Virgin Atlantic reports a loss for 2017

As Virgin Atlantic reports a loss for 2017, we take a look at the competitive challenges facing the airline.

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Virgin Atlantic aircraft at London Heathrow

Virgin Atlantic has reported a financial loss for 2017.

Bloomberg reports that the airline lost £28.4m before exceptional items.

This compares to a profit of £23m for 2016. This is Virgin Atlantic’s first loss after three consecutive years of profit. Passenger numbers fell by 100,000 to 5.3m.

Virgin has cited numerous causes for its loss

These are: The fall in the value of the pound following the 2016 EU Referendum result; disruption to flights to Florida and The Caribbean due to Hurricane Irma; and engine maintenance to its Boeing 787-9 fleet which has necessitated leasing in aircraft from other airlines.

These are made with some justification. Virgin is a “dollar short” company. It has more expenses than revenue in dollars which means it is exposed to a fall in the pound. One reason why BA’s parent IAG bought Aer Lingus is because it is a “dollar long” company.

Virgin is also not alone in reporting financial loss. Norwegian reported a loss in 2017. Cathay Pacific has also reported a second consecutive annual loss.

BA and Virgin have diverted widely in financial performance

Whilst external factors have no doubt had an impact, the divergence in the financial performance of BA and Virgin Atlantic is stark.

Last year, BA reported an operating profit of £1,754m carrying approximately 8 times as many passengers as Virgin Atlantic. BA’s parent company, IAG, which is notorious for its cost discipline, reported an operating profit of €3,015m.

For nearly three decades, the UK aviation market was characterised by a David & Goliath battle between the two airlines. The Virgin narrative was that it could take on BA anywhere, if only it could expand at Heathrow. 

With the luxury of private ownership and, at times, an extremely cunning PR department, Virgin could make all sorts of claims and never ceased to have fun at the expense of its rival.  

Virgin delighted in hurling brickbats. Whether it was due to Virgin offering in-flight massages “BA doesn’t give a shiatsu”. Or BA making cool-headed fleet decisions like buying the twin-engined Boeing 777 to which Virgin responded by painting the decal “4 Engines 4 Long-Haul” on its aircraft. Or BA’s own self-inflicted wounds. Or a PR banana skin thrown its way. By contrast, BA as a public company was bound by the mundane requirement to follow stock exchange rules on company announcements. It had little choice but to maintain a dignified silence in the face of endless ribbing by Virgin.

Yesterday, the world

In recent years, Virgin routes from Heathrow to Accra, Cape Town, Chicago, Mumbai, Nairobi, Sydney, Tokyo and Vancouver have been suspended. It’s not clear where future growth will come from.

More recently, Virgin has chosen to tactically add capacity to existing routes, with additional winter seasonal frequencies from Heathrow to Barbados and Las Vegas to compliment existing services at Gatwick. It will also add an extra frequency from Heathrow to Johannesburg from Sunday 28 October 2018, as South African Airways cuts a daily flight.

The competitive environment for Virgin has got harder

This is for numerous reasons.

1. The EU – US Open Skies Treaty

Until late March 2008, air travel between the UK and the US was governed by an archaic treaty known as Bermuda II. Flights from London Heathrow to the US were restricted to two US airlines, American Airlines and United Airlines, What were then Continental, Delta Air Lines, Northwest Airlines and US Airways were forced to fly from London Gatwick. BA and Virgin Atlantic were the only UK airlines allowed fly to the US from London Heathrow, much to the frustration of bmi. Certain routes could also not operate from London Heathrow. BA could only fly direct to Atlanta, Dallas Fort Worth and Houston from London Gatwick.

The EU-US Open Skies Treaty tore up all of these restrictions. It allowed what was then Continental, Delta Air Lines, Northwest Airlines and US Airways to move their London operations to Heathrow. One consequence of this is that Heathrow slots have become significantly more expensive. In March 2008, Continental paid a record-breaking $208m for four Heathrow slot pairs. Based on slot trading activity over the past ten years, Virgin has not been willing to entertain paying such money for slots.

2. The American Airlines & BA Joint-Venture

The Open Skies treaty allowed American Airlines and BA to finally secure a joint-venture on flights between Europe and the US.

Virgin campaigned fiercely against it, once again painting “No way BA/AA” on its aircraft. Though Virgin was largely a lone voice. Regulators granted approval with relatively limited concessions after two previously unsuccessful attempts.

Launched in 2011, the joint-venture allows the two airlines to co-ordinate routes and schedules. This allows American and BA to offer high frequency schedules to major gateways such as Chicago, Los Angeles, Miami and New York JFK. Virgin has since responded with its own joint-venture with Delta Air Lines

3. BA joining International Airlines Group

Since 2011, BA has been part of International Airlines Group, initially with Iberia and now Aer Lingus, LEVEL, and Vueling. As well as cost and revenue synergies, all member airlines share a common frequent flyer currency “Avios” which extends the reach of their respective frequent flyer programmes.

Most significantly, in what was previously thought as unthinkable, IAG acquired bmi British Midland from Lufthansa. Merged into BA, it simultaneously increased BA’s dominance at London Heathrow and deprived Virgin of a codeshare partner and domestic feed for its flights.

4. US airlines have raised their game

Once upon a time, unless price was the sole consideration or you were tied to a American frequent flyer programme or corporate agreement, BA and Virgin were always the first choice to fly across the Atlantic. In business class, you were guaranteed a fully flat bed. In economy, you were guaranteed seat back in-flight entertainment. And only BA and Virgin offered premium economy.

Whilst they still have their faults, US airlines have since sharpened up their act with refurbished cabins, next generation aircraft and fully-flat beds in business class. American, Delta and United are either in the process of adding, or will shortly add, premium economy.

5. More competition

Norwegian’s rapacious expansion at London Gatwick has been well documented. Whilst there are legitimate doubts about the pace of Norwegian’s growth, it does now serve major gateways on the East and West Coast of the USA. Norwegian will soon be able to claim to serve two states not served by Virgin, Illinois and Texas. Whatever the long term outcome for Norwegian it has proved their is a market for a low cost long-haul product.

And it’s not just Norwegian. Aer Lingus has grown substantially at Dublin adding Miami, Seattle and Philadelphia with the benefit of US Customs & immigration pre-clearance.

Where next for Virgin Atlantic?

The next 12 months or so will see the biggest changes in Virgin Atlantic’s near 35 year history.

The airline is already making competitive responses by unbundling its economy product. It is also due to take delivery of the Airbus A350 in 2019.

Most significantly, Sir Richard Branson’s Virgin Group is to cede control of the airline, selling a 31% stake to Air France KLM on an as yet unspecified date. This will leave Delta Air Lines as the single largest shareholder.

Delta and Virgin have given some clues as to what may happen next. Delta and Virgin will merge their transatlantic joint-venture with that of Delta and Air France KLM. There is likely to greater co-operation between Virgin and Air France KLM’s respective frequent flyer programmes. Delta and Virgin have pursued cost savings through co-location at airports and merging back office systems, and these are likely to continue further.

The Virgin brand will be retained, but much like BA post IAG, behind the scenes the airline is likely to be radically different than before.

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