Branson Says Virgin Atlantic Has Options in Quest for Allies

Richard Branson said he’s in talks with as many as three potential suitors for Virgin Atlantic Airways Ltd. and that he’s likely to reach a decision on a partnership sometime in the next quarter.

“Discussions with two or three parties are progressing,” Branson said last night in an interview in Chicago. “Within the next two or three months we should be clear on whether there’s an alliance we’re happy with or not.”

Branson, 60, has hired Deutsche Bank AG to assess Virgin Atlantic’s strategic options as rivals British Airways and American Airlines boost cooperation on key trans-Atlantic routes. The entrepreneur, who founded the U.K. carrier in 1984, said that while joining an alliance is essential, it’s not yet clear whether he will sell down his 51 percent stake.

“I’ve always made clear that I would still be very much involved,” Branson said. “My principal interest is in the alliance. If it means selling shares, we’ll consider that.”

Carriers may be dissuaded from taking a stake in Virgin Atlantic because of the strength of British Airways, said Chris Logan, an analyst at Echelon Research & Advisory in London. BA is allowed to coordinate fares and timetables with AMR Corp. (AMR)’s American after their alliance won antitrust approval last year.

‘Price War’

“I’m not sure any airline would want to pay a lot of money for Virgin and then try and earn a return on that investment on business across the North Atlantic,” Logan said. “That would mean taking BA on head-to-head and might trigger a price war. I’m not sure that’s something they would want to do.”

The fate of a 49 percent stake in Virgin Atlantic held by Singapore Airlines Ltd. (SIA), which could determine control of the company, will probably turn on the choice of alliance, Branson said. Singapore Air is a member of the Star Alliance, alongside Deutsche Lufthansa AG (LHA), United Continental Holdings Inc. (UAL) and BMI, the No. 2 slot-holder at London’s Heathrow airport after BA.

“Whether Singapore Airlines decides to sell their shares or not depends on what offer, what the alliance is,” Branson said. “That’s undecided.”

Joining the SkyTeam grouping led by Delta Air Lines Inc. (DAL) and Air France-KLM (AF) Group would also help bolster Virgin’s business model. Membership of the Oneworld alliance may be less likely given the rivalry with British Airways at Heathrow.

“It’s pretty safe to say that Virgin won’t join Oneworld,” Logan said. “They could do something in Star, including even a Heathrow slot exchange or joint venture arrangement with Lufthansa-BMI. That’s something that would be easier to do than if they were operating as a standalone airline.”

Brand Strength

Virgin Atlantic doesn’t necessary need to join the biggest alliance on offer, said Branson, who was speaking at an event to publicize the Virgin America unit’s new services from Los Angeles and San Francisco to Chicago.

“Virgin already has the branding around the world and that’s getting stronger,” he said. “So no need to have the biggest grouping. But we do think it should have a grouping that brings strength.”

Virgin Atlantic first said in December it had attracted approaches from several parties, six months after Chief Executive Officer Steve Ridgway signaled its interest in a merger, and had appointed Deutsche Bank to evaluate options.

Branson said earlier this month in Sydney that the linkup between British Airways and American Airlines had made it “more of an imperative for us to look at our own alliances.”

Airline alliances allow carriers to offer a wider network of flights, share lounges and in some cases to reduce common costs, and are likely to form a template for mergers within the industry, according to Willie Walsh, chief executive officer of BA’s parent, International Consolidated Airlines Group SA.

“I don’t think an alliance is going to make much difference to Virgin,” said John Strickland, an aviation analyst at JLS Consulting. “They are smaller but they have areas of focus that have value. They could tweak the network and perhaps decide to fly less elsewhere and play to their strengths.”

To contact the reporters on this story: Mary Jane Credeur in Chicago at mcredeur@bloomberg.net; Steven Rothwell in London at srothwell@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Ed Dufner at edufner@bloomberg.net

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