--Virgin Atlantic move follows sale of bmi to British
Airways
--Virgin Group's rail unit lost U.K. rail franchise last
week
--Short haul seen as Virgin Atlantic loss leader for premium
long-haul traffic
By Marietta Cauchi
LONDON--Richard Branson's Virgin Group, bristling from recent
setbacks to its U.K. travel-market strategy, is to take on British
Airways on its home turf as its 51%-held Virgin Atlantic airline
plans to start flying between London and Manchester, one of the
U.K.'s biggest cities, from early next year.
This first foray into the short-haul market by Virgin Atlantic,
a joint venture between Virgin and Singapore Airlines (C6L.SG),
follows the airline's unsuccessful bid for bmi ltd., the regional
British carrier bought in April by BA's parent International
Consolidated Airlines Group (IAG.LN).
Bmi, whose previous owner was Deutsche Lufthansa AG (LHA.XE),
has much sought-after take-off and landing slots at Heathrow,
London's biggest airport which is operating at full capacity, and
provided Virgin Atlantic with connecting traffic under a
now-defunct code-sharing agreement. The U.K. anti-trust authorities
approved the BA-bmi deal but Virgin Atlantic has appealed to the
European Commission on the grounds that it is anti-competitive.
Virgin Rail Group, jointly owned by Virgin and Stagecoach Group
PLC (SACKY), lost the contract to run the London-to-Scotland rail
service, passing through Manchester, to rival bidder FirstGroup PLC
(FGP.LN) last week after operating the route for 15 years.
Virgin Atlantic's move comes as many European airlines with
short-haul and long-haul operations such as Air France, owned by
Air France-KLM SA (AF.FR), IAG's Iberia unit, and smaller flag
carriers like SAS AB (SAS.SK) are struggling to cover their costs
in the face of high fuel prices, slack economic growth, and fierce
competition in local markets from discount airlines.
Virgin Atlantic Chief Executive Steve Ridgway said Tuesday that
the Heathrow-to-Manchester route it plans to stop operating next
March is just the start of the company's new short-haul operation.
The airline, which flies 5.5 million passengers a year, aims to
give IAG a run for its money on other short-haul routes as well as
for compete for passengers connected to flights to North America
via Heathrow.
"Our new service will provide strong competition to omnipresent
BA; keep fares low and give consumers a genuine choice of airline
to fly to Heathrow and beyond," Mr. Ridgeway said.
BA is currently the only other operator of direct flights
between Heathrow and Manchester so Virgin won't compete head on
with budget carriers Ryanair Holdings PLC (RYA.DB) and easyJet PLC
(EZJ.LN).
Virgin's other airline brands, which include Virgin Australia
Airlines and Virgin America, operate domestic flights in their
respective markets but analysts were skeptical of the
cost-effectiveness of the new strategy for a specialist carrier
like Virgin Atlantic which lacks the extensive international and
domestic routes of other network airlines.
"The number one reason to have short haul is to get more premium
passengers on your long haul flights," said Gert Zonneveld, an
analyst at brokerage house Panmure Gordon.
"Most of the network carriers lose money on their short haul
business because they can't compete on costs with the low cost
airlines," Mr. Zonnenfeld said.
Virgin Atlantic is likely to restrict its short-haul business to
where it can pick up significant premium traffic for routes to
North America. In the case of Manchester, 65% of passenger flying
to London do so to connect to international destinations.
"Virgin is likely to struggle to make money from its short haul
business on a standalone basis though it likely increases feeder
traffic for Virgin at Heathrow," said Jarrod Castle, an analyst at
UBS.
Write to Marietta Cauchi at marietta.cauchi@dowjones.com
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