Skift Take

On a branding and product level, Virgin Atlantic has long punched above its weight. But overall, Virgin Atlantic is just another undersize airline trying to squeeze out a profit amid intense competition. Perhaps Heathrow's expansion will change that. But don't bet on it.

Virgin Atlantic, tiny by global airline standards, outlined a plan in London to fly to 84 new destinations in Europe, the Americas, Asia, and Australia as it seeks to challenge British Airways’ market dominance in London.

But there’s a giant catch. British Airways owns London not because of its tradition, service standards or marketing acumen, but because it controls the vast majority of slots at London Heathrow Airport. According to Virgin Atlantic, British Airways’ parent International Airline Group, or IAG, holds more than 55 percent of all of takeoff and landing rights at Heathrow, with no other carrier holding more than 5 percent.

That could change, though. Heathrow plans to open a new runway within the next decade, its third, and the airport’s capacity will increase. Virgin Atlantic on Wednesday launched a campaign to persuade regulators to award it more than its share of slots, so it can seriously challenge British Airways.

If it receives all the new rights it wants, Virgin Atlantic , which now flies to just 19 destinations, said it could start 12 new routes in the UK, 37 in Europe, and 35 in the rest of the world. However, that kind of growth is far from a sure thing, since British Airways, as market leader, would get the bulk of the slots under current allocation rules. Not surprisingly, Virgin Atlantic wants to change those rules.

“This is a once in a lifetime opportunity presented to Virgin Atlantic once a third runway is built,” Virgin Atlantic told Skift recently in an interview in London. “Our ambition is to assume the role of Britain’s second flag carrier. That can only be achieved aided by changes in the way slots will be allocated.”

The average traveler might think Virgin Atlantic is already Britain’s second flag carrier. But despite all of the buzz created over the past 35 years by Richard Branson’s marketing machine, Virgin Atlantic is a commercial afterthought.The airline has just 47 aircraft, all of them long-haul, and with the exception of a few routes to Asia and South America, it flies mainly to North America and the Caribbean, where it leverages its antitrust immunity with Delta Air Lines.

Virgin Atlantic which is 49 percent owned by Delta, recently bought a piece of FlyBe, a regional British airline flying turboprops, to feed some of its flights in London and Manchester, but even that is a small operation.

“They are sort of an undersized airline with a bad track record, and they are competing against one of the strongest and smartest carriers in the world,” said Jay Shabat, senior analyst at Skift Airline Weekly. “IAG is just awesome. They don’t play games.”

Dreams of Grandeur

In the airline’s dream world, all of that changes.

On Wednesday, it released a list of all the routes it could fly at Heathrow, including Aberdeen, Britain, Kolkata, India, and Kumming, China. While expansion to the largest European and global cities makes sense, some of Virgin Atlantic’s proposed routes seem far-fetched. For example, Virgin Atlantic said it could fly to Sydney, which would be the world’s longest route, too far for any current-generation airplane to fly nonstop.

Then again, even if regulators are receptive to Virgin Atlantic’s arguments, the airline is unlikely to win enough slots for every flight. Its announcement on Wednesday appears to be more of a negotiating ploy, with the airline assuring regulators it can challenge British Airways’ monopoly.

Virgin Atlantic claims it could provide competition on 26 routes where British Airways’ or one of its joint venture partners, such as American Airlines, is the only option. Overall, Virgin Atlantic said, International Airlines Group or its joint venture partners operate on 77 monopoly routes.

In the worse-case scenario for Virgin Atlantic, International Airlines Group could extend its advantage. The new runway, which should open in 2026, would accommodate 350 new slots, and under current guidelines that look at how many slots an airline has today, British Airways would get many of them.

Meanwhile, Weiss said, Virgin Atlantic would get only 10 slots, bringing its total haul to 40. On a percentage basis, that’s a big jump, but it’s not nearly enough for an airline to operate a major global hub.

“We believe that this current slot regime is very appropriate for running day-to-day operations, but it not fit for purpose for a 50 percent increase in slots available,” Weiss said. “The government will not achieve its objective of providing domestic feed and having new entrants competing on long-haul routes.”

Ministers at the highest level of the UK government have “bigger fish to fry,” with Brexit, Weiss acknowledged, but he said mid-level bureaucrats handling the issue have been receptive to the airline’s arguments.

“When you explain that there are 350 new slots and Virgin Atlantic will get 10, everyone looks at you and says, ‘Really?'” Weiss said. “Yes, really. And that’s where we start our conversation. I think we’re barging into an open door.”

The runway almost certainly will be built, but Airline Weekly’s Shabat said he wonders if the best thing for Virgin Atlantic would be Heathrow staying the same size, as more slots will lead to more competition.

Now, low-cost-carriers generally avoid the airport because of the high cost of entry. And even major global carriers tend not to grow, since a slot is so expensive. Scandinavian Airlines sold two in 2017 for $75 million, according to reports.

“You’re in a protected little cocoon at Heathrow” Shabat said.

But since the airport is going ahead with the plan, Shabat said Virgin Atlantic might as well ask for all it can.

“You can make money with Heathrow slots,” he said. “They don’t want to be in situation where British Airways gets the lion share of the slots and they are even more of an afterthought than they are now.”

Feeding Long-Haul Jets

Virgin Atlantic likely will not get all it wants, but if it gets a reasonable number of new slots, the airline’s strategy should change to more closely mimic other successful global airlines.

Today, Virgin Atlantic is among the world’s most unusual airlines, because it flies only widebody jets on long-haul routes. Most airlines fly a mixture of short-haul and long-haul routes, using smaller airplanes to feed intercontinental flights. Even in a market as large as London, airlines prefer to have some passengers flying in from Continental Europe to fill connecting flights.

Virgin Atlantic has experimented with connecting flights before. From 2013 to 2015, it operated an airline called Little Red, flying four Airbus A320 leased from Aer Lingus on domestic routes. The airline lost a considerable money before its parent closed it.

Virgin Atlantic soon will try again. Earlier this year, it bought a share of FlyBe, a struggling turboprop operator with robust operations in Manchester and London.

But to feed its proposed new flights, Virgin Atlantic will need more feed, and that feed will require more slots, Weiss said.

“We would like to double on the long haul, so 30 more slots,” Weiss said. “But in order to achieve success, you need a ratio anywhere between two and a half to five short-haul domestic slots and European slots to feed one long haul, so we’re talking about 150 slots that we would like to have.”

If regulators give Virgin Atlantic more slots, the airline would need to add new airplanes with Weiss saying the airline could grow to up to 80 aircraft.

To fly European and UK routes, Virgin Atlantic might acquire another short-haul airline, but Weiss said it’s too soon after the FlyBe acquisition to give that serious consideration.

“Let’s rebrand it, let’s get it up to the standards that we need it to be, because our name, Virgin, will be on on the door,” Weiss said. “First, there’s a bit of work to be done, but consolidation Europe has started to happen. Some of the weaker carriers have gone away. I believe there will be further opportunities, but we’ve got enough right now to handle.”


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Tags: british airways, International Airlines Group, London Heathrow, virgin atlantic

Photo credit: A Virgin Atlantic jet soars over British Airways airplanes at London Heathrow. Virgin Atlantic wants to increase its size at Heathrow. 277085

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