London ‘Land Grab’ Looms as Branson Mulls Virgin Atlantic Fate
The U.K. billionaire is considering options for his Virgin Atlantic Airways Ltd., whose 288 takeoff and landing slots at Heathrow are 3 percent of the total. A buyer would be able to use the slots to add lucrative flights to U.S. and Asian business markets, said Ray Neidl, senior aerospace specialist at Maxim Group in New York.
“This is huge, and we’re probably never going to have this happen again in our lifetime,” Neidl said in an interview. Heathrow slots are “hard to come by even in ones and twos. It’s a once-in-a-generation opportunity.”
Delta, Air France and their SkyTeam alliance are the smallest airline group at Heathrow, with 5 percent of slots, trailing 47 percent for British Airways’ Oneworld and Star Alliance’s 25 percent. Slots are so valuable that Continental Airlines paid $209 million for four pairs three years ago.
Branson is studying the sale of his 51 percent stake after hiring Deutsche Bank AG to review options, and Etihad Airways has signaled interest, said a person familiar with the matter, who declined to be identified because talks are private. Goldman Sachs Group Inc. (GS) is assisting a possible Delta-Air France bid, London’s Sunday Times reported Feb. 20, without citing anyone.
‘Be a Target’
Virgin Atlantic’s allure reflects “a bit of a land grab for scarce slots,” said Laurie Price, director of aviation strategy at consultant Mott MacDonald Group Ltd. in Croydon, England. “Anybody who owns those slots has got to be a target.”
Spokesmen for Delta, Air France-KLM and Etihad declined to discuss Crawley, England-based Virgin Atlantic.
“Virgin Atlantic is a strong, independent business with a good growth position at both London Heathrow and Gatwick so we are not surprised that there is interest in us,” said Janine Doy, a spokeswoman for the airline. “We cannot comment any further at this stage.”
European Union rules require the zone’s airlines to be under European control, so a Virgin Atlantic ownership change would have to involve an EU partner such as SkyTeam’s Air France-KLM (AF) or Star’s Deutsche Lufthansa AG (LHA), according to Price.
A sale of Singapore Airlines’ 49 percent stake, which the carrier acquired in 1994, would be open to all bidders. Having that holding on the market also would create an opening for a U.S. buyer such as Atlanta-based Delta to participate alongside Air France-KLM.
Control of Virgin Atlantic’s slots at Heathrow is “the whole rationale for Delta and Air France being interested,” said Jim Higgins, an analyst at Soleil Securities in New York who recommends buying Delta. A sale of Singapore Airlines’ holdings may tempt Lufthansa, he said.
“No decision has been made about an immediate divestment of our stake,” a Singapore Airlines spokesman, Nick Ionides, said in an e-mail. He said the carrier regularly reviews options and was open to “any interesting opportunities.” A Lufthansa spokeswoman, Claudia Lange, declined to comment.
Heathrow is about 15 miles (24 kilometers) from London, compared with 30 miles for Gatwick airport, making it a magnet for the business travelers prized by airlines. It’s also at 99 percent capacity and has no expansion planned.
Virgin Atlantic faces mounting Heathrow competition after British Airways and AMR Corp. (AMR)’s American Airlines, a Oneworld partner, gained antitrust immunity in July, allowing them to coordinate prices and schedules on trans-Atlantic flights.
That added to pressure from Lufthansa, which in 2009 exercised an option to buy a controlling stake in British Midland, known as BMI, the No. 2 slot owner at Heathrow. With that move, Lufthansa kept BMI’s slots, now totaling 780, off the open market while expanding Star’s size advantage over the independent Virgin Atlantic.
While Delta CEO Richard Anderson declined on a December conference call to discuss the status of any talks with Virgin, the company has indicated its interest in Heathrow, where it has 10 daily flights.
“We think there is room to grow there,” Delta Executive Vice President Glen Hauenstein told investors on the same call.
Delta, the world’s second-largest carrier after Star member United Continental Holdings Inc. (UAL), dwarfs Virgin Atlantic’s fleet of 39 jets and revenue of 1.98 billion pounds ($2.76 billion) for the year ended February 2010. Delta had 815 planes at the end of 2010 and revenue of $31.8 billion.
Open Skies Treaty
What it lacks is a big footprint at Heathrow, where it didn’t win clearance to fly until the approval of the 2007 U.S.- EU Open Skies treaty.
“SkyTeam has a relative weakness there,” said Jonathan Wober, a London-based analyst at Societe Generale. While Air France-KLM has a hub in Paris, its home city, “the London market is huge, particularly in the premium market,” he said.
Branson, 60, must consider the future of the Virgin brand in deciding how much control to cede, said John Strickland, an airline analyst at JLS Consulting Ltd. in London. The 26-year- old Virgin Atlantic is the flagship of Branson’s wider portfolio, ranging from space travel and luxury vacations to gyms and mobile phones, Strickland said.
Should Branson give up command, Virgin Atlantic’s new owner would get Heathrow assets that would rise in value along with travel demand, said George Hamlin, president of Hamlin Transportation Consulting in Washington.
“The economy is better and traffic is up,” Hamlin said. “And they’re not making any more slots.”