Shy Virgin Atlantic seeks early nuptials. Considering merger option - Branson

Virgin Atlantic's President, Sir Richard Branson, has stated that the carrier is considering the ‘option’ to merge with another carrier, but only if Virgin is unable to remain 'independent'. The airline is 49% owned by Singapore Airlines and SIA is reportedly planning to sell its stake; but that is not a new development.

Virgin remains unaligned and looks increasingly exposed as competing airlines consolidate into alliances or merge completely. Virgin’s nemesis British Airways may be next in line as it slithers slowly but inexorably towards an accommodation with Iberia and American Airlines, the latter now quite possibly to precede the former as BA – according to UK media reports - has commenced retraining staff ahead of a planned roll-out of its alliance with AA in Aug-2010. The carrier expects the agreement to be approved next month while the more formal deal with Iberia is currently pencilled in for Jan-2011, but still has several hurdles to overcome.

Hurdles or not, Branson’s ‘BA/AA No Way’ campaign, which dates back over a decade and which embellished many of his aircraft, seems to have run out of steam even if he is, again, threatening to go to court over it.

Virgin Atlantic has been regrouping, following BA’s decision as the recession set in to turn its focus to building its market share in the upmarket leisure segment, where Virgin is traditionally strong. But that strength is itself a double-edged sword – Virgin Atlantic’s reliance on premium passengers is greater even than that of BA and it has been forced already to axe some of its passenger frills like the manicure service. Virgin opted to reduce capacity over the European Winter just ended by 7%, in reaction to a "bleak" outlook for the airline industry.

In Jan-2010, it entered into a contract to purchase six A330-300 aircraft from Airbus, and to lease another four from AerCap, as part of the carrier’s fleet renewal plans. The lease terms for all aircraft are 12 years and deliveries are scheduled for 2011 and 2012. The ten aircraft, leased to increase capacity while it awaits the delivery of 15 B787s in 2013, are worth approximately USD2.1 billion and will improve services between the UK, Africa, Asia, North America and the Caribbean. The airline plans what it calls “revolutionary onboard cabin innovations” including USB ports and in-flight internet. Virgin will also take six A380s from 2013.

A little more quietly, Virgin cancelled an order for six Airbus A340-600s, whilst bringing in the ten A330s, the first twin-engine aircraft ever operated by the company. In cancelling that order Virgin may have brought the curtain down on the A340, which was regarded as too expensive to operate by many airlines, especially on very long sectors. In all, Virgin has 25 A340s; 19 A340-600s and six A340-300s.

Who would merge with Virgin Atlantic?

Branson’s admission that it may become "impossible for Virgin to remain an independent airline and survive and that it may come to a situation where it has to consolidate" begs the question of just who would want to merge with it anyway?

It is a global airline, with nine US routes, eight in the Caribbean (unashamedly pitched at the premium vacationers), four in Africa, one in the Middle East, and five in Asia Pacific, but it is still slave to a joint ‘old world’ Heathrow/Gatwick base/hub operation where both airports are operating at full capacity and now without the possibility of any relief in the form of additional runways.

Moreover, it is still widely regarded as a point-to-point carrier and therefore less able to benefit from connecting traffic than its better known rival, BA. It has courted both Lufthansa and bmi in recent years, and Lufthansa over bmi (now rebranded as British Midland International), but both appear to have decided to keep their distance.

Virgin currently codeshares with mostly Star Alliance carriers, bmi, SIA, Continental, Air China, ANA, SAA, US Airways and the unaligned Jet Airways and Virgin Blue, but that is still a long way off the more formal arrangement that it now evidently needs.

The one factor in Branson’s favour is that he has managed to retain control over staff relations (ironically by asking them forcibly, last year, to quit if they didn’t like the terms and conditions on offer) while BA shoots itself in the foot with alarming regularity – in Mar-2008 courtesy of the chaotic opening of Heathrow’s Terminal 5, and this year with what seems to be an endless series of strikes by the trades unions Unite and Bassa. Consequently, Virgin’s load factors surged - in both cases by 10% or more - adding to a bottom line that was starting to look like it might go into the red. Remaining profitable will, at least, not actively put a potential merger partner off.

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