The End of the Virgin Airlines Relationship?

From today's The Times (I'll give the link, but it's a paid subscription that you'll need to read it online)
"Two of the world’s biggest airlines have joined forces to examine a bid for Sir Richard Branson’s Virgin Atlantic.

Air France-KLM and America’s Delta, both members of the SkyTeam airline alliance, have linked up to try to tempt Branson into joining their transatlantic joint venture, formed in May 2009. It allows partners to share revenues and costs and to co-ordinate flight schedules. The consortium, which has appointed Goldman Sachs as its adviser, is likely to go head to head with Etihad, owned by the ruling family of Abu Dhabi. Etihad has drafted in Bank of America Merrill Lynch to advise it.

Branson hired Deutsche Bank in November to examine the options for his 51% stake in the airline, which he founded in 1984. The remaining 49% is owned by Singapore Airlines, which has previously indicated that it would sell at the right price.

The Virgin founder was forced to review his airline’s future after bitter rival British Airways was last year given regulatory clearance to form its own transatlantic alliance with American Airlines and Iberia, making it even tougher for Virgin to compete at Heathrow.

Branson campaigned aggressively against the tie-up, saying it would create a “monster monopoly” that would be bad for passengers because it would concentrate pricing power in the hands of fewer airlines. Industry sources said the increased competition across the Atlantic meant Branson would either be forced to bring in a deep-pocketed investor or sell out altogether.

It is not the first time Delta and Air France have joined together to run the rule over a potential target.

Last year the SkyTeam partners were in talks about investing €1.5 billion (£1.3 billion) in Japan Airlines, which was in dire financial straits.

Japan eventually spurned their approach, deciding to end talks with Delta and remain in the Oneworld airline alliance to preserve its relationship with American Airlines and British Airways.

Airlines have been huddling together to ride out the turbulence of the worst economic downturn since the Great Depression.

Delta merged with Northwest Airlines in 2008 to create the world’s biggest airline, with 786 aircraft.

BA has also recently completed its long-running merger with Spanish partner Iberia to create International Airlines Group.

Meanwhile, Lufthansa, the German flag carrier, has been on an unprecedented spending spree over the last few years, snapping up BMI British Midland, Brussels, Swiss and Austrian Airlines.

James Hogan, chief executive of Etihad, has decided to get in on the action and has written to Deutsche to register his interest in Virgin Atlantic.

Virgin said: “Virgin Atlantic is a strong, independent business with a good growth position at both London Heathrow and Gatwick, so we are not surprised there is interest in us.”

http://www.thesundaytimes.co.uk/sto/business/Companies/article555344.ece

 

I posted in another thread (http://milepoint.com/forums/threads/virgin-atlantic-with-co-miles.1811/) that I'm worried the VS relationship will end, but it was for other reasons. It might have made sense for CO to partner with them, but UA adds many more flights to LHR (SFO, LAX, ORD, IAD, in addition to IAH and EWR) and thus the TATL part of VS is mostly irrelevant to UACO. Yes, VS also offers flights to Asia, Africa and Australia as well, but they are of little interest to UACO - Asia and Australia are TPAC for American fliers and LH can be used for connections to Africa. So, all things considered, I was expecting the CO partnership with VS to be terminated anyway.

It will be interesting if VS joins an alliance. SRB has resisted it so far, but there has always been speculation, especially with SQ's 49% stake. If they join ST, then that alliance will suddenly become more attractive to me. I also wonder what such a move would mean for the rest of the airlines in the Virgin group.

 

The other potential acquierer, according to the article, is Etihad, which has been orbiting the Star Alliance. If they were to confirm membership, or have it confirmed on them, and they also succeed in the quest for VS, then this thread may become moot.

I agree with your assessment about route overlapping, and its effect on the continued relationship with the new UA/CO.

 

Very interesting article. Thanks for sharing! I've wndered about how long the CO relationship is going to last. I can't imagine it will last past the date that the CO code goes away.

 

The AF-KL-DL acquisition of VS doesn't make any sense. LHR-CDG is 216 mi, LHR-AMS is 236 mi. What does ST need with another long haul base in NW Europe? What does make sense is a *A take over of VS, either by SQ (not likely) or LH (more likely). If that were to happen you would have VS and BD operating as a de-facto carrier out of LHR that can take on BA.

 

Hub-wise indeed a bit strange, on the other hand, getting a nice firm ST presence in London, that's something SkyTeam is lacking at the moment. Remember how *A was very happy about CO's greater NYC presence...

I wonder if LH would acquire VS on those grounds. They've been gutting BD (no more BD AMS-LON!), and do remember that VS is also taking high revenue passengers on the transatlantic ex-LON market from LH...

It would however be quite nice I think, and give *A a very large leg-up over ST, which might be one the reasons ST is also actively pursuing a bid...

 

But you have to remember LHR is only a long haul base for VS, there are no short hauls. So either it's all OD traffic, or connecting on to another continent. It doesn't really matter if I fly from SEA-LHR-JNB or SEA-AMS/CDG-JNB. Sure AF/DL picks up marginal revenue on the TATL JV routes, but they have to share it as well. Plus AF loses revenue because there is no JV on the onward routes.

As an O/D market, there is an argument that it drops a lot of connections into non-stops out BOS, MIA, LAX, SFO, ORD, and IAD. But the people that wanted the non-stop are already flying them and DL doesn't gain the revenue the connection got them. Sure they may steal some clients from UA, as VS flies into all UA hubs save DEN.

I can see DL benefiting some, maybe. But I see no gain for AF/KL, unless they are just going for market saturation and hoping for the best. That seems like a poor way to run an airline though. Though when your two hubs are 300 miles apart, they may not care about adding a third.

I stand-by what I said, I think the only win is for LH to turn LHR into a true hub with a VS/BD combination. Whether or not that could get by EU regulators is another story. There is also a certain historical irony with LH buying what previously could not be taken by force.

 

I'm not sure, but I've always read from every airline when they were beating their drum that London is a very strong O/D market, plus the last year several SkyTeam flights (well AF/KL/DL) have been launched between non-hub cities (from the flying metal perspective). I think this is partially a move to not cede market-share in the short term and more consolidation in the long term.

AMS and CDG fulfill somewhat different (though overlapping) roles I think at times. But then again, LH has two hubs in the same country even (FRA/MUC)... But I do think that LHR as a hub for AF/KL might get interesting due to it being outside of Schengen and thus less preferable for travellers when considering AMS/CDG (leaving other issues out of scope)...

I would love a good VS/BD combination to break open the Europe-London markets, it would make a good fit. I do wonder whether that combination would join an alliance though, and what SQ would want/do with their stake... BA till now has been able to ward off having to compete with a real powerhouse in the LON area, it could get very ugly very quickly... The EU regulators have less of a say over the UK market if I recall correctly, but this could get highly political given the homebase of AF and LH...

 

Here is a link to an article that announces the hire and possible scenarios

I could not agree more. And actually VS/BD would be a very interesting scenario and would give IBBAAA a real run for their money at LHR.
Interesting enough for me to almost consider flying via LHR

GBM

 

would singapore airlines have a say anywhere? after all they do have a 49% stake dont they? would Branson's 51 percent be attractive enough to someone?

 

I would definitely prefer a VS/BD tie up (with BD DC as the FFP )

Not sure LH are interested in keeping BD or taking on VS. They have decided not to merge DC into M&M and overall don't seem as interested in integrating BD as they have with other acquisitions.

However EY buying both SQ and SRB's stakes could be interesting, especially if they also bought BD from LH. This would make it very interesting whether they join *A or not.

I definitely agree that VS/BD would be the best from a consumer perspective as it'd give AA/IB/BA some real competition out of LON.

 

This is very good news. However, I don't know how this gonna help SkyTeam? Since SkyTeam have hubs such as CDG, AMS, MXP and yes maybe you could add LHR. I think they are after the LHR slots. Then again... as reported in past news Virgin has pretty FA's.

 

Etihad buying VS plus joining star would be awesome

 

Here, here. This would be the absolute best outcome IMO.

 

As I understand it, both VS and BD's business is mostly O/D out of LHR. It has been VS's Achilles Heel and the one of the reasons why VS has not grown faster, despite offering the best longhaul hard and soft product ex-LHR. Even as part of LH, BD still is largely O/D, with LH managing its own connecting traffic ex-LHR to FRA or MUC.

So these two airlines control a very large percentage of slots at LHR, a place where slots are very valuable and next to impossible to obtain in any quantity. It's also a place where OneWorld have over 50% of slots and where O/D traffic is particularly strong. It also has more international traffic than any other airport, IIRC.

Putting VS into SkyTeam would result in OneWorld remaining the predominant carrier at LHR with *A and ST playing bit part roles. VS joining *A, however, would mean that *A becomes a significant and viable competitor to OneWorld at LHR: I would imagine that this would be better for VS's new owner and better for the travelling public.

 

I also agree that a VS & BD combination would be best. Reminds me of the old Pan Am situation: they had a terrific world-wide route network, with very little in the way of domestic US feeder flights. Yes, the UK isn't the same size as the US, but having a combination of long-haul with short and medium-haul flights might be a very attractive situation for VS an BD.