The interest of the world’s second-largest carrier, Delta Air Lines in Virgin Atlantic has certainly caused some excitement in the aviation scene, if not started a British war between old rivals International Airlines Group (IAG) chief executive Willie Walsh and Virgin Group chief executive Richard Branson.
The following looks at what the deal means to each of the key players, including those on the sideline.
Delta has reached agreement with Singapore Airlines (SIA) to purchase its 49% stake in Virgin for £224 million (US$361 million). SIA bought the stake in 1999 for £600 million (US$965 million) at a time when the Singapore carrier wanted to extend its wings across the Atlantic from Europe, preferably London-Heathrow, to the US east coast. But over the years, it proves to a disappointing investment that SIA has for some time now expressed its intention to let go.
SIA in a statement that it released said it had been “evaluating strategic options for the stake for some time, as the investment has not performed to expectations and the synergies the parties originally hoped for have not materialised.”
The sale of the Virgin stake at a loss may be a case of a painful relief for SIA that has been waiting perhaps too long for a suitable buyer. It shall soon, as if thankfully, be history.
Some media reports have excused the sale as a refocus of the SIA strategy to rebuild home strengths in view of increased competition in the region. SIA launched a new budget carrier – Scoot – in July to compete in the low-end market which is growing faster than the full-service segment there. So it has been suggested that SIA will want to divert some energy there to grow Scoot and sibling airlines SilkAir and Tiger Airways, should the 33% interest in Tiger is not already slated to be the next to be divested.
Not quite the kind of retreat you expect, however, of an airline that has successfully spread its wings far and wide.
Delta Air Lines
While the Virgin chapter closes for SIA, it opens a new ambitious phase for Delta, which aims to expand its transatlantic reach. The Virgin deal is one way to “overcome slot constraints” at London Heathrow. Delta Air Lines chief executive Richard Anderson said: “Our new partnership with Virgin Atlantic will strengthen both airlines and provide a more effective competitor between North America and the UK, particularly on the New York-London route.”
Together, Virgin and Delta will offer 31 peak-day round trips between North America and the United Kingdom (UK) in direct competition with the British Airways-American Airlines alliance.
Competitors operating into and out of London-Heathrow have always faced a slot problem. Sir Richard Branson was particularly guarded against a possible equity tie-up between BA and American, which have decided to enter into a commercial alliance instead. Virgin felt BA has also been unduly advantaged by its parent International Airlines Group (IAG) acquiring British Midlands International (BMI).
In a way, Delta is pursuing a dream that SIA lost. The next question to ask is whether Delta will stop at the 49% stake in Virgin that it acquires from SIA. Speculations had it that Delta might skirt around European Union (EU) regulations that do not allow majority foreign ownership by working through SkyTeam partners Air France-KLM to acquire some of the remaining 51% stake still owned by Sir Richard Branson. This possibility had sparked a spat between Sir Richard Branson and Walsh who apparently suggested that the Virgin brand might not be around in five years.
Sir Richard Branson hailed the Delta-Virgin development as “the start of a new era of expansion, financial growth and many opportunities for our customers and our business.”
This was the man who had in the past viewed airline alliances as anti-competition initiatives but today said it was time Virgin form alliances to ensure its survival. There are talks too of Virgin soon joining one of the three airline blocs of which most major airlines are already members. One thing for sure that in view of Virgin’s rivalry with BA, oneworld is undoubtedly not a choice. It is a toss-up between Star Alliance and SkyTeam of which Delta is a member. Indications are that Sir Richard Branson is more inclined towards Star Alliance.
In response to Walsh’s remark about Virgin’s future, Sir Richard Branson said he would bet £1 million that Virgin, which he affectionately referred to as his “baby”, would still exist in five years. Sir Branson, who founded Virgin 28 years ago, insisted: “We have no plans to disappear.”
Walsh, who did not disguise his disrespect of Sir Branson, replied with a wager of a “knee in the groin” instead; he said he did not have the money and that since Sir Branson was a “billionaire banker”, the £1 million “would not hurt him” according to reports by The Guardian and Telegraph.
Rivals Virgin and BA have never been the best of friends, running a long feud that dates back to the early 1990s, during which time Virgin launched a “No way BA/AA” campaign against BA’s proposed merger with American. Both airlines have also long been engaged in fierce tussles over landing slots at London Heathrow, but Virgin failed to stop IAG’s acquisition of BMI this year. In 1993, Virgin Group chief executive Richard Branson successfully sued BA for poaching Virgin passengers and staff and for spinning negative stories about him in what was referred to as a “dirty tricks” campaign.
Five years is not a long time but anything can happen in the volatile airline business. Admired as a shrewd entrepreneur and respected for his management expertise, Sir Richard Branson is an industry enigma. Even as Branson reduces his stake in his “baby”, there are ways to retain the Virgin identity – at least for five years. New majority owners may want to retain Virgin brand loyalty and continue to ride on Virgin’s popularity.