A VERY HAPPY NEW MILLENNIUM TO ALL OUR READERS Aviation Strategy Issue No: 27 January 2000 A fly on the wall CONTENTS h to be a fly on the wall at global alliance quarterly meetings when air- Oline chief executives discuss and debate the state of the industry. For Analysis example, at the latest oneworld meeting the American Airlines team no doubt were called upon to update their alliance partners on their unilater- Repercussions of the SIA/ al deal with Swissair. BA in particular would have been listening closely, having just lost out to Swissair in their bid to purchase 20% of LOT. Virgin Atlantic deal 1 Now the focus of attention for any fly interested in the aviation industry must turn to the next meeting of the chief executives of the Star Alliance, The wizard of Oz: where Cheong Choong Kong, the deputy chairman and chief executive of Lessons of Virgin Express, Singapore Airlines, will explain the thinking behind his airline's decision to for Virgin Australia 2-4 buy 49% of Virgin Atlantic. SIA has been a somewhat reluctant member of the global alliance fra- Capacity plans: Are ternity, a sentiment shared perhaps by its great regional rival, Cathay airlines acting rationally? 5-7 Pacific. Both airlines entered into the alliance game relatively late, when their structure had already been set by the major US and European carri- The retirement factor 8 ers. They also committed themselves at a time of relative weakness fol- lowing the (temporary) collapse of the Asian economies. Joys of the Internet 9 Rather than join a strategic alliance, SIA for some time has pursued a policy, in some respects similar to that of the SAir Group, of expansion Briefing through acquisition. Like SAir, SIA has a strong balance sheet; unlike SAir, SIA had, until the Virgin acquisition, failed to get into the ownership game. Southwest in the It tried to buy into Qantas, Ansett, Thai, China Airlines and an Indian start- 21st century 9-14 up all without success. SIA's entry into Star fooled some into perhaps believing that SIA was Russian airlines: now fully embracing the global alliance concept. The fact is that it is pur- the capitalist suing a clever dual track approach. Referring to the Virgin purchase, SIA experiment continues 14-17 states: "this big investment ... will move it nearer to its goal of being a major global group of airlines and airline-related companies". It should be Management noted that the acquisition of a stake in Virgin Atlantic completes SIA's round the world network, and Branson has stated that his airline will Maintenance accounting remain outside Star. as a strategic tool 18-19 So at the next Star meeting, the SIA CEO may be met with some stony faces. As the only Star partner with access to the transatlantic market from Macro-ttrends 20-21 Heathrow, United will be keen to hear how SIA code-sharing agreements with Virgin Atlantic will impact its services. Similarly, a financially strength- Micro-ttrends 22-23 ened Virgin will pose a serious threat to the transatlantic ambitions of Lufthansa/SAS-backed-British Midland. There are also repercussions in the southern hemisphere. Virgin Australia (outside the SIA deal, but nonetheless backed by a richer Branson thanks to SIA) is set to become a low cost rival to Star partner PUBLISHER Ansett. Further, Virgin Atlantic currently serves the Australian market through a codeshare with Ansett. It will be interesting to see whether the Aviation Economics Ansett codeshare survives or whether Virgin links up exclusively with SIA's James House, LG, wide-ranging network to Australia. 22/24 Corsham Street Still, Virgin Atlantic could be integrated into the Star Alliance at some point in the future when a UK-US open skies is signed and BA/AA antitrust London N1 6DR immunity is finally agreed. Then Virgin, armed with more Heathrow slots, Tel: +44 (0) 171 490 5215 would be even more effective competitor against oneworld. And then Fax: +44 (0) 171 490 5218 Virgin Australia could become the low cost arm of Ansett, which would tar- e-mail: [email protected] get oneworld rival Qantas. Aviation Strategy Analysis Branson: the wizard of Oz? ichard Branson, owner of Virgin Atlantic and • Cultural problems Rpart owner of the floated Virgin Express, has The airline has also admitted to cultural differ- announced his intentions to start up a low cost ences between the former US senior manage- Aviation airline in the Australian domestic market. What ment team under Jonathon Ornstein, imported Strategy is published 12 lessons can be learnt from the none-too-success- from Mesa Airlines in New Mexico whence they times a year by ful Virgin Express operation? Can Virgin Australia have returned, and the European workforce. It Aviation succeed where the previous generation of low wasn't just the brasher American style, it was the Economics cost carriers - Compass Airline and Southern fact that they imported a US product but didn't on the first of Cross - failed? seem to understand that it had to be adapted to a each month new environment. By contrast, Ryanair and easyJet have borrowed all the key low-cost Editors: Lessons of Virgin Express Keith McMullan strategies from the US, but have given them a Tim Coombs Brussels-based Virgin Express is many uniquely European feel. observers' favourite to be the next European air- The recent appointment of John Osborne (for- Subscription line failure, following the demise in 1999 of carri- merly GB Airways) as CEO may be significant; enquiries: ers such as AB Airlines, Color Air, and Debonair. certainly he is more likely to appease the Belgian Tim Coombs/Keith McMullan Virgin Express has been a very poor stock market authorities who have now granted a four-month Tel: +44 (0) 171 performer: it is currently rated 64% below its 1997 extension to the airline's AOC. 490 5215 flotation price. Some of Virgin Express's problems are outside its control but most could have been • The relationship with Sabena Copyright: foreseen. Virgin Express more or less had to forge a Aviation codeshare/blockseat agreement with Sabena in Economics All rights reserved • Conflict with the Belgian authorities order to gain access to Sabena's slots at It is not easy to run an airline (nor any com- Heathrow. However, the agreement meant that Aviation pany) out of Belgium. Labour costs are inflated by Sabena sold the business cabin, leaving Virgin Economics government social charges which add about 37% Express just with Economy and hence unable to Registered No: 2967706 (England) to the basic salary compared to around 10% in replicate its very successful Virgin Atlantic prod- the UK and other countries. Faced with what is uct within Europe. Registered Office: regarded as unreasonably high pilot costs and Cooperation between the two airlines has James House, LG inflexible work rules, Virgin Express's manage- always been strained, and the relationship is 22/24 Corsham St ment made last year (1999) a decision to con- inevitably coming under stress as competition London N1 6DR VAT No: 701780947 centrate future growth in Shannon, Ireland where between the two carriers grows - for example, they already had five 737s based. Virgin Express competes with its own service ISSN 1463-9254 This provoked a review of the carrier's AOC from Brussels to London Stansted. The arrival of The opinions expressed in this publication do not nec- by the Belgian Civil Aviation Administration Sabena's new A319s in 2000 may terminate the essarily reflect the opinions (BCAA). The BCAA was specifically concerned agreement. of the editors, publisher or contributors. Every effort is that the airline's AOC covered only Belgian-reg- made to ensure that the information contained in this istered aircraft and that plans to shift the main • The route network publication is accurate, but operation to Ireland was a flag-of-convenience The network has little in the way of coher- no legal reponsibility is accepted for any errors or tactic. ence. Apart from London Stansted and possibly omissions. Virgin Express has responded by arguing Shannon, Virgin Express flies to some of the The contents of this publica- that it is not labour costs that are driving it to highest cost airports in Europe. This is anathema tion, either in whole or in part, may not be copied, Ireland, but an inability to hire Belgian pilots. to Europe's leading low cost carrier, Ryanair. stored or reproduced in any format, printed or electronic, The airline claims that it has only enough From its primary hub at Brussels National, without the written consent Belgian crews to man nine of its total of 16 only three destinations have a daily frequency in of the publisher. Belgian-registered aircraft. excess of four flights - London (split between ser- January 2000 2 Aviation Strategy Analysis vices to Stansted, Heathrow and Gatwick), Cents per DOMESTIC UNIT REVENUE Barcelona and Rome. Six other European cities ASM are served from Brussels but for the most part 18 COMPARISONS, 1998 only have one daily departure. 16 Virgin Express's timetable shows many con- New Australia necting opportunities over Brussels but the only 14 Zealand Japan US points linked with more than three daily frequen- 12 cies are all from London - to Barcelona, 10 Taiwan Copenhagen, Madrid, Milan, Rotterdam and Korea Rome. All these have very attractive direct ser- 8 vices offered either by flag-carriers or by other Malaysia 6 low cost airlines. Virgin Express must have to operate at the most price-sensitive and therefore 4 lowest-yielding end of the market 10 15 20 25 30 So the Virgin Express formula is unlikely to be $000s GDP per capita PPP adjusted Source: Goldman Sachs.