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Fri 13 Sep 2013 11:09 AM

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Virgin looks past the Atlantic

Just seven months after becoming the first American to take the helm of Sir Richard Branson’s Virgin Atlantic, Craig Kreeger is hoping its partnership with US carrier Delta Air Lines will bring the British carrier back in the black by 2015, but he has not ruled out further alliances, even with some of the Gulf’s fast-growing airlines.

Virgin looks past the Atlantic

“Coming together is a beginning; keeping together is progress; working together is success,” the legendary carmaker Henry Ford is often quoted as saying in reference to what makes a successful marriage. As the creator of one of America’s most iconic brands, it’s fair to say he knew what he was talking about.

In the aviation sector this advice certainly rings true as alliances, partnerships and the marriage to old rivals seems to have become the de facto way of doing business. Dubai’s Emirates Airline, the once staunchly independent operator, has cosied up to Qantas. Etihad has joined forces with Air France-KLM and has invested in equity partnerships with a whole host of different carriers. Qatar Airways is this month set to join up with the Oneworld alliance.

Diplomatic relations between Britain and the US may have been shaken by events in Syria in recent weeks, but the transatlantic ‘special relationship’ was solidified recently with the announcement that Delta Air Lines, America’s largest carrier, had bought a minority stake in Virgin Atlantic, the British operator owned by Sir Richard Branson.

In June, the $360m deal was given the stamp of approval by the US Justice Department and the European Commission and late last month it was reported the agreement is on track to receive immunity from US antitrust laws to operate a planned transatlantic joint venture.

The US Department of Transportation said it had tentatively concluded that the alliance, which involves Delta buying a 49 percent stake in Virgin Atlantic, would promote competition and would provide benefits to consumers in the North America-United Kingdom market.

“Our big opportunity for change is our relationship with Delta Air Lines,” says Virgin Atlantic CEO Craig Kreeger, who was appointed in February and is the British carrier’s first American CEO.

“We are still waiting for antitrust approval to begin activities on coordination and we anticipate this will offer a whole new host of codeshare destinations in the United States.

“I think it really gives us clear value in two fundamental ways: for our customers that are here in the UK, or going from points east like Dubai, it offers an array of new destinations in the United States that we can offer to those customers on a very seamless basis. We will have 45 new destinations connecting over JFK that didn’t exist a month ago.

“On the other side of the ocean in the United States, if you combine the Virgin Atlantic service experience with Delta’s strength and distribution in the United States and their frequent flyer base and travel agent relationships, we are very confident that will result in many more customers trying our services and liking them and over time move from our competitors to a combination of Delta and Virgin Atlantic.”

In the Middle East, Virgin Atlantic’s only route is into Dubai and Kreeger admits there are no major plans at present to boost its service to and from Heathrow but he is always open to any opportunities that may arise.

“I think our strategy in the Middle East would have to be put in the context of our broader strategy. We are a UK-based airline that serves a blend of business and leisure markets.

“Dubai has become a significant leisure destination for UK customers and it fits in with our general strategy. It fits because of its importance to the UK as a destination and once there we want to make it work by selling on the other side... We don’t have any current plans for expansion in the Middle East [but] we are always looking for the right opportunities.”

The increased links between Dubai and the UK were emphasised by two reports in recent months. The Post Office, the UK’s biggest foreign currency provider, revealed sales of dirhams rose 49 percent year-on-year during July and August, making it one of the fastest-growing currencies this year.

Secondly, the UAE is becoming an increasingly popular destination for British expatriates, edging out more traditional destinations such as France and Spain.

According to the Natwest International Personal Banking Quality of Life report, the country is now the third-most popular destination for Britons seeking to live abroad, up from sixth place last year, and ninth place in 2011.

Having said that, Kreeger says he hasn’t noticed any rise in one-way tickets from London to Dubai just yet: “It is not something I would normally think to ask about. We have been pleased with the load factors we have had this summer, it has been a busy summer to and from Dubai.”

The recent Syrian crisis caused jitters among the business community in Dubai and the stock markets took an early tumble on fears of western military action against president Bashar Al Assad’s regime, but Kreeger is hoping this won’t put people off continuing to buy their dirhams and book holidays in the emirates.

“We haven’t seen any evidence of that. We will be looking at that. The immediate impact has been an increase in fuel prices, for which we are significantly hedged and it is a concern.”

Looking at Virgin Atlantic’s route map, around half of its business is directed towards the US, which explains why the marriage with Delta makes sense. However, Kreeger hasn’t ruled out signing up to a similar alliance looking east, which would give it the same traction and boost its global network.

“We have a number of partners around the world. The question as to whether a Middle East carrier would make sense as an alliance partner, or some form of relationship, is one to be determined.”

Kreeger points out Virgin already has interlining deals — which is a commercial agreement between individual airlines to handle passengers travelling on itineraries that require multiple airlines — with several Middle Eastern carriers, such as Oman Air, Gulf Air, Qatar Airways, Emirates and Saudi Arabian Airlines.

“We do have some opportunities today and take advantage of those. Whether we will choose to create an expanded relationship with some others is to be determined.”

If an alliance with a Gulf carrier was to happen, Abu Dhabi’s Etihad Airways would seem the most likely candidate. Virgin Atlantic’s codesharing partners Virgin Australia and India’s Jet Airways are already part-owned by Etihad. Singapore Airlines and Air New Zealand also have strong links to both carriers. On paper, Etihad would seem the most likely candidate, but Kreeger is keeping his cards close to his chest at the moment.

“I think we are pretty comfortable with the two shareholders that we have, Richard and the Virgin Group owns 51 percent and Delta owns 49. We haven’t contemplated any changes to that... Getting the Delta deal performing well for our customers is job one and the first priority... We will evaluate future alliance partners in other parts of the world, including the Middle East, after we have made some progress there first.”

Of course, Delta was one of the founding carriers behind SkyTeam, the aviation alliance set up in 2000 and which also includes Air France-KLM and Korean Air. While this is also the most likely candidate, Kreeger again has left the door open.

“I do think an alliance decision is one we will have to make. I am not convinced one way or another yet as we have some powerful bilateral partners in different alliances so we will have to decide is there more value in a SkyTeam alliance, which realistically with our relationship with Delta if we were to choose an alliance SkyTeam would be the obvious choice. Is there more value in a SkyTeam alliance rather than a blend of partners or on a bilateral basis? There are pros and cons for both and in due course we will take a close look at which one the answer is.”

All this ultimately comes down to the balance sheet. Last month, Delta reported a quarterly net income of $685m, a turnaround from the $168m loss in the same period a year ago.

At the same time, Virgin Atlantic was having a tougher time over the last year and lower demand for business travel caused by the London Olympics dragged it to a wider annual loss.

In May, it reported a loss of £93m ($141.6m) for the year to the end of February, 16 percent worse than the £80m loss it reported a year earlier. This was despite revenue increasing 5 percent to £2.87bn and 5.5 million passengers using the airline in the 12 months, an increase of 188,000 over last year.

“Last year saw a double-dip recession, a continued weak macroeconomy, and an Olympic Games which, although a fantastic event, severely dented demand for business travel,” Kreeger says, but is confident the airline will be back in the black by 2015.

“To be clear what we are targeting is profitability in the year ending 2015 so it is even sooner than that. Our fiscal year runs March to February and we are absolutely focused on making that happen.”

One of the aims Kreeger is looking to achieve is further expansion into India and Africa: “Virgin Atlantic’s presence in India and Africa is reasonably significant. In Africa we fly to Nigeria and South Africa and currently Ghana and in India we fly to Mumbai and Delhi.”

In 2004, Virgin Nigeria was established but the venture proved futile and Branson pulled out in 2010. Given that experience, Kreeger says there are no plans to invest in an Indian carrier and the likelihood of Virgin India taking to the skies is pretty slim.

“[We] have no plans, from my perspective, for a separate Indian or African operation. Although Richard and the Virgin Group are always looking for good investment opportunities, there are none that I am aware of currently in the planning process for any of those.”

India is the second-largest market for Virgin Atlantic after the US and Kreeger has said in the past the airline is exploring plans to start expanding to new Indian cities once it takes delivery of more fuel-efficient aircraft, such as Boeing’s controversial 787 Dreamliner aircraft.

“We have 16 [787] aircraft on firm order with five options. Of those, the first is to be delivered to Virgin Atlantic in September 2014, so just about a year from now. We will take the aircraft over 2014 to 2017. We will be taking the second 787-900 so we are early in the delivery list and I am excited about the aircraft.”

While complications with batteries and engines saw the Deamliner grounded earlier this year, Kreeger says this will not impact delivery of Virgin Atlantic’s aircraft and he has no concerns about the safety of the model.

“In my seven months here I have spoken to the Boeing team quite a few times to understand how they have been progressing and throughout the time period the 787-800 issues were being worked on and resolved and work continued on the 787-900.

While we have significant delays since the original order was given I haven’t seen any changes to our delivery schedule over the last several months.”

On the Airbus side, delivery dates for Virgin Atlantic’s A380 aircraft is less clear. Virgin Atlantic was one of the first carriers to order the superjumbos from the French-based company when it placed the order for six planes in 2000. They were due to arrive in 2006 but construction issues and the global economic slump extended the delays.

“The A380s are deferred and we will have to consider what we will do with that as we get closer,” Kreeger says. “We have not got any other aircraft and as we get closer we will decide what to do. We have no other aircraft on order. We will have a decision over the next year or so about replacing some of our 747-400s but have not placed any orders or made any decisions yet.”

Branson and the Virgin Atlantic brand are renowned for their marketing prowess and this year made headlines when it introduced stand-up comedians and live music on some of its routes.

“That was a specific promotion in recognition of a comedy festival going on in Edinburgh and it obviously worked out very well and we were quite pleased with it,” Kreeger says. “We don’t have any plans on doing it elsewhere but we are always looking for ways to surprise our customers.”

When it comes to surprising customers, no one does it better than Branson and Virgin. Will that involve a link up with a Gulf carrier? That would certainly be Branson’s biggest surprise yet.

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RAH 6 years ago

"Qatar Airways is this month set to join up with the Oneworld alliance."

QR officially joins oneworld Oct 30th, 2013.