business

Branson’s Virgin Atlantic Swings to Loss After Low-Cost Squeeze

Updated on
  • U.K. carrier also hurt by weaker pound, spate of hurricanes
  • New economy-class choice will aim to fend off cut-price rivals

Photographer: Andrew Harrer/Bloomberg

Virgin Atlantic Airways Ltd. posted a loss last year as the weak pound hurt demand for flights from the U.K. and made it tougher for the carrier to compete with long-haul discounters led by Norwegian Air Shuttle ASA.

Revenue also fell and occupancy levels slipped, Virgin, founded by Richard Branson in 1984, said Thursday in a statement. Chief Executive Officer Craig Kreeger said macro-economic factors will continue to make conditions tough this year, with higher U.K. inflation likely to “hit customers in their pockets.”

While sterling’s slide following Britain’s 2016 vote to quit the European Union spurred a 20 percent increase in U.S.-based customers, that hasn’t made up for the impact on the U.K. market, with overall passenger numbers 100,000 lower at 5.3 million. Hurricanes in the Caribbean and U.S. also hurt sales and faults with Rolls-Royce Holdings Plc engines affected aircraft availability.

The pretax loss for 2017 was 28.4 million pounds ($40 million), excluding one-time items, compared with a profit of 23 million pounds the previous year.

Kreeger is banking on a new “economy light” brand to lure price-sensitive customers and make Virgin Atlantic more immediately visible as people search for fares. The option includes hand baggage only and no guarantee that friends and families can sit together. An “economy delight” product will have a 34-inch seat pitch, three inches more than standard, priority boarding, checked luggage and free seat selection.

Virgin Atlantic is facing a new breed of competitor as Norwegian Air builds London’s Gatwick airport into a major base. Network specialists are responding with lower-cost operations that could begin to threaten Virgin on some of its leisure-oriented routes. Long-time rival British Airways has established a new discount unit, Level, and this week said it separately plans to launch a no-frills “basic economy” fare of its own on long-haul flights.

Crawley, England-based Virgin Atlantic is 49 percent owned by Atlanta-based Delta Air Lines Inc., something the carrier said helped tap U.S. custom after the Brexit vote. Europe’s biggest carrier Air France-KLM Group, a Delta ally, has also agreed to buy a 31 percent stake in a move that will see billionaire Branson’s holding reduced to 20 percent.

Three or four of Virgin’s Boeing Co. 787 fleet have been grounded at any one time for fixes to their Rolls-Royce Trent 1000 engines amid durability issues. The airline is currently in talks with Rolls, which has made payments to cover costs, and is also leasing Airbus SE A330s to provide extra capacity cover.

Virgin Atlantic is also uniquely exposed to U.K.-U.S. leisure flows and to the Caribbean destinations ravaged by storms throughout 2017, Kreeger said.

(Updates with CEO comments on U.K. economy, engine issue from second paragraph.)
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