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Virgin plans massive growth

Transforming competition at an expanded Heathrow airport

Virgin Airlines’ announcement to greatly expand services from an expanded Heathrow may be music to the ears of some, although British Airways (BA) may not be quite so keen. Neither will those opposed to a larger and busier West London hub.

What seems obvious however is that demand is such that Virgin sees a viable opportunity to grow its business – or is it really a viable opportunity? While there may be a case for suggesting that long-haul routes can provide suitable growth it has been tried before.

British Caledonian is the most obvious example, with their route structure from Gatwick. BCAL as they were often known however, almost went bankrupt, as have numerous other UK airlines that have tried to compete with British Airways (and before them, BOAC and BEA). None have survived.

All of those failed carriers, Dan Air, British Island Airways and, going back decades, airlines like Autair (who later became Court Line and ultimately went bust in the 1970s) flew from Gatwick, not Heathrow. Autair did in fact operate from Heathrow, as did British Eagle, who also failed and one other airline that took on BA was British Midland (BMI).

British Midland, like most of the others, had their roots in flying from regional airports to holiday destinations but evolved into BA’s main competitor at Heathrow. Going back to the days of Autair, they too had a range of UK domestic services from the west London airport but withdrew as they could not make enough money to survive. British Midland however, appeared to have everything going for them – until they tried to expand into long-haul.

Acquiring three Airbus A330 aircraft for use on longer ranger routes, BMI were unable to get enough landing and take-off slots at Heathrow to use them. They ended up leasing the aircraft to other airlines or flying them from Manchester. Like British Caledonian, BMI found it was unable to operate a strong enough short-haul network to support additional long-haul services. So why is it that BA has been able to?

(above - British Airways)

British Airways have economy of scale as a company, as well as being the established and dominant airline at Heathrow. The airport also has its own economy of scale in that much of its business comes from equally well-established big airlines from other countries (and many of them), all of which combined makes it very difficult for a newcomer to break into. British Caledonian failed because its operations were centred on Gatwick, which has always lacked the connectivity at Heathrow. British Midland failed because its UK domestic and European network was simply not strong enough to compete with BA and the airline did not have an equally strong long-haul route structure.

One other aspect to this is that on the shorter short-haul routes, like London to Paris and Brussels, Eurostar train services have eaten away at the market share of airlines flying those routes.

So why do Virgin think they can succeed where so many others have failed? Their previous attempt at UK domestic services – with their ‘Little Red’ brand - also didn’t work. The carrier’s planned long haul and new short haul route network calls for an end to British Airways’ parent International Airlines Group’s (IAG) dominance over the UK’s only hub airport. The proposed route maps show the intention of serve up to eighty-four new destinations in the UK, Europe, and across the globe when, and if, the third runway is complete. This presents a fourfold increase on the nineteen current long haul routes now operated from Heathrow.

Virgin also operate from Manchester as well as Gatwick, and from the economic point of view, undoubtedly would find it beneficial to concentrate their long-haul services at one airport – which has to be Heathrow. This will only work however if they can truly compete on equal terms with British Airways. The proposed route map illustrates how the airline’s flying programme could grow to deliver a big change in choice for customers, but these plans to become Britain’s second flag carrier (as BCAL once were) hinge on forthcoming Government decisions on slot allocation at an expanded Heathrow.

Of the new destinations planned, twelve are domestic, including Belfast, Exeter, Glasgow, Inverness, Manchester and Newcastle; thirty-seven are European, including Barcelona, Dublin and Madrid; and thirty-five are global. The UK government’s Aviation Strategy Green Paper has set a primary objective for the allocation of additional Heathrow capacity to facilitate effective competition between airlines, benefitting consumers through more choice and lower fares. It has also set secondary objectives to improve domestic connectivity and to improve connectivity to international destinations that are currently underserved or unserved.

Virgin Atlantic believes the route network plans enable the government to meet all three objectives by bringing new competition across multiple domestic, European and global routes, as well as opening up brand new destinations. ‘Without a second flag carrier connecting passengers between its domestic, short and long haul services, these important objectives cannot be met,’ says the airline.

As things currently stand, IAG holds more than 55% of all the take-off and landing slots at Heathrow, with no other airline holding more than 5% of the remaining slots. An analysis of OAG flight schedules shows IAG and its partners (including Aer Lingus, Iberia and Vueling) operate just over 75 monopoly routes. Virgin Atlantic wants to compete on around a third of these routes if slot reform is achieved. Virgin says its plans address the urgent need for strong, effective competition at the UK’s only hub airport and will reduce the cost of flying for millions of British business and leisure passengers for whom Heathrow is the gateway to the world.

“Heathrow has been dominated by one airline group for far too long… Britain, and those who travel to it, deserve better… Air passengers need a choice and Virgin Atlantic is ready to deliver when Heathrow expands,” says Shai Weiss, CEO Virgin Atlantic.

Mr Weiss describes the third runway as “a once in a lifetime opportunity to change the status quo” and create a second flag carrier. “This would lower fares and give real choice to passengers, as well giving Britain a real opportunity to boost its trade and investment links around the world,” he says.

“Changing the way take-off and landing slots are allocated for this unique and vital increase in capacity at the nation’s hub airport will create the right conditions for competition and innovation to thrive,” he adds.

2019 has been one of significant growth for Virgin Atlantic, which has followed a focus on the trans-Atlantic market with its joint venture partner and shareholder Delta Air Lines. It has announced new routes from Heathrow to Tel Aviv, Mumbai and São Paulo and formed part of the Connect Airways consortium that recently acquired Flybe.

And therein may lie the key. Flybe, with its existing UK domestic routes could provide the links to Heathrow that Little Red could not – if they can be flown profitably and the third runway is built. What may also help is the rise of the airline alliance; Virgin's tie-up with Delta and other members of the Sky Team group will give them something BCAL and British Midland did not have (below - Delta Airlines).

The UK has seen a plethora of UK domestic routes over the years and few have survived. Part of the problem has always been that Heathrow has lacked the runway capacity to support a viable UK domestic route network. But that is only part of the problem; competition from rail services also has had its effect, as has – at least in the past – population size. However, with the growth in numbers of people living in the UK, can that growth alone support increased UK domestic services to Heathrow?

Only time and a third runway at Heathrow will tell.

© Kevan James 2019

More on Heathrow and UK domestic services can be found in Kevan James's book, 'Heathrow Airport. 70 Years and Counting', published on November 1.

This book is the second edition of the author's 2016 publication, 'Heathrow Airport An Illustrated History'.

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