Virgin Atlantic faces period of turbulence

Virgin Atlantic reaches its 25th anniversary next June and is already planning quite a celebration. The airline is expected to mark its quarter century by unveiling a major advertising campaign reminding customers of the unique position the brand occupies in the airline sector. 

Details are sketchy, but the ads could reflect on Virgin’s 25 years of airline innovation, from introducing the first in-seat video screens to its status as the first (and only) long-haul rival to a major European national carrier.

But as the Open Skies deregulation of transatlantic flights takes hold – and even Ryanair announced this week that it plans to operate a service between the UK and US – some are wondering whether the next 25 years will be as kind to Virgin Atlantic as the first 25 have been.

When Virgin Atlantic’s anniversary arrives on June 22, 2009, the worlds of transatlantic and long-haul travel are likely to have changed beyond recognition. By next June, competition authorities should have ruled on British Airways’ third attempt to tie up with American Airways. This is being fiercely opposed by Virgin through its “no way BA/AA” campaign, which portrays the deal to merge transatlantic operations as anticompetitive and likely to lead to increased prices. Meanwhile, BA’s proposed merger with Spain’s national carrier Iberia – delayed this week – may have taken place.

There should also be some answers to questions about Virgin’s own position in the rapidly consolidating airline sector.

Virgin has said it wants to buy British carrier BMI and get hold of its landing slots at Heathrow, though observers believe such a deal is unlikely. However, there is a possibility that Virgin could strike some kind of partnership deal with Lufthansa, which owns a 30% stake in BMI and is seen as the most likely victor in a buyout of the UK airline.

Virgin Atlantic’s prospects are summed up by airline consultant Eli Abeles of ABS Consultancy. “The chances of the BA/AA merger going ahead are 60%. The chances of Virgin buying BMI are 20%. If both of these go against Virgin, it could be in serious trouble over the long term.”

He points out that as a standalone airline, Virgin Atlantic does not reap the benefits of alliances accruing to rivals, such as offering passengers increased frequent flyer miles through onward travel. This puts pressure on it to expand its agreements with Continental, Jet and Singapore Airlines, which owns a 49% stake in Virgin Atlantic.

However, Abeles doubts stories that have suggested Singapore Airlines is looking to sell its share. But he believes Singapore would like Virgin to work more closely with it rather than “doing its own thing”.

By contrast, other observers are confident that Virgin Atlantic can continue to thrive as a niche, upmarket player even in the face of consolidation and without the need to tie up with rivals. “Airlines are going to get bigger, and economies of scale will become more important,” says Charles Trevail, founder of brand consultancy Promise.

“In a business where margins are small, Virgin’s role as a premium, niche operator is not a bad place to be as it is long-established and has a powerful brand.” Trevail is impressed by the range of schemes launched by Virgin which seal the loyalty of customers. One is the “limo to lounge in ten minutes” offering, which is the airline’s promise to passengers arriving by car at its Upper Class Wing at Heathrow Terminal 3 to speed them through check-in. This is seen as preferable to climbing endless escalators in BA’s Terminal 5.

Trevail was closely involved with the launch of Silverjet, the business class airline offering transatlantic flights between Luton and the US which went bust earlier this year. This underlines the difficulties faced by new entrants into the market, but emphasises the strengths of the long-established Virgin Atlantic brand against smaller rivals.

What can keep Virgin Atlantic strong in the rapidly shifting airline market is the powerful franchise it has forged with its loyal customers, using innovation, marketing and the entertainment values borrowed from Virgin’s music business. A spokesman says: “Innovation is one of our brand values. We’ll always go on investing in the product – that has defined our DNA. On many airlines there is all too often no decent film to watch, there is no fun on board. That is not how travel should be, people want to be entertained and get value for money.”

Some wonder if there will be much for any airline to celebrate by next June as the economic downturn takes hold.

Even so, Virgin Atlantic’s recent results looked promising. Sales, including those of Virgin Holidays, for the 12 months to the end of February this year were up 9% to £2.3bn, with pretax profits rising 38% to £61m. Passenger numbers increased over 7% to 5.7 million after Virgin Atlantic invested heavily in its business class facilities in Heathrow’s Terminal 3 and expanded its network of routes to 30. The airline also claimed it was taking passengers away from British Airways during the bungled opening of Terminal 5.

The spokesman says Virgin Atlantic has always had to strive for business in a competitive, low margin industry. “We are proactive, innovative and forward thinking. We don’t have a right to exist. In Germany, France and Spain they don’t have long haul rivals to their national carriers. We have to do things differently.” He points out that Virgin has ordered 15 Boeing 787 Dreamliners to be delivered by 2013 and adds that margins in the airline industry tend to be “tiny”, with Virgin Atlantic earning margins of about 3%, in comparison to BA’s 10%.

“The industry has never been that profitable. It is very cyclical with huge fixed costs, we have to pay so much to airport operator BAA.” He believes that in an economic downturn, BA could be worse hit than Virgin because it has half of its top 20 key accounts with financial institutions, while Virgin’s accounts tend to be with media companies.

He is also confident that Virgin Atlantic can continue to thrive in its present state even if it doesn’t manage to strike the key deal with BMI. “We have been an upmarket niche operator and we hope in the future we will continue to be so,” the spokesman concludes.

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