Friday, February 25, 2011

Virgin Atlantic Airbus A340-300 (G-VHOL) on th...
Virgin needs merger to secure flight path

By Mark Kleinman

Published: February 25 2011 20:39
Last updated: February 25 2011 20:39
Not for the first time in his career, Sir Richard Branson may be approaching the end of the runway.

Four months after hiring Deutsche Bank to carry out a strategic review at Virgin Atlantic, the number of parking stands available for a suitable merger looks limited.

Unlike the occasion in 1999 when a deal to sell almost half of his company to Singapore Airlines (for what turned out to be a bumper price) was proposed on a restaurant napkin, the Virgin founder will this time be pressed into more formal negotiations.

Sir Richard does hold some important cards. Virgin Atlantic’s ownership of 3 per cent of Heathrow’s landing slots is attractive to the SkyTeam Alliance led by Air France-KLM and Delta Air Lines, which has been working with Goldman Sachs on a takeover proposal for several months.

Similarly, Virgin’s transatlantic routes would be a useful addition to the Star Alliance (of which Singapore is a member), which could be re-engineered by Lufthansa to use its BMI subsidiary as a feeder network for Sir Richard’s airline.

The third alternative for Virgin would be to agree a deal with one of the major Gulf-based carriers. Etihad, of Abu Dhabi, has expressed publicly an interest in extending its relationship with Virgin Blue in Australia, which would help it fulfil a desire to create a global brand.
Alternatively, Sir Richard might eschew a full merger or sale of Virgin Atlantic in favour of joining one of the major alliances. That, though, would risk diluting the Virgin brand while not providing the expansion capital required for an independent carrier to compete with a new wave of aviation industry powerhouses.

There may also be another, nuclear, option: selling to British Airways’ new parent company, International Airlines Group, an idea cheekily raised this week by Willie Walsh, its chief executive.

Even if that idea repels Sir Richard, sitting out the next wave of airline mergers looks like the least viable option if he wants to secure Virgin Atlantic’s long-term future.

Copyright The Financial Times Limited 2011. You may share using our article tools.

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