Virgin Atlantic ready to take on BA
By Mark Kleinman
Last Updated: 1:26am BST 31/08/2008
The Telegraph
Sir Richard Branson’s Virgin Atlantic has engaged heavyweight City advisers to engineer its role in a round of airline industry consolidation likely to be fuelled by the high oil price and an increasingly tough operating environment.
People close to Virgin Atlantic say that Credit Suisse had been hired by the company some time ago and that no talks are currently being held between Branson, who is Virgin Atlantic’s president, and either BMI, its smaller rival, or BMI’s second-biggest shareholder, Lufthansa.
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However, the recruitment of a leading investment bank to provide counsel on a prospective change of ownership at BMI reflects Branson’s determination that Virgin Atlantic should play a prominent role in future aviation sector takeovers.
In an exclusive interview with The Sunday Telegraph, Branson reiterated his belief that a combination of Virgin Atlantic and BMI would represent an obvious next step in the long-term consolidation of an industry which only on Friday saw another transatlantic carrier, Zoom, collapse, leaving thousands of passengers stranded.
“There is considerable logic in Virgin and BMI working as one. We do not overlap on routes, [and a merger] would give us a good short-haul network and give them a good long-haul network. By doing that it would create a more formidable competitor to British Airways,” he said.
BMI’s future ownership has been the subject of ongoing speculation for years, but it has intensified in recent months because a put option for Sir Michael Bishop’s 50 per cent plus one share, which allows him to sell his stake to the German flag-carrier at a pre-determined, although undisclosed price, expires next year.
Bishop has declined to comment in detail about the arrangement with Lufthansa, which also has a call option on his stake that becomes effective in December and lasts until June 2009.
BMI is seen by analysts as a particularly valuable business because of its ownership of the second-highest number of take-off and landing slots at Heathrow Airport after BA.
“We are watching the situation. Michael really doesn’t have anything to do with BMI any more in that he has effectively given up a decision to Lufthansa over future ownership,” said Branson.
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Speaking from a holiday on the island of Necker this weekend, Branson attacked the “monster monopoly” which he argues would be created by the approval of an alliance between BA, his long-standing bête noire, and American Airlines. The proposed tie-up, which was announced earlier this month, has been rejected by regulators on two previous occasions, and Branson sees no reason for them to alter their stance this time around.
On Friday, the European Commission said that it was launching a probe into whether the BA-AA alliance and BA’s planned merger with Iberia of Spain violated EU anti-trust laws, a move greeted by Branson with typical enthusiasm.
“It is great news, and the fact that they have launched it before a BA/AA filing [to them] demonstrates that the Commission is taking it very seriously,” he said.
Branson’s rampant opposition to BA’s plan to tie up a larger chunk of the transatlantic market has always smacked of pure economic self-interest – he admits that Virgin “will be seriously damaged” by his rivals’ alliance – but he also insists he is adopting a role the British public has come to know well during the last 20 years: that of the corporate altruist, a ruthlessly successful businessman who has become fabulously wealthy by defending the consumer’s interest.
“If Virgin is worried, then the public should be worried. Together, BA and AA will twist the arms of travel agents to give them business because of their dominant share of the market. With the business market, BA/AA will go to the JP Morgans and the Goldman Sachs who will have to use them because of their domestic networks, transatlantic networks and European networks. It will be sheer monster monopoly dominance.”
This weekend, Branson also accused BA of misleading City analysts and shareholders over the likely timetable for securing regulatory clearance for their alliance, referring to comments made by Willie Walsh, BA’s chief executive, that he expected to have it approved “on this [the Bush] administration’s watch”, in other words, within the next three months.
The Virgin president poured scorn on that expectation. Sources in Washington expect the Department of Transport to pass judgement on the tie-up by the middle of next year “at the earliest”.
“We would hope that the next administration is a more consumer-friendly administration,” said Branson, who has written to the presidential candidates Barack Obama and John McCain to express his views.
BA rejects Branson’s claims about the impact of a deal with AA, saying he is regurgitating arguments “used in a completely different regulatory and competitive environment in 1996 and 2001″. A BA spokesman denied that the company had referred to a formal time frame for clearance.
“Obviously, we would welcome it if we were given approval before the end of the year, but if it runs into next year, so be it,” said the spokesman.
Last week, BA scored a rare public relations victory over Branson, the master of the photo-opportunity, when it brought home the triumphant British Olympic team from Beijing.
Yet days later, Branson was back to his own favourite participation event: riling his larger rival. Financial results which looked strong in the context of the climate saw Virgin Atlantic claiming it had won significant new business from the fiasco over Heathrow’s Terminal 5. An increase in business travellers helped swell Virgin Atlantic’s pre-tax profit before exceptional items to nearly £61m in the year to February, up from £44m a year earlier. “The people who defected will stick with us,” said Branson.
In addition to BMI and the planned BA/AA alliance, Branson has the ownership of his own flagship company to consider. Singapore Airlines, which acquired a 49 per cent stake in Virgin Atlantic in 1999, signalled last year that it was reviewing options for the shareholding, including a sale or an initial public offering.
Virgin Atlantic has pre-emption rights over the stake, although Branson said he was unclear about the price his shareholder would be willing to sell at. “They might have changed their minds. I am still interested in buying it from them.”
Branson has other airlines to think about, too. His Virgin Group, where he is chairman, is locked in talks with a potential partner in Russia as he considers the launch of a domestic airline there. The negotiations, which have been taking place since the beginning of the year, involve Virgin buying a stake in Sky Express, a low-cost commercial carrier.
Branson insists he is undeterred by the sense of crisis that has engulfed other foreign investors in Russia, including BP, the oil company, in recent months.
“The West missed a major opportunity when [Boris] Yeltsin [the former Russian president] was in power, when Russia wanted to join Nato and the West turned him down,” he said.
“It is incredibly sad that Russia is not now part of Nato or of Europe. I hope the politicians can make amends. Businesspeople have got to do their best to trade with Russia.”
Virgin’s moves into overseas domestic airline industries have not always met with unmitigated success. The group is considering offloading or reducing its stake in its business in Nigeria because of a dispute with the country’s government over the location of its domestic operations.
In Australia, where Branson is now the biggest shareholder in the listed airline Virgin Blue, he has seen the company’s share price slump this year, not unlike the stock market performance of many other airlines around the world as investor sentiment across the industry continues to darken.
Next week, Branson will publish his latest book, a guide called Business Stripped Bare to doing business, which marks a departure from the string of autobiographies he has published in the past.
One suspects Walsh will not be among those receiving a free copy.
“We’re going to wage one hell of a campaign to stop their deal happening,” said Branson.