In successfully acquiring loss-making British Midland Airways (bmi) along with its subsidiaries bmi Regional and bmi Baby, of which bmi Regional was subsequently sold to Sector Aviation Holdings for ?8 million in cash, International Airlines Group (IAG) unit British Airways (BA) has gained 42 valuable London Heathrow slot pairs at a significant bargain, following the failure in its previous owner Lufthansa?s efforts to sell the bmi Baby unit.
Most importantly for British Airways, it has granted the UK?s biggest carrier a rare opportunity to expand internationally to tap into the tremendous growth potential offered by emerging economies in Asia and Latin America, at a time London Heathrow is operating at full capacity at 98% and new airport capacity will not be added anytime soon, if at all.
For Virgin Atlantic in which UK billionaire Richard Branson owns 51% of its shares and Singapore Airlines (SIA) owns the rest, however, failing to acquire bmi and its assets that used to worth as much as ?616 million (US$980 million) at the end of 2008, means Virgin Atlantic has done too little, too late to secure its own growth potential and hence it is likely to remain a niche international carrier going forward.
The carrier recorded a pre-tax operating loss of ?80.2 million (US$124.5 million) for FY2011/2012 ending 28th February 2012, versus an operating profit of ?18.5 million a year ago. Revenue rose by 3% to ?2.74 billion backed by a 2% increase in the number of passengers carried to 5.4 million at a 78% load factor.
?In an incredibly challenging market, we have managed to grow top line revenues and fly more customers than last year.?However, with the prevailing uncertainty in the economy, sky high fuel prices and a 25% hike in our air passenger duty fees, converting this sales growth into profit has not been possible,? Virgin Atlantic chief executive Steve Ridgway said.
For the FY2012/13 first quarter, revenues increased by 5.8% to ?481.9 million with a 2.3% increase in passenger numbers to 1.3 million versus the year-earlier results while launching a ?50 million cost-reduction programme and a ?100 million upgrades in Upper Class.
Image Courtesy of Andy2982
Virgin should partner with Flybe for domestic feed
As a pre-requisite in approving the British Airways/bmi merger, the European Commission (EC) has ordered BA to surrender 14 daily slot pairs at London Heathrow, with 2 of them being already leased to Transaero for flights to Moscow.
Virgin Atlantic said it plans ?to apply for all of the remedy slots? and will launch a thrice daily flights between London Heathrow and Manchester from 31st March 2013 onwards by using ?some of its existing slots to service the Manchester to London route? with leased Airbus A319 narrowbody aircraft.
?Flying between Heathrow and Manchester is just the start for Virgin Atlantic?s new short-haul operation.?Operating a London to Manchester route will provide an invaluable feed to our existing long-haul network for both business and leisure passengers. It is the perfect introduction to short-haul flights for Virgin Atlantic,? Virgin Atlantic chief executive Steve Ridgway said.
Launching the London Heathrow to Manchester route will provide competition where British Airways (BA) currently has a monopoly in operating 17 daily flights on the route, 13 of which originate from London Heathrow.
The airline also plans to launch daily flight between London Heathrow and Moscow onboard Airbus A330-300 aircraft using some of the relinquished British Airways slots.
?Linking these two cities will be an important part of our strategy to run short-haul flights into Heathrow, thus feeding our long-haul network. Our core flying has always been across the Atlantic but we will also continue to grow our routes to emerging markets?if given the slots at London Heathrow,? Ridgway commented.
However, operating the London Heathrow-Manchester route alone will not provide the domestic feed Virgin Atlantic has hoped for and should it want to create a viable and strong domestic network, either it has to create a domestic unit for Virgin Atlantic-branded flying and establish a dedicated rostering system for domestic crew, or partner with an established player that fits into Virgin Atlantic?s long-haul niche business model.
Aspire Aviation believes partnering with British carrier Flybe makes the most sense for Virgin Atlantic, either through the form of codeshares or outsource the Virgin Atlantic-branded domestic flying to Flybe, or both.
First of all, entering into a codeshare agreement with Flybe will immediately provide a strong domestic feed at London Gatwick as the British hybrid carrier operates flights to 10 domestic and regional destinations, including Nantes and Bergerac in France, as well as Jersey, Aberdeen, Newcastle, Belfast City, Isle of Man and more in the UK.
While Flybe currently does not serve London Heathrow, switching some of the highest-yield flights from London Gatwick to London Heathrow is achievable and feasible provided that Virgin does win all, or 12, relinquished highly sought-after and scarce Heathrow slots or opt to lease the Heathrow slots for domestic flying.?In doing so, the codeshare agreement will be structured as a win-win partnership that provides domestic feed for Virgin Atlantic and also provides international feed for Flybe in return.
Moreover, partnering with Flybe is a capital-lite business model which preserves scarce capital resources for improving its core product ? niche, customer-oriented business long-haul flying. The domestic UK market is arguably an unforgiving one given the high penetration rate of low-cost carriers (LCCs) such as EasyJet and Ryanair that depress the domestic yield significantly.
In light of the relative high cost base of Virgin Atlantic against Flybe, let alone EasyJet and Ryanair, the profit margin in creating and operating its own domestic operation is likely to be slim and razor-thin, if not loss-making and hence it does not make sense. This financial state will only further worsen and be unsustainable should Virgin Atlantic and its pilots union ? British Air Line Pilots Association (BALPA), decide to fly its domestic flights with cockpit crew at the same pay scale and roster as those flying internationally.
Furthermore, Flybe does operate numerous regional routes to major Continental European hubs, such as Paris Charles de Gaulle airport, Geneva, Frankfurt, Brussels, Amsterdam and Helsinki in Finland, especially its Finland operation that connects many Finnish cities to the Finnish capital. As Flybe?s ambition is to become a pan-European regional aviation brand, it makes even more sense for Virgin Atlantic to partner with it to provide international feeding for the loss-making hybrid carrier, which lost ?3.8 billion in FY2011 ending 31st March.
Image Courtesy of Bloomberg
Virgin Atlantic should join Star, strengthen alliance with Virgin Australia
While Virgin Atlantic needs to partner with Flybe to strengthen its domestic operations in the short term and free up scarce capital resources to pursue better rate of return in emerging markets, it has to join Star Alliance and strengthen its alliance with Virgin Group airlines around the world, especially with Virgin Australia on the lucrative but hotly-contested Kangaroo or Falcon Route for origin and destination (O&D) traffic between Australia and Europe.
The need to join Star Alliance is necessitated by the fact that its capacity share at London Heathrow is just 5.4% whereas British Airways (BA) has a dominant 45.6% capacity share and a 51.8% share of slots, which is consistent with European majors? shares at their respective hubs, such as Lufthansa having a 67% share of slots, whereas?Air France-KLM have 59% and 57% share of slots at Paris Charles de Gaulle Airport and Amsterdam Schiphol airport, respectively.
Despite Virgin Atlantic has been expanding its North Atlantic capacity in the past few months while others have pared back capacity in order to preserve better yields, its share is nevertheless dismal, with a 5.28% capacity share, or 579 million available seat kilometres (ASKs) offering 84,000 weekly seats, a 9.2% year-over-year increase. This is in sharp contrast to United Airlines? 12% capacity share with 1.32 billion ASK offering 200,000 weekly seats, which is the biggest North Atlantic carrier for the month of September, according to Innovata data.
The second and third-largest North Atlantic carriers, SkyTeam?s Delta Air Lines and oneworld?s British Airways (BA), in the meantime, has a capacity share of 11.8% and 11.4%, respectively which represent a respective year-over-year growth rate of -1.8% and 5.7%. Lufthansa, the fourth-biggest carrier in the North Atlantic market, has a 10.1% capacity share albeit its capacity, measured in available seat kilometres (ASKs), has dropped 3.2% year-over-year to 1.11 billion or a 3.4% decline in weekly seats offered to 151,000.
Should Virgin Atlantic join the Star Alliance and its transatlantic joint venture (JV) ?Atlantic++?, an anti-trust immunised?JV between Lufthansa, United Continental, Air Canada, Swiss International Air Lines and Austrian Airlines, it will gain instant access to United Airlines? comprehensive US network by rationalising its New York flights from both John F. Kennedy International Airport and Newark to just Newark where United Airlines has a strong presence, or possibly codeshare flights to many other North American destinations besides the ones it currently serves ? Boston, Washington DC, Orlando, Miami, Chicago, Las Vegas, Los Angeles, San Francisco and Vancouver.
In addition, Virgin Atlantic can enjoy improved yields through co-ordinated pricing and scheduling, improved network access and reciprocal frequent-flyer programme than it otherwise could as a standalone player. It could also help cushion the effect from a potential stake acquisition by British Airways (BA) in bankrupt American Airlines (AA), after the chief executive of BA?s parent International Airlines Group (IAG), Willie Walsh, said it may buy a stake in AA and strengthen its oneworld alliance, of which AA holds a 3.5% capacity share at London Heathrow.?Adding Virgin into the Atlantic++ immunised transatlantic joint venture (JV) would add around 5% of capacity share to the Star Alliance?s 32.3% share, against oneworld?s 18.9% and SkyTeam?s 18.2% shares.
Most importantly, Virgin Atlantic has to strengthen its ties with its 49% shareholder Singapore Airlines (SIA) in addition to Virgin Australia, regardless of whether it joins Star Alliance or not.
Make no mistake, while joining Star Alliance still provides the best value to Virgin Atlantic as it could possibly lease some slots from fellow Star member Lufthansa which holds a 3.7% capacity share at London Heathrow, and it is best for Virgin Atlantic to realise the bigger picture and face the reality of increased collaboration as soon as possible before it is too little and too late, there are things it could have done and should do straightaway.
For instance, it currently has a codeshare agreement with Virgin Australia on the Hong Kong-Sydney route while it flies to Dubai once a day. Virgin Atlantic should switch the Dubai flights to Abu Dhabi and extend the codeshare agreement to the London Heathrow-Abu Dhabi route with Virgin Australia to where the latter operates a once daily flight to Abu Dhabi. Should Virgin Atlantic intend to maximise its volume effect for the codeshare agreement, it could complement it by entering another codeshare agreement with Abu Dhabi-based Etihad Airways, an existing partner of Virgin Australia, which will shift the traffic further to the Falcon Route and grow the Eithad-Virgin Australia partnership instead of undermining it.
Further, it should launch flights to Asian destinations as it currently flies to Hong Kong, Shanghai and Tokyo only. It could also launch flights from London Heathrow to Singapore Changi airport and enter into a codeshare agreement with Singapore Airlines (SIA),?its 49% owner and a codeshare partner of Virgin Australia to Paris and Frankfurt, thereby offering travellers a complete variety of choice going to Australia.
Image Courtesy of Virgin Australia
Virgin Atlantic should take action now before it is too late
While Virgin Atlantic fails to acquire British Midland Airways (bmi) and secure its coveted London Heathrow slots, its hard-earned independence should have been more carefully weighed against the cost of being unaligned and the cost of failing to acquire bmi, which is to expand its international operation.
?We made an offer for bmi and BA made another one to stop us getting it. In the meantime, what should be happening is more runways, so we?re very sad at what the DfT [Department of Transport] has said about delaying the review. It?s holding Great Britain?back and holding us back,? Virgin Atlantic founder Richard Branson said.
?That was the right offer for bmi. We?re doing the best we can. Ever since we set up the airline 28 years ago Heathrow has been full,? Branson lamented.
This is in spite of British Airways (BA) successfully acquiring bmi on a very attractive commercial term that saw its acquisition price being significantly discounted owing to Lufthansa?s failure to sell the low-cost bmi Baby unit, and?Delta Air Lines, US Airways and Continental Airlines successfully obtaining slots following the 2007 historic European Union (EU) ? United States open skies accord.
Worse still, Virgin Atlantic has not relied on its partners, or the lack thereof, to remedy its network deficiency in Asia/Pacific and Latin America.
As British Airways evaluates launching new routes to secondary Chinese cities such as Chonqqing and Chengdu, Virgin Atlantic is standing still and even does not have flights to Beijing, in addition to Singapore, Bangkok, Kuala Lumpur, Jakarta, Hanoi and Ho Chi Minh City, etc.
In Latin America, British Airways flies to Sao Paulo and Rio de Janeiro in Brazil, a fast-growing emerging market that could bode well for the premium carrier. Launching new flights to Rio de Janeiro and Sao Paulo makes sense for Virgin Atlantic given Brazil is one of the fastest-growing emerging economies in the next 20 years or so and air travel demand between the two countries will be buoyed by the FIFA World Cup in 2014 and the 2016 Olympics.
Making matters worse is the UK coalition government which has a pledge not to build a 3rd runway at London Heathrow that offers the quickest solution to a lack of airport capacity in the London area.
?There are lots of different options for increasing airport capacity,? UK prime minister David Cameron said, despite calls from?39 Conservative lawmakers to build 2 new runways to increase passenger capacity at London Heathrow.
While introducing the Airbus A380 superjumbo into its fleet can help provide more lift for a limited number of slots, Virgin Atlantic needs more mid-sized long-haul, fuel-efficient aircraft such as the Boeing 787-9 Dreamliner for the medium term to replace its ageing gas-guzzling 4 Airbus A340-300s, 13 Boeing 747-400s and 19 A340-600 airplanes with 4 A340-600s going to be phased out in October 2012.
?I think the A380s in this current climate we will delay further, because there?s a recession going on. What we want are slightly smaller, slightly more efficient planes,? Virgin Atlantic founder Richard Branson commented.
With Qantas cancelling its 35 firm orders for the 787-9 thereby freeing up scarce delivery slots in 2014 and 2015, Virgin Atlantic could grab this unique opportunity to place additional 787-9 orders and secure early availability at a premium and retire its remaining A340 fleets much faster. In doing so, its fuel expenditure will decrease gradually despite a sustained high oil price even at a time of economic stagnation or anaemic global economic recovery, as the 787-9 burns 2.4 litres (L) of fuel per passenger per 100 kilometres (km) with a range of?8,050nm and 280 passengers, whereas the A340-600 burns 3.5l of fuel per passenger per 100km.
Last but not least, Virgin Atlantic should take the unique opportunity to order additional 787-9 examples which Qantas cancelled, align itself with Virgin Australia and Singapore Airlines much more closely or even enter a codeshare agreement with Etihad Airways and switch its daily Dubai flights to Abu Dhabi, while adopting a capital-lite business model by partnering with Flybe to create a true domestic feed network. This will free up key capital resources for Virgin Atlantic to pursue international growth which carries a higher rate of return for shareholders and improve its overall standing against its arch-rival British Airways (BA).
After all, Virgin Atlantic has already missed out on its chance to grow internationally repeatedly and there is no guarantee that it can afford in continuously doing so before reaching an inflexion point. At stake is Virgin Atlantic?s future and its future role in the air transport industry, and the sooner it listens to the wake-up calls and faces the reality, the better.
Image Courtesy of Boeing
Source: http://www.aspireaviation.com/2012/08/30/a-major-restructuring-for-virgin-atlantic-is-overdue/
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