A Rattled Virgin Atlantic Plans London-Manchester Flights
08/21/2012| 11:04am US/Eastern
-- Virgin Atlantic move follows sale of bmi to British Airways
-- Virgin Group's rail unit lost U.K. rail franchise last week
-- Short haul seen as Virgin Atlantic loss leader for premium long-haul traffic
By Marietta Cauchi
LONDON--Richard Branson's Virgin Group, bristling from recent setbacks to its U.K. travel-market strategy, is to take on British Airways on its home turf as its 51%-held Virgin Atlantic airline plans to start flying between London and Manchester, one of the U.K.'s biggest cities, from early next year.
This first foray into the short-haul market by Virgin Atlantic, a joint venture between Virgin and Singapore Airlines (C6L.SG), follows the airline's unsuccessful bid for bmi ltd., the regional British carrier bought in April by BA's parent International Consolidated Airlines Group (>> International Consolidated Airlines Grp).
Bmi, whose previous owner was Deutsche Lufthansa AG (>> Deutsche Lufthansa AG), has much sought-after take-off and landing slots at Heathrow, London's biggest airport which is operating at full capacity, and provided Virgin Atlantic with connecting traffic under a now-defunct code-sharing agreement. The U.K. anti-trust authorities approved the BA-bmi deal but Virgin Atlantic has appealed to the European Commission on the grounds that it is anti-competitive.
Virgin Rail Group, jointly owned by Virgin and Stagecoach Group PLC (SACKY), lost the contract to run the London-to-Scotland rail service, passing through Manchester, to rival bidder FirstGroup PLC (>> FirstGroup plc) last week after operating the route for 15 years.
Virgin Atlantic's move comes as many European airlines with short-haul and long-haul operations such as Air France, owned by Air France-KLM SA (>> AIR FRANCE -KLM), IAG's Iberia unit, and smaller flag carriers like SAS AB (>> SAS AB) are struggling to cover their costs in the face of high fuel prices, slack economic growth, and fierce competition in local markets from discount airlines.
Virgin Atlantic Chief Executive Steve Ridgway said Tuesday that the Heathrow-to-Manchester route it plans to start operating next March is just the start of the company's new short-haul operation. The airline, which flies 5.5 million passengers a year, aims to give IAG a run for its money on other short-haul routes as well as to compete for passengers connected to flights to North America via Heathrow.
"Our new service will provide strong competition to omnipresent BA; keep fares low and give consumers a genuine choice of airline to fly to Heathrow and beyond," Mr. Ridgway said.
BA is currently the only other operator of direct flights between Heathrow and Manchester so Virgin won't compete head on with budget carriers Ryanair Holdings PLC (RYA.DB) and easyJet PLC (>> easyJet plc).
Virgin's other airline brands, which include Virgin Australia Airlines and Virgin America, operate domestic flights in their respective markets but analysts were skeptical of the cost-effectiveness of the new strategy for a specialist carrier like Virgin Atlantic which lacks the extensive international and domestic routes of other network airlines.
"The number one reason to have short haul is to get more premium passengers on your long haul flights," said Gert Zonneveld, an analyst at brokerage house Panmure Gordon.
"Most of the network carriers lose money on their short haul business because they can't compete on costs with the low cost airlines," Mr. Zonneveld said.
Virgin Atlantic is likely to restrict its short-haul business to where it can pick up significant premium traffic for routes to North America. In the case of Manchester, 65% of passengers flying to London do so to connect to international destinations.
"Virgin is likely to struggle to make money from its short haul business on a standalone basis though it likely increases feeder traffic for Virgin at Heathrow," said Jarrod Castle, an analyst at UBS.
Write to Marietta Cauchi at email@example.com
Corrections & Amplifications
This article was corrected at 1612 GMT because it misspelled the surname of Virgin Atlantic Chief Executive Steve Ridgway in the seventh paragraph. It also misspelled the surname of Panmure Gordon analyst Gert Zonneveld in the 11th paragraph. The article also incorrectly stated that the airline would stop, rather than start, operating Heathrow-to-Manchester routes from March in the sixth paragraph.
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