Budget airlines need alliance to fight BA SBHD: Merger talks between Virgin and easyJet have faltered, but they will need to resolve their differences to combat BA. By David Benady and Stephanie Bentl

Although the talks may have stalled, the fact that easyJet and Virgin Express have discussed an “arrangement” or merger shows that this year’s launch of British Airways’ low-cost airline is starting to affect the shape of the market. Sources say the two sides met on November 18 and that a merger – to create a powerful low-cost airline as early as March or April – was on the agenda. Both sides admit they have had conversations but Virgin denies a merger is being discussed at the moment, while easyJet refuses to comment on the detail of the meeting. Insiders say there is still “more than a 50 per cent chance” that a deal will be struck, though the branding of any merged airline could be a stumbling block. It is thought any deal would involve a share swap. Virgin Express, which achieved a $98m (60m) public listing on New York’s Nasdaq market and on the Brussels stock exchange in November, would swap shares for a stake in easyJet, which is owned by the Haji-Ioannou family. The November 18 talks were followed by a meeting between Stelios Haji-Ioannou, easyJet chairman, and Virgin Express chief executive Jonathan Ornstein in Brussels. The creation by BA of its own discount airline, codenamed operation Blue Sky, was greeted with stiff protests from both Haji-Ioannou and Virgin’s Richard Branson. They argued that BA would use profits from its lucrative international routes to subsidise the discount airline. Haji-Ioannou filed a complaint with the European Commission in November, claiming the BA plan was an abuse of its dominant market position. A merger could put easyJet and Virgin in a stronger position to combat the threat from BA. The two airlines fly different routes and believe they would escape a referral to competition authorities. Both use the same aircraft, the Boeing 737 (easyJet is awaiting delivery of 12 new Boeing 737-300s in August) and Virgin Express wants new planes – it hopes to have a total of about 20 by the summer. The two operations also share the same type of booking and reservation systems, although easyJet exclusively uses direct selling, while Virgin Express relies to an extent on travel agents. Virgin Express operates out of Brussels, while easyJet runs out of an overcrowded Luton and increasingly Liverpool and is looking at basing more of its aircraft in Amsterdam. The company would jump at the chance of extra room for its planes in Brussels and if the merger goes ahead, one possibility would be for the two to operate independently, one in the UK and one on mainland Europe. But the main stumbling block to any deal appears to be how the merged airline would be branded. If it were to use the Virgin name, it would probably have to pay a fee to Virgin – the Virgin Express flotation prospectus expresses this as 0.5 to one per cent of turnover. The Virgin name also has strong connotations in air travel, given the powerful branding of Virgin Atlantic, with top in-flight entertainment and all the trappings that are absent in no-frills travel. There are fears that using the internationally known Virgin name in the UK for a budget airline could create expectations that are not fulfilled. A possible compromise could be to use the easyJet brand name in the UK and the Virgin Express name in Europe, though this would defy the principles of any discount operation, which make savings through consolidating marketing budgets. Tony Anderson, easyJet sales and marketing director, refuses to comment on the possibility of a merger, but he says: “We’ve talked to a number of players during 1997 including BA. The launch of Blue Skyä increases the likelihood of consolidation within the no-frills sector during 1998. EasyJet says it is considering all its options, including flotation. We believe the easyJet brand will work for us on a pan-European basis and has a long-term future.” Virgin Express director of corporate affairs Paul Skellon adds: “We’ve always stayed in contact, Jonathan Ornstein has got good contacts with Stelios. We are not in the process of doing something with easyJet. It is not where our area of focus is. We are not talking about a merger, but we have explored co-operation and lots of ideas have been bounced around. There are only three serious players and we have all chatted. The door is always open, but we are not in active merger discussions.” Last October, Branson announced radical expansion plans for Virgin Express, created by the 1996 buyout of Euro-Belgian Airlines. The company is planning to launch services from Birmingham, Manchester, Glasgow and Edinburgh to Brussels and on to Madrid, Rome and Copenhagen. These would add to the existing flights from Heathrow and Gatwick to Brussels, which are also to be expanded. The plans, which go live this spring, would, claims Virgin, undercut BA prices by up to 80 per cent. The talks come as the European airline industry tries to consolidate itself following two years of gradual deregulation. The aim of deregulation was to make it easier for new airlines to launch by allowing greater access to airports and opening up the number of slots available for take-offs and landings. In the past four years, 88 airlines have been set up across Europe, though more than 30 have gone bust. A merger would not only provide some stiff competition to the new BA discount operation. It would also make life more difficult for the other European discount operations such as Irish operator Ryanair and Debonair. It appears to have stalled on the branding issue. But as the launch of BA’s low-cost operation gets closer the two sides may discover that it is something on which they can find agreement after all.

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