Virgin Atlantic’s deal with Air France-KLM last month marks a major departure for the UK carrier. Ian Taylor considers the rationale
Sir Richard Branson’s deal with Air France-KLM at the end of July marks the end of an era, assuming regulatory authorities in Europe and the US sign off on it.
Virgin Atlantic will remain a UK-based airline with a UK air operating certificate, but it will no longer be majority UK owned.
Indeed, it appears the carrier won’t be majority EU owned when Britain leaves the EU.
Air France-KLM is taking a 31% stake. Delta Air Lines already holds 49%. So it was odd for Branson to assert in a letter to staff explaining the deal: “I will remain the largest individual shareholder.”
Indeed, he may remain the largest individual holder of shares, but Delta has a share two-and-half-times larger and it is difficult to avoid the conclusion that Delta calls the shots – and will do even more so with partner Air France-KLM holding an additional 31%.
As Ryanair chief executive Michael O’Leary put it: “Air France’s investment in Virgin Atlantic is a cover for Delta.”
O’Leary added: “You have to ask how Virgin Atlantic retains a UK AOC [air operating certificate] when it is foreign owned.”
Willie Walsh, head of British Airways parent IAG, made the same point in May, speaking at the CAPA Airline Leaders’ Summit in Dublin.
“The truth is Virgin Atlantic is controlled by Delta,” he said. “We know Delta has a 49% stake, but the way it is structured it is clear Delta controls Virgin Atlantic and is leading the joint venture.
“Delta came up with a smart way of working around the restrictions. That is the reality.”
EU and US regulatory approval nonetheless appears a formality. Why? Because the EC has previously signalled it is relaxed about its own ownership and control rules.
EC director general for mobility and transport Henrik Hololei told the same CAPA summit: “We have a 49% limit [on foreign] ownership in Europe, [but] it’s debatable whether it is fit for purpose.
“Is Manchester City less a Manchester football club because its owner is not British? It has a better stadium. It has better players. The fans are happy.
“It is the same with airlines. You see the ownership holding. Effective control is another thing.”
Hololei suggested: “What allowed is to move ahead [of other regulatory authorities on foreign ownership] is we shifted the question.
“We don’t ask to prove you have effective control, but to prove you don’t have effective control.”
So in the case of Virgin Atlantic, Branson or Virgin Group do not have to prove that he or it exercises control. Rather, 49%-stakeholder Delta has to demonstrate it does not exercise control.
Hololei clearly suggested this is somewhat easier, otherwise how has the EC been able “to move ahead” on an issue where “it is debateable whether the limit on ownership in Europe is fit for purpose”.
Branson and BA
Branson’s letter pointed out: “Virgin Atlantic has been flying for half my lifetime.” He appears to measure the airline’s success in relation to British Airways and the latter’s efforts to scupper it – on which he has point.
He noted: “I remember the day we started when Lord King from British Airways forecast our early demise.
“It hasn’t always been easy. We’ve had to withstand British Airways’ ‘Dirty Tricks’ campaign, which tried to put us out of business and where we won the largest libel settlement in British history.
“I’m sure plenty of you will remember receiving the ‘BA Christmas Bonus’.
“We’ve had to endure a consistently uneven playing field with British Airways keeping a stranglehold on Heathrow slots, enabling it to feed its long-haul operation from a myriad of short-haul flights across the UK and Europe.”
More recently, Branson noted: “[BA] has merged with Iberia to form IAG, [and] acquired rivals such as BMI, Aer Lingus and Vueling, increasing its presence at Heathrow and extending its network.”
Other challenges – “the trauma of 9/11 and the collapse in international travel that followed” – appear to pale beside the life-or-death struggle with BA.
However, Branson informed staff: “Now we have Brexit, which before it’s even happened has had a negative effect on the financial performance of both our holiday company and the airline.”
So thank goodness US fairy godmother Delta came along five years ago to take the 49% stake previously held by Singapore Airlines, which had acted as a sleeping partner.
Branson insisted: “One of the best moves we made was tying up with Delta Air Lines to create a joint venture across the Atlantic.
“Part of the rationale was to provide a competitive alternative to BA and American Airlines’ alliance.”
It has certainly done that. Branson recalled: “Willie Walsh predicted the Virgin Atlantic brand would disappear within five years. He said he’d accept a knee in the groin from me if it didn’t.
“Well Willie, that five-year point is up this December and Virgin Atlantic is still flying strong.”
‘We need feed’
Finally, Branson’s letter to staff moves to the rationale for his deal with Air France-KLM.
He told them: “Delta has helped us considerably with feed from America, but because we don’t have more slots at Heathrow or Gatwick we’re unable to enjoy feed from Europe or provide onward journeys for customers we are now carrying to London.
“Delta’s partners in Europe, Air France and KLM, give us that network and connections.”
The enhanced joint venture with Delta, Air France-KLM and Alitalia “will be extremely beneficial to our airline, our customers and the brand”.
He reassured staff: “We’ve agreed how important it is the Virgin Atlantic brand lives on as part of our arrangement.”
However, the reality is Air France-KLM will not feed traffic to Virgin Atlantic, not with their existing schedules. They feed traffic to Paris Charles de Gaulle and Amsterdam Schiphol.
Virgin Atlantic operates solely from London’s Heathrow and Gatwick. Air France and KLM don’t fly to and from Gatwick and both operate shuttle services from Heathrow to their respective hubs.
KLM, in particular, has a remarkably extensive UK operation. It flies from 16 UK airports to Amsterdam. How will that feed Virgin Atlantic?
Slots at Heathrow are not two a penny – rather more like two a £50 million. Slots at Gatwick at peak times also aren’t readily available. So it’s hard to fathom the feed argument unless the partners plan some significant changes.
Branson’s other points make rather more sense:
“The airline industry has consolidated . . . and it’s now our turn to put ourselves at the heart of an important alliance.” In other words, Virgin Atlantic can’t survive on its own any more.
And “as I get older, I want to be certain that all the necessary building blocks are in place for Virgin Atlantic to continue”.
It’s a retirement plan, and perfectly understandable as such.