The end of Virgin Atlantic's 'splendid isolation'?

photo by 900hp from Flickr, licensed under CC

The proposed tie-up between British Airways and American Airlines is moving closer to getting the green light from US authorities, and as such, Virgin Atlantic President Richard Branson is apparently worrying (saying - Branson doesn't seem like the type that worries a lot) that his airline might have to find a partner in response.

He's no doubt speaking in response to the continuing trend of consolidation in Europe. Air France and KLM have been merged for six years now, and the Lufthansa Empire has expanded its reach into Belgium (Brussels Airlines) and the UK (bmi) in addition to Austria (Austrian Airlines) and Switzerland (Swiss). Closer to Virgin Atlantic's home turf, British Airways and Iberia have already announced an intention to merge, and it's the prospect of a three-way combination between BA (Virgin's longtime archrival), Iberia and American that has been giving Branson the most grief.

He's been outspoken against the BA-AA deal for quite some time, but it seems now as though he's come to terms with its apparent inevitability - and what that means for his airline in terms of survival. Virgin Atlantic has remained fiercely independent for its entire existence (although Singapore Airlines owns 49% of the airline, the maximum amount allowed), and while it has codeshare agreements with a handful of airlines, it has never joined an alliance. But if it wants to compete with a larger British Airways, it might need to look at finding a partner. “If it becomes impossible for us to remain an independent airline and survive, we may come to a situation where we have to consolidate," Branson said.

Naturally, this begs the question - with which carrier would Virgin Atlantic consolidate with? bmi (also known as British Midland) would appear to be the logical choice, according to Branson: “I don’t think bmi has a future as a stand-alone airline if it stays in the same shape... something will happen – the two of us would be stronger together than separate.” On the surface, this seems like a good match. bmi is a member of Star, the alliance that Virgin Atlantic seems to be on good terms with (stakeholder Singapore Airlines is also a member), and is also a rival of the dreaded British Airways. Virgin Atlantic is also strictly a long-haul carrier (much like Singapore), meaning that it loses out on some passenger traffic that would be connecting through Heathrow or Gatwick on their way to other European destinations (although codeshares do help here). bmi, on the other hand, has a few longer-haul destinations but for the most part sticks close to home. So, Virgin's long-haul network should perfectly complement bmi's short-haul - right?

Complicating things is the fact that Lufthansa now owns bmi outright, and is in the process of restructuring it - and, in the process, cutting quite a few inter-European routes. Gone are Paris, Brussels, Amsterdam - service to some of these, as well as few other cities, has been supplanted by Lufthansa-owned or operated carriers. For example, the 'bmi' flights from Heathrow to Frankfurt and Milan are operated by Lufthansa. This is all well and good for bmi, perhaps, but it makes it less attractive as a merger partner, as it wouldn't have many European routes of its own to bring to the table. And bmi wouldn't have all that much to gain from a merger, either. Virgin Atlantic has a nice long-haul vacation getaway network set up at London Gatwick, but their other long-haul service at Heathrow, while substantial, pales in comparison to that of British Airways. Its relative isolation (i.e. no alliances) also makes it less attractive as a merger partner, since bmi could ostensibly benefit from being an alliance member (as it currently is, in Star).

So while bmi might seem the obvious choice, it's not necessarily an ideal fit. But if Virgin Atlantic faces a 'merge or die' scenario, then bmi might start looking a lot more attractive.

A tidbit to ponder: according to the Times article, Singapore apparently is seeking to sell its stake in Virgin Atlantic, which might expand merger possibilities. And another interesting point about Virgin Atlantic: Branson has stated that its new strategy will be to look towards leisure travel for growth, rather than business travel. Right now, he says, the airline's business is 70% at London's Heathrow airport and 30% at Gatwick, although "this will have to start balancing out."

And Branson is still sticking to his trademark optimism. He has still promised to battle it out in court against the BA-AA deal's regulatory approval if needed - however much of a 'done deal' it already is - and he has also noted that BA's ongoing labor strife (they're "shooting themselves in the foot," he says) has only helped to benefit his airline's revenue.