airport since last summer, BA and American are providing customers – notably higher spending business travellers – with an attractive service compared to competitors. For example, the two airlines have 11 daily flights from Heathrow to JFK, while Virgin has three.
Virgin’s market share on the Heathrow to JFK route – measured by seating capacity – has dropped over the past five years, from 24 per cent in 2007 to 20 per cent last year, say Nomura analysts. Although there is some uncertainty around IAG’s joint venture with American – because the US carrier’s parent company last November filed for bankruptcy protection in order to restructure – both partners insist they are committed to their North Atlantic business.
Virgin, meanwhile, has expanded its network beyond the US into Africa, Asia and the Middle East. But with Chinese, Indian and Gulf carriers increasing their flights to the UK, it underlines how Virgin’s opportunities in the east could be limited.
Expansion opportunities for Virgin will be challenged further if IAG secures regulatory approval – without concessions – for its proposed acquisition of BMI, the second-largest holder of take-off and landing slots at Heathrow.
Branson recognised the seriousness of the strategic threats to Virgin in 2010 by launching a wide-ranging review of the airline.
Ridgway says Branson is prepared to relinquish his status as controlling shareholder – he owns 51 per cent of the airline – and Singapore Airlines, which has 49 per cent, wants to sell.
But so far, Virgin has not found a suitor. Delta Air Lines, which has been expanding at Heathrow since 2008, looked at Virgin last year but balked at the asking price, says one person familiar with the situation.
Etihad Airways, the Abu Dhabi-based carrier, also considered Virgin last year but concluded it could not do a deal partly because of foreign ownership restrictions, says one person close to the matter.
Ridgway declines to discuss Delta or Etihad, but just as Virgin’s search for a new equity partner is proving protracted, so are its deliberations over joining one of the three global airline alliances.
The Oneworld, SkyTeam and Star alliances enable member airlines to offer customers more destinations by code-sharing, as well as other benefits.
Given BA is a member of Oneworld, Virgin is in talks about joining either SkyTeam or Star, but Ridgway suggests Virgin will not make a final decision until the future of BMI is resolved.
In the meantime, Ridgway insists Virgin can prosper on its own. Like many airlines that benefited from the economic recovery in 2010, Virgin returned to profit. It recorded a pre-tax profit of £18.5m in 2010-11, compared to a loss £132m in the previous year.
Ridgway highlights Virgin’s gross cash position, which stood at £562.4m on February 28 2011. Deducting bank loans, Virgin had net cash of £520.8m.
“We remain strong on our own,” says Ridgway, before adding pointedly: “And we remain very attractive to potential partners in the future.”
Culled from FT
