Bloomberg News

Virgin Atlantic Seeks Return to Black Via ‘Little Red’ Push

April 08, 2013

Virgin Atlantic Founder Richard Branson

Richard Branson, center, arrives aboard the inaugural Virgin Atlantic Little Red flight at Edinburgh Airport wearing a Harris Tweed Kilt. Photographer: Jeff J Mitchell/Getty Images

Virgin Atlantic Airways Ltd., best- known for long-haul flights to New York and the Caribbean, is poised to roll out a third domestic route in a bid to funnel more passengers from northern Britain to its London hub.

The service from Aberdeen in Scotland to Heathrow airport, commencing tomorrow, will take the number of daily trips at the “Little Red” domestic arm to 26, after the introduction last week of flights from Edinburgh and Manchester, northern England.

Richard Branson’s Virgin is adding its first all-U.K. routes in 28 years after losing passengers carried to its hub by ally BMI in 2012 when the Deutsche Lufthansa AG (LHA) unit merged with British Airways. While the service will bear Virgin’s scarlet livery and use operating slots secured by the carrier, the planes will be operated by Ireland’s Aer Lingus Group Plc. (AERL)

“In an ideal world they wouldn’t be doing short-haul,” said John Strickland, the director of JLS Consulting Ltd. in London. “The real aim for Virgin is feeder traffic, but in accounting terms these kind of routes tend to be loss-makers.”

Crawley, England-base Virgin, under new American chief Craig Kreeger, 53, made its name serving a mix of trans-Atlantic business routes, holiday destinations such as Cancun in Mexico and global cities including Sydney, Hong Kong and Cape Town.

Mounting Losses

Unlike larger carriers such as BA, Lufthansa and Air France-KLM Group (AF), Virgin opted not to develop a network of short-haul services feeding passengers onto its intercontinental flights, relying instead on demand for travel originating or ending in London, topped up by the defunct partnership with BMI.

Virgin Atlantic had a loss of 80.2 million pounds ($123 million) in fiscal 2012 as it struggled with high fuel costs and increased competition from an antitrust-immune alliance of BA and American Airlines. That widened to 135 million pounds in the 12 months ended Feb. 28, the London-based Sunday Times newspaper reported March 10, citing an internal company memo.

Virgin has sought to restore earnings by freezing pay, delaying the addition of bigger planes and cutting unprofitable routes to destinations including Nairobi and Kingston, Jamaica.

While an alliance with Delta Air Lines Inc. (DAL:US), agreed in December, should boost traffic from the U.S. by coordinating schedules and sharing flight codes, Virgin needs Little Red to tap the one-third of U.K. residents who live in northern England and Scotland, three or more hours from Heathrow by road or rail.

Gulf Threat

The need to retain feeder flights has been heightened by the introduction of long-haul services from cities such as Manchester by Emirates, Etihad Airways PJSC and Qatar Airways Ltd., which offer hundreds of onward links via hubs in the Gulf.

From Edinburgh, the most popular through-route based on sales so far is Tokyo’s Narita airport, with three times as many bookings as any other connecting destination, followed by New York John F. Kennedy and San Francisco, the company said today.

From Aberdeen, JFK and Shanghai are most popular, while for flights from Manchester “the runaway leader” is JFK, followed by Los Angeles and San Francisco.

The new business will utilize four Airbus SAS (EAD) A320 narrow- body planes and crews, rented from Dublin-based Aer Lingus on a so-called wet lease basis. Virgin expects it to carry almost 1 million passengers in the first year of the operations.

Code-Share Partners

The Manchester-Heathrow service began March 31 and that from Edinburgh on April 5, with round-trip tickets starting at about 107 pounds.

Heathrow-bound departures will be timed to maximize onward connections, though early-morning flights should appeal to business travelers and the operation “covers the day,” Chief Executive Officer Kreeger said today at a press briefing.

Some 31 airlines, many of them former BMI partners, are also offering flights with Little Red connections. Four -- Singapore Airlines Ltd. (SIA), Air New Zealand Ltd. (AIR), South African Airways and Cyprus Airways -- are code-sharing on the new routes, with more carriers poised to do so, the company said.

Virgin said it’s holding talks with Heathrow Airport Ltd. aimed at collocating Little Red flights that serve the hub’s Terminal 1 with long-haul flights operating out of Terminal 3.

Little Red “will stop British Airways dominating routes and driving higher prices,” according to Branson, 62, who said at the briefing in Edinburgh that a partnership with Air France- KLM, Delta’s ally in the SkyTeam global alliance, is a possibility once the tie-up with the U.S. carrier is completed.

Rail Option

“It makes sense,” Branson said. “The most important thing is for us to get the Delta deal through. Once that’s happened, I wouldn’t be at all surprised if we would have some discussions.”

The billionaire entrepreneur added that the new routes to Scotland won’t comprise the ability of his Virgin Trains business to bid for the upcoming East Coast rail contract.

Branson owns 51 percent of Virgin Atlantic, with Delta paying $360 million for the 49 percent that had been held by Singapore Airlines Ltd. The airlines are working with regulators on both sides of the Atlantic and anticipate winning approval for their joint venture later this year, Ed Bastian, the U.S. company’s president, said March 21.

The introduction of Little Red also casts a spotlight on Kreeger, who took over as CEO from Steve Ridgway on Feb. 1, having previously spent 27 years at AMR Corp. (AAMRQ:US), where he helped coordinate the American Airlines-British Airways (IAG) joint venture.

To contact the reporter on this story: Kari Lundgren in Edinburgh via klundgren2@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net


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