Transport Airlines

Does the Virgin-Delta deal prove British Airways boss right? Not exactly

Dec 17, 2012 1:42 am

Skift Take

BA’s Willie Walsh can’t be proven right about mergers until he’s able to turn his acquisition spree into a well-functioning concern, which he’s plenty far from being able to do.

— Jason Clampet

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Benjamin Myers  / Reuters

British billionaire Richard Branson arrives for a State Dinner held in honor of Britain's Prime Minister David Cameron and his wife Samantha at the White House in Washington March 14, 2012. Benjamin Myers / Reuters


Air travel and global communications promised to bring people together. But what two titans of those industries have shown is that modern technology can also reignite a good business feud across three continents.

British Airways and Virgin Atlantic hangars sit beside each other at Heathrow, but the bosses are poles apart. In Mumbai to launch new flights recently, Virgin’s Sir Richard Branson responded to a question about Willie Walsh, chief executive of BA’s parent company International Airlines Group, with a simple “Who?” – a slight noted instantly at IAG’s head office.

By 3am, in the galley of a BA plane flying over central Russia last Sunday, Walsh was sharing a few choice thoughts on rumours that Virgin was set to announce a deal with American carrier Delta Air Lines. A buyout could only signal the end of Branson’s beloved brand, he speculated.

Branson, leaving New York for his Necker Island home, was quick to reply to reports of Walsh’s words. “This is wishful thinking and totally misguided. Will BA never learn?” he wrote on his blog, offering a £1m bet that Virgin Atlantic’s name would still be on the planes in five years’ time.

Walsh, now in the South Korean capital, Seoul, responded that if Branson was saying he would still own the airline in its current form, it was an interesting bet. But he wanted to even the stakes up with the man he called a billionaire banker: “I don’t think a million pounds would hurt him. A knee in the groin maybe – I’m sure that would be just as painful for him as me.”

Branson, back in Necker – with details of Delta’s £224m purchase of Singapore Airlines’ 49% stake in Virgin confirmed in transatlantic press conferences – leapt jubilantly on Walsh’s “rather childish response”, saying: “It seems a very painful and foolish thing for him to propose, but I would be happy to accept. We’ve got used to BA hitting below the belt over the years, but I’m confident it would be the other way around on this occasion.”

Although he referred to the bet as “this bit of fun”, whoever gets to do the kneeing is likely to apply maximum force. Both men are keenly aware of the value of headlines, but this is not pantomime enmity: it’s born of fierce competition – and it’s personal. Walsh and Virgin’s departing chief executive, Steve Ridgway, share public platforms and are amicable. But with the Virgin founder, it’s a different matter.

Bad blood between the airlines long predates Walsh. In 1993 the “dirty tricks” legal battles culminated in BA paying Virgin more than £3m in damages and costs to settle a libel case. The price-fixing scandal of the mid-2000s, which led to BA being fined £58.5m for colluding on fuel surcharges while Virgin escaped punishment for reporting it to the authorities, still rankles.

Beyond these historic wounds, BA has been constantly aggravated by an upstart that took it on and – although only a fraction of BA’s size – consistently demanded equal attention, and usually received it.

Most think mergers inevitable in a perennially struggling industry hit hard by recession and sky-high fuel prices. Virgin though has not simply – until now – kept fiercely clear of alliances, Singapore’s investment notwithstanding, but attempted to derail Walsh’s own plans, including IAG’s takeover of the loss-making bmi.

Douglas McNeill, a transport analyst at Charles Stanley Securities, says: “It’s long been acknowledged that the industry would benefit from consolidation. There are simply too many airlines chasing too few passengers.

“But talk is cheap – Walsh got on and made it happen. He’s put together four significant deals in two years: first Iberia-BA, then adding bmi and [Spanish airline] Vueling, with the American Airlines joint venture along the way. And Virgin has lobbied against much of that activity.” In McNeill’s view, Walsh “sees himself as helping to create the future of the industry, and Virgin as an obstacle to progress”.

Yet the deal Virgin struck with Delta last week, forming a joint venture on transatlantic routes that will (with competition clearance) see the airlines feeding each other’s passengers into their own network, is a tacit admission that Walsh’s vision of the future is inescapable. Looking ever more the minnow as rivals combined, Virgin needed something to emulate BA’s own effective merger of UK-US routes with American Airlines.

Aviation consultant Chris Tarry says the upside is clear: “It gives Delta and Skyteam greater access to Heathrow, and feeds more of its origin traffic to London. And it gives Virgin greater access to the domestic markets in the States.” But he warns that the “synergies” airlines seek in partnerships and alliances don’t automatically follow. Sceptics of the benefits of cross-border consolidation can point to the problems of Air France-KLM – if not IAG itself.

Ownership rules restrict takeovers from outside the EU. Brian Pearce, chief economist at the International Air Transport Association, points out that antiquated bilateral treaties on flying rights between nations also inhibit full mergers, so airlines are finding inventive ways to achieve the same results. Airline alliances, he added, had not resolved issues such as unproductive scheduling clashes: “This is the next step from the alliance. Airlines have found they can plan their businesses much more effectively in a joint venture.”

Now both Walsh’s and Branson’s airlines will be buoyed in competition on lucrative transatlantic routes by a major US partner.

And as for that knee-in-groin bet? McNeill, like Walsh, thinks there could be a threat to the Virgin brand if Delta gets the chance to buy Branson’s controlling stake, but there are plenty of obstacles. While it doesn’t take a contract lawyer to spot that these two wily operators have left enough wriggle room in the terms of the wager for 11 December 2017 to pass without any testicular nastiness for either, McNeill concluded: “Walsh might be well advised to put a cricket box on his Christmas list.”


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