Richard Branson’s domestic airline dream dies, but BA rivalry lives on

Richard Branson

Standing in a brand new British Airways A380, at an altitude of 35,000ft over the Atlantic, Willie Walsh couldn’t resist having a dig at an old rival.

Sir Richard Branson’s Virgin Atlantic airline had, he said, made a bad mistake launching a domestic service from Heathrow. “It’s looking terrible. The fact is they are struggling – you can’t make money flying planes that are less than half full. I said it would be a mistake – and am delighted to be proven correct.”

A few days later, last Monday, those words proved prophetic as Branson announced that he was grounding the Little Red carrier permanently. So that’s a point to BA and its parent company, International Airlines Group, in a long-running corporate rivalry that has seen both sides notch up notable victories.

The bad blood goes back to the 1980s, to the early years of Virgin Atlantic, and peaked with “dirty tricks” claims that eventually saw BA pay damages of more than £600,000 to Branson and Virgin Atlantic in 1993. From the beginning, the entrepreneur positioned his airline as the challenger upstart to the might of BA.

Echoes of this persist in the latest chapter with the Little Red closure. The mini-airline, which started flights from Heathrow to Manchester and Scotland only last year, owed its existence to the same gambit that gained Virgin its first foothold in the UK’s main hub back in 1991. Competition authorities then, as 22 years later, concurred with Branson’s lawyers’ view that BA had too much market power at Heathrow, and forced the flag carrier to give up prized slots to its competitor. But whereas Virgin Atlantic went on from that point to become an established long-haul competitor, Little Red struggled in a short-haul market dominated by BA at Heathrow, and easyJet and Ryanair elsewhere.

Little wonder that Walsh, who had accurately forecast Little Red’s financial trouble, expressed glee at its demise. But Virgin argued that the competition authorities had granted it a totally inadequate number of slots at Heathrow. The odds, Branson said, “were stacked against us”. With the demise of Little Red, the Heathrow slots will revert to BA – unless another contender wishes to give it a go.

So the local skirmish is over, but the real battle continues elsewhere. Virgin Atlantic’s defeat in its attempt to compete domestically with BA may have wounded its pride, but the cold logic for Little Red was not to unite the peoples of south and north Britain, but to bring the corporate travellers of Scotland and Manchester on to the Virgin international network.

That network is now pointed firmly towards the US, ever since Atlanta-based Delta Air Lines bought 49% of Virgin Atlantic at the end of 2012. The hope is that the Delta will restore Virgin to fighting weight in the industry’s most lucrative swath of sky – above the Atlantic between Heathrow and the US.

This is a significant month for Virgin Atlantic and BA: both are rolling out new planes on US routes: Branson’s first Dreamliner will start a regular service to Boston; and BA’s A380 will begin flying to Washington.

Last week BA marked four years of collaboration across the Atlantic with American Airlines in a joint venture that now generates revenues of almost $10bn a year. It was approved by competition authorities in 2010, despite bitter opposition from Virgin Atlantic. The subsequent merger of US Airways and American has further fattened the BA/AA joint business: the number of routes has grown from 50 to 88, and combined revenues are up by 50%.

The deal allows the two airlines to co-ordinate slots – a practice Virgin had argued would be bad for consumers. Walsh counters that customers have benefited, particularly from a wider route network and more frequent flights – the airlines now provide 17 flights a day between New York and Heathrow – and says fare increases are due solely to rising fuel costs.

“All of the evidence says the customer is doing very well,” Walsh said. “We have spent more money on our product in the past four years than we had in the previous 10, because we know they have a great choice.”

Virgin Atlantic, one of the last major long-haul carriers not to join an airline alliance, fell into the open arms of Delta, the US’s second-largest carrier. Insiders say Branson was scanning for a partner for some time before the BA/AA tie-up, confirmed in 2010, turned up the pressure on him. With Delta, Virgin Atlantic now has nine flights a day on the world’s key business-travel route – to New York from Heathrow. It is still smaller than BA/AA, but edging closer.

Analysts say the tie-up improves Virgin Atlantic in terms of size, breadth of network and number of flights. The deal also helps Virgin Atlantic sell tickets in America’s corporate market, where Delta is a household name. But those brought up on the Branson swashbuckle may feel this comes at a high cost.

Sitting in his new Airbus at 35,000ft, Walsh also claimed that Branson’s airline was “controlled by Delta”. This dig was a nod to a European commission investigation into the ownership of Virgin Atlantic by a non-EU carrier. Delta’s 49% stake is at the limit of foreign ownership rules, but the shareholder is not exercising control. Virgin chief executive Craig Kreeger said he was not unduly concerned at this: “We are very confident that Virgin is run by us.”

Even so, the Delta culture appears to have permeated its partner. One analyst said: “They are aggressively managing the business for profitability rather than grand developments... It’s not dots on the map, it’s not sexy and it’s not glamorous.”

Virgin’s retrenchment has seen it not just grounding its domestic flights but pulling back from destinations such as Tokyo, Mumbai and Cape Town, under stiff competition from Gulf carriers. Ambitious deals such as an option for six A380s to match BA are back on ice, although the efficient Boeing Dreamliners can not come soon enough to cut its fuel bills. The 28 October inaugural flight for Virgin’s first 787 Dreamliner – the first of 17 on order – will be to Delta’s Atlanta hub. But with a typical Bransonian flourish, the flight will be all about the journey rather than the destination: UK electronic soul band Rudimental will play what Virgin Atlantic promises will the first ever gig to be streamed live from over the Atlantic.

Branson may be pleased that Walsh feels there is sufficient rivalry to keep up the invective. But one industry observer suggests that hostility is waning, pointing to a world where few airlines can survive alone, and the deep pockets of Gulf players such as Emirates and Etihad are displacing the big beasts of old: “They are busy trying to make money, rather than beat the crap out of each other.”

And with conventional aviation losing its sense of adventure, Branson’s space programme has become a bigger obsession. His eyes are on the stars, and his mind more on Galactic than Atlantic.

AERIAL ASSAULTS

2008 Branson on Walsh’s accusation that the entrepreneur had lied when claiming he had condemned price-fixing on the BBC’s Money Programme: “It is no wonder that BA is in the state it is in if Willie Walsh has the time to watch past editions of the Money Programme.”

2012 Walsh on Branson’s offer of a £1m bet over the success of Virgin Atlantic’s Delta deal: “Is Branson going to be the 51% owner of Virgin Atlantic in five years from now? If he wants to bet that, I think it would be an acceptable bet. But he’s a billionaire banker - allegedly - and I don’t think a million pounds would hurt him. A knee in the groin would be acceptable.”

Branson replied: “We’ve got used to BA hitting below the belt over the years, but I’m confident it would be the other way around on this occasion.”

2014 Walsh on the ice-bucket challenge: “I nominate the man who effectively owns and controls the Virgin transatlantic business. That’s right, Richard, this is for you - Richard Anderson, CEO of Delta.” He went on: “The Delta management team are much more rational… Virgin has almost disappeared... Delta control Virgin… We just call it Delta now.”

Powered by Guardian.co.ukThis article was written by Gwyn Topham, for The Observer on Sunday 12th October 2014 00.05 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010

 

JefferiesAnd the Best Place to Work in the global financial markets 2016 is...

Register for Financial Markets News Alerts