Virgin Finally Hooks Up: Why Richard Branson Cut a Deal With Delta

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Look up flights to London Heathrow from New York City airports on Kayak or Travelocity for departure next week and there appear to be about 400 non-stops daily, with most round trips in the $1,300 to $1,700 range. The number of flights is deceiving, though, and so is idea that there’s that much competition, because most of the departures are code-shares. A British Air flight is the same one offered by American Air and Iberia; Delta, Air France and KLM cohabit another listing, while United teams with Lufthansa.

It’s the kind of market cooperation/collusion that has driven Virgin Atlantic founder Sir Richard Branson up the wall for decades. But it’s also the driver behind’s Delta’s $360 million deal to acquire the 49% stake in Virgin Atlantic currently held by Singapore Airlines. Branson, the prankster-in-chief at Virgin Atlantic and myriad other businesses, has railed against BA and American in particular for trying to control competition on the valuable New York-Heathrow route, given that Heathrow is the gateway to everywhere. And Branson had been reasonably successful in steering his stylish, insouciant airline through the industry’s frequent turbulence.

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Branson has started and stopped, bought and sold dozens of businesses, though, and he knows better than to go against the tide of market forces. And market forces have very much moved against Virgin Atlantic. That’s why he pushed Singapore Airlines, which owned 49% of Virgin Atlantic, to sell out to Delta. It’s difficult to be a lovable renegade in an industry that has been relentlessly consolidating. Passengers may like Virgin Atlantic, but the emergence of large global networks such as One World and Star Alliance have increasingly put the carrier at a disadvantage. “We have always been known for our innovation and service and have punched above our weight for 28 years,” Branson said in a statement. “That is why our customers love us so much. We will retain that independent spirit but move forward in a strengthened partnership with Delta.”

The Delta tie-up is what the industry calls “metal neutral,” meaning Delta passengers who book a NYC-London flight might end up on a Virgin Atlantic flight and vice versa. It means that Delta will offer 9 daily nonstops to Heathrow from JFK and Newark with the benefit of the 4 in Virgin Atlantic’s system, greatly expanding Delta’s market share on that critical route. The joint venture will offer 31 daily round-trip flights between the U.S. and U.K. and share frequent flyer benefits and airline clubs. The two carriers will share the costs and profits on the route.

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Virgin Atlantic is getting what it currently lacks: a comprehensive, seamless global network to feed passengers into its system. Sure, you can connect globally with Virgin Blue, Virgin America, Virgin Australia, and a few Asian airlines like ANA. But if you are flying from, say, Cincinnati to Budapest—and looking for frequent flyer miles—the big carriers have an edge. United merged with Continental; Delta with Northwest; British Air with Iberia; Air France with KLM and Alitalia. And on it goes. Branson saw this coming in 2009, when he tried, and failed, to stop American and BA from linking. In a letter to then Senator Obama and Senator John McCain he wrote that “BA/AA would have a combination of high frequencies and a transatlantic network that could not be replicated by any other airline/alliance, and which would make it impossible for other carriers to compete for time-sensitive corporate or business travelers.”

This is exactly what happened. The big networks scooped up the mileage-seeking frequent fliers, leaving low-fare leisure customers for the rest. That’s one reason why Virgin Atlantic is losing money. Branson’s predicament has been exacerbated by BA’s buying control of BMI airline from Lufthansa, giving it even more of a grip on Heathrow, thus leaving Virgin Atlantic hemmed in on both sides of the pond. The Delta deal gets Virgin Atlantic back into the pool for business customers, especially if it joins Delta’s SkyTeam alliance. Consolidation is rarely good for most of the flying public because, as in any market, fewer competitors means higher prices. But the deal makes sense for Virgin Atlantic at this point. “Now we are partnering with Delta we can give them a real run for their money which is I suspect why BA’s Chief Executive has behaved the way he has over the last couple of days,” Branson blogged.

Oh, that. BA CEO Willie Walsh couldn’t help but stick a boot in, suggesting that Virgin Atlantic would be history in five years. “I can’t see Delta wanting to operate the Virgin brand because if they do what does that say about the Delta brand?” he told the UK’s Telegraph newspaper. And for good measure, he later added about Branson: “I just don’t see that the guy has anything that stands out in terms of what he has achieved in the industry.” It’s a pretty astounding statement considering that Branson has started multiple airlines and a space adventure company and changed the way we travel—Virgin America, for instance, may be the best ride in the country. Branson offered to bet £1 million, payable to BA’s staff, if Virgin Atlantic didn’t last five years; if Walsh lost, he would pay £1 million to Virgin Atlantic staff. Walsh said that he’d bet Branson a kick in the groin, since he didn’t have £1 million. Branson took him up on it.

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I’m betting on Branson. And I can envision him auctioning off, for charity, the right to kick Willie Walsh in the family jewels. There must be thousands of Heathrow passengers who would pay good money for that opportunity.

1 comments
mnjimmy
mnjimmy

I hope your headline writer received a bonus for coming up with that headline.  :)