The end of Virgin Atlantic's 'splendid isolation'?

photo by 900hp from Flickr, licensed under CC

The proposed tie-up between British Airways and American Airlines is moving closer to getting the green light from US authorities, and as such, Virgin Atlantic President Richard Branson is apparently worrying (saying - Branson doesn't seem like the type that worries a lot) that his airline might have to find a partner in response.

He's no doubt speaking in response to the continuing trend of consolidation in Europe. Air France and KLM have been merged for six years now, and the Lufthansa Empire has expanded its reach into Belgium (Brussels Airlines) and the UK (bmi) in addition to Austria (Austrian Airlines) and Switzerland (Swiss). Closer to Virgin Atlantic's home turf, British Airways and Iberia have already announced an intention to merge, and it's the prospect of a three-way combination between BA (Virgin's longtime archrival), Iberia and American that has been giving Branson the most grief.

He's been outspoken against the BA-AA deal for quite some time, but it seems now as though he's come to terms with its apparent inevitability - and what that means for his airline in terms of survival. Virgin Atlantic has remained fiercely independent for its entire existence (although Singapore Airlines owns 49% of the airline, the maximum amount allowed), and while it has codeshare agreements with a handful of airlines, it has never joined an alliance. But if it wants to compete with a larger British Airways, it might need to look at finding a partner. “If it becomes impossible for us to remain an independent airline and survive, we may come to a situation where we have to consolidate," Branson said.

Naturally, this begs the question - with which carrier would Virgin Atlantic consolidate with? bmi (also known as British Midland) would appear to be the logical choice, according to Branson: “I don’t think bmi has a future as a stand-alone airline if it stays in the same shape... something will happen – the two of us would be stronger together than separate.” On the surface, this seems like a good match. bmi is a member of Star, the alliance that Virgin Atlantic seems to be on good terms with (stakeholder Singapore Airlines is also a member), and is also a rival of the dreaded British Airways. Virgin Atlantic is also strictly a long-haul carrier (much like Singapore), meaning that it loses out on some passenger traffic that would be connecting through Heathrow or Gatwick on their way to other European destinations (although codeshares do help here). bmi, on the other hand, has a few longer-haul destinations but for the most part sticks close to home. So, Virgin's long-haul network should perfectly complement bmi's short-haul - right?

Complicating things is the fact that Lufthansa now owns bmi outright, and is in the process of restructuring it - and, in the process, cutting quite a few inter-European routes. Gone are Paris, Brussels, Amsterdam - service to some of these, as well as few other cities, has been supplanted by Lufthansa-owned or operated carriers. For example, the 'bmi' flights from Heathrow to Frankfurt and Milan are operated by Lufthansa. This is all well and good for bmi, perhaps, but it makes it less attractive as a merger partner, as it wouldn't have many European routes of its own to bring to the table. And bmi wouldn't have all that much to gain from a merger, either. Virgin Atlantic has a nice long-haul vacation getaway network set up at London Gatwick, but their other long-haul service at Heathrow, while substantial, pales in comparison to that of British Airways. Its relative isolation (i.e. no alliances) also makes it less attractive as a merger partner, since bmi could ostensibly benefit from being an alliance member (as it currently is, in Star).

So while bmi might seem the obvious choice, it's not necessarily an ideal fit. But if Virgin Atlantic faces a 'merge or die' scenario, then bmi might start looking a lot more attractive.

A tidbit to ponder: according to the Times article, Singapore apparently is seeking to sell its stake in Virgin Atlantic, which might expand merger possibilities. And another interesting point about Virgin Atlantic: Branson has stated that its new strategy will be to look towards leisure travel for growth, rather than business travel. Right now, he says, the airline's business is 70% at London's Heathrow airport and 30% at Gatwick, although "this will have to start balancing out."

And Branson is still sticking to his trademark optimism. He has still promised to battle it out in court against the BA-AA deal's regulatory approval if needed - however much of a 'done deal' it already is - and he has also noted that BA's ongoing labor strife (they're "shooting themselves in the foot," he says) has only helped to benefit his airline's revenue.

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A Virgin interlining agreement

photo courtesy flightglobal

'Virgin' airlines Virgin America and V Australia (part of Australian carrier Virgin Blue) announced that they're going to start a US-Australian 'interline' agreement that allows travelers to book travel on both airlines between the US and Australia. For example, if you lived in Boston, you could fly from Boston to Los Angeles on Virgin America and then from Los Angeles to Sydney on V Australia, all on a single ticket.

Despite the press releases heaping praise on "a seamless "Virgin" experience," an interlining agreement really doesn't make the relationship between the rather disparate Virgin brands any closer. Most airlines have various interlining agreements; for example, United and American have an interlining agreement with each other, and V Australia and Delta announced one back in March. For the traveler, this usually means that you don't have to retrieve your luggage in the stop-over airport and check it in again for the next flight, as you would have to do if you were traveling on two airlines that didn't have an interlining agreement.

An interline agreement shouldn't be confused with a code-share agreement. That's when an airline can issue a flight number for a given flight, even if its code-share partner is actually the one operating it. (This is a common practice among airline alliance members. For example, US Airways flight 5947 between Spokane, WA and Denver is really operated by United Airlines flight 812.) Both airlines can then sell tickets on the same flight.

As of yet, there's been no announcement of any code-sharing between Virgin America and V Australia. But fellow 'Virgin' companies Virgin Atlantic and Virgin Blue already codeshare.

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Virgin Atlantic posts profit, but can it last?

photo courtesy Virgin Atlantic

Only a few days after arch rival British Airways posted a record loss, Virgin Atlantic Airlines announced some surprising news this week: it made a profit for the 2009 fiscal year. Even more surprisingly, pre-tax profits doubled from £34.8 million to £68.4 million ($109.3 million). And to rub it in even more to British Airways, Virgin claims that the increase in profits came from an increase in premium passengers, a demographic that BA is particularly reliant upon. Because price-cutting, Virgin was able to keep load factors in its first and business class seats solid. "We are winning market share from our competitors during the toughest trading environment ever," said CEO Steve Ridgway. "Our load factors remain resilient as travelers take advantage of these bargain fares, proving the value of vigorous competition."

But Virgin's reported recent financial success isn't as simple as just an increase in passengers. Virgin Atlantic locked in its fuel prices two years ago, meaning that the airline didn't have to deal with the steep rise in prices that occurred last year. And Virgin Atlantic, unlike most of its competitors, isn't publicly listed, meaning that it doesn't have to disclose detailed financial information. The Times' Ian King notes that Virgin released the numbers two months earlier than they did last year, which "raises the suspicion that their release has been timed not only to embarrass the old enemy but also to emphasize the airline’s strength to the trade at a time when the battle for corporate clients is more ferocious than ever."

While Virgin might be in a comparatively good spot right now, especially when viewed in light of British Airways' abysmal financial performance, they might not be able to keep it up for much longer. The transatlantic price war that Virgin is taking part in has started to take a toll on profits, and the state of the industry as a whole isn't solid (as Virgin's CEO has admitted). Check back in a couple of months - I'm sure that we'll see a much more subdued financial announcement from Virgin Atlantic then.

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Air France and Delta finalize joint venture

A Boeing 777 in Air France's new livery. Photo courtesy Air France

Air France/KLM and Delta yesterday put the finishing touches on a $12 billion-a-year joint venture deal that would allow them to operate as a single carrier on North Atlantic routes. The pact extends a previous joint venture that KLM and Northwest have had since 1997. Air France merged with KLM in 2004, and Delta recently took over Northwest, allowing for a four-way alliance (all are already members of the SkyTeam alliance).

The deal is a revenue- and profit-sharing venture, and will have antitrust immunity (something that American and British Airways are seeking right now). It affects more than 200 daily transatlantic flights to over 400 destinations in Europe and North America, or around 27% of total trans-Atlantic capacity. It also allows them to more effectively combine operations. For example, if both Delta and Air France have a flight from New York to Paris, but both flights are only 1/3 full, they can be combined and flown on one aircraft. Marketing, pricing, and ticketing will also be shared, and these result in very impressive cost savings (about $150 million per airline).

As previously mentioned, American, Iberia and British Airways in the oneworld alliance and United, Lufthansa (and soon Continental) in the Star Alliance are working on similar deals. This means that airlines without an alliance affiliation - like Virgin Atlantic - might suffer as a result. And while this means that Air France and Delta are cooperating even more closely, they can't actually merge - under US law, a foreign company can't own more than 25% of a US airline, although this rule might end in the future.

Some slides from the Air France/Delta news conference in Paris on Wednesday:

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AA/BA alliance a "monster monopoly"?

photo by Jun Seita

Virgin Atlantic president Richard Branson has called upon the US Department of Transportation to reject a proposed alliance between American Airlines, British Airways and three other airlines, claiming that it would form a "monster monopoly" that would pose a serious threat to the survival of rival airlines and would mark the end of "red-hot competition."

In an address to the National Press Club in Washington last week, Branson warned that a tie-up would be "disastrous" for consumers, and highlighted the fact that American and British Airways, combined with their oneworld alliance partners, would control almost half of the takeoff and landing slots at London Heathrow. "It doesn’t make sense to encourage even less competition by allowing dominant carriers to increase their stranglehold by setting prices together and agreeing schedules," he said. "...Our arguments are as strong today as they were on the previous two occasions when BA and AA tried to merge. Their dominance has grown even further between then and now."

Under the proposed alliance, American, British Airways, Finnair, Iberia, and Royal Jordanian Airlines would receive antitrust immunity on transatlantic flights - something that has already been granted by the DOT to carriers in the rival SkyTeam and Star alliances. "This permission or antitrust immunity has already been granted to 10 airlines in Star and six in SkyTeam - including the recently merged and now world's largest airline Delta," said an American spokesperson, in an email to AFP, adding that the proposed alliance was "simply seeking to level the playing field."

But Branson predictably did not agree with this logic, stating: "I understand that it is tempting for regulators to say, 'We’ve given dispensation to one alliance, we should do likewise for others' as they’ve done previously. But they must resist temptation. Each anti-trust application must be considered on its merits and it’s clear that the application for a merger between BA and AA must be rejected."

Branson has lobbied against proposed two AA/BA tie-ups in the past (1997 and 2001), both of which failed due to regulatory concerns. American's argument that 'it's only fair that we get this too' certainly has credit to it, but the sticking point is likely to be Heathrow - the AA/BA presence there is already enormous. The DOT has six months to issue a ruling, so we'll just have to wait and see if Branson is successful in putting down a proposed AA/BA alliance for a third time.

Last month, former American CEO Robert Crandall said that "any objective observer would have to look very hard to find a way in which alliances have benefited consumers." He also believes that "airline alliances have been far more beneficial for international airlines than for US carriers, and for that reason alone, I think they should be disallowed." Interestingly, he also noted that if Star Alliance and SkyTeam are allowed their own antitrust agreements, "AA-BA should be permitted as well."

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American's new deal with BA, Iberia

American Airlines, Iberia, and British Airways announced earlier today that they were forming a three-way alliance that would allow them to cooperate on flights between Europe and North America. Although the three airlines are already part of the oneworld alliance, the deal allows them to work more closely together and to cut costs. Not surprising, Virgin Atlantic's Richard Branson took a dim view of the deal, which he said would create a "monster monopoly".

The announcement comes at a time when other airlines are also seeking to link up: United, Continental, Air Canada and Lufthansa are working on a transatlantic alliance, similar to the AA/Iberia/BA one announced today.

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Branson to start Virgin Russia

photo by Cubbie_n_Vegas

The man that brought you Virgin Atlantic, Virgin America, Virgin Blue, Virgin Nigeria and others is preparing to do it again.

Billionaire Richard Branson has announced plans to start an airline in Russia, tentatively called Virgin Russia. He plans to take advantage of the oil-fueled Russian economy, which has given the average Russian more money (and an airline market that's growing at around 10 percent a year). "We hope to offer the Russian people a really good airline. We may be able to do it a little better than is being done at the moment," said Branson. "We're in discussion with two or three partners." Branson also noted that there are "150 million people here within a three-hour flight from Moscow."

Branson certainly faces some challenges in his new endeavor. He'll be taking a swipe at state-run carrier Aeroflot, and is seeking "two or three" Moscow-based local carriers to team up with him, although he has said that his partners don't necessarily have to be airlines - "what we are looking for is people we can trust, people we could work with," he said. The Moscow Times identified several possible partners as Russian startups SkyExpress and Red Wings.

And Aeroflot is currently dominant in Moscow, which isn't planning that to change. Aeroflot Deputy CEO Lev Koshlyakov said that the "Russian market is competitive and is attracting more and more interest, with various business models... A new player coming in will make everyone mobilize their resources." And Aeroflot CEO Valery Okulov asked, "Why should we fear competition? We have always struggled with competition, so what do we have to fear?"

The Russian government also has to be dealt with. It has been notoriously hostile to certain foreign investment (e.g. some oil projects), and although there's no indication that the government would block a Virgin investment, Branson should definitely keep this in mind.

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British Airways launches OpenSkies

Although it’s no secret that British Airways has been looking to expand in the transatlantic market, the airline made an announcement yesterday that it is starting an “airline within an airline”. OpenSkies, as the new entity is called, will start flying in June with a single Boeing 757-200 from New York to either Paris or Brussels. Another 757 is planned to join the fleet later this year, with six aircraft in all by 2009. In a statement, Willie Walsh, BA CEO, said that "by naming the airline OpenSkies, we're celebrating the first major step in 60 years towards a liberalized US/EU aviation market which means we can fly between any US and EU destination”. Future cities will probably include Milan, Frankfurt, Amsterdam, and Madrid.

This is a smart move on BA’s part – the Open Skies agreement signed between the US and the EU would add a lot of pressure at BA’s London Heathrow hub. Currently, only United Airlines, American Airlines, BA, and Virgin Atlantic can fly from the US into Heathrow, but this is expected to change soon as more US carriers add the airport. It’s also a smart idea that British Airways decided to buck the “premium transatlantic” trend that pushed MaxJet into bankruptcy last month – OpenSkies will have business class, premium economy, and economy class (each with 24, 28 and 30 seats, respectively). But BA isn’t alone in this area – British carrier bmi, Delta Air Lines, and Air France/KLM are all expected to follow suit with Heathrow-US routes.

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Virgin eyes premium market

Speaking on the day of his airline's inaugural flight between London-Heathrow and Nairobi, Kenya, Virgin Atlantic chief Sir Richard Branson recently announced the launch of a business-only airline that would connect London and various European destinations with the US. Branson said that the airline "would provide choice and quality for the customer" and would hopefully be up and running in nine to 18 months.
The airline wouldn't be a fully separate entity; it would probably be an airline within an airline (Branson did say that the airline would be under the Virgin Atlantic name). The London airport was not yet mentioned - Heathrow, Gatwick, Luton, or Stanstead are all possibilities. Like arch-rival British Airways' newly announced service, Virgin's will connect London, Paris, Milan, Frankfurt and Zurich with the US (probably New York). "We've got to compete in this area," said Branson. "The service will be of the highest quality and will be competitive in terms of price." Virgin will also have to go up against airlines like Silverjet, Maxjet, Eos, and L'avion, all of which offer premium trans-Atlantic service.

Virgin is also reportedly in talks with aircraft manufacturers Boeing, Airbus, Bombardier and Embraer over a new aircraft order for up to 15 airplanes.

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