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Virgin Atlantic backs off all-premium-class idea

Failure to launch? Virgin Atlantic Airways delays decision to launch an all-premium-class airline.
Failure to launch? Virgin Atlantic Airways delays decision to launch an all-premium-class airline.Image: Boeing Photo / Virgin Atlantic Airways
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Eight months after Sir Richard Branson revealed his airline Virgin Atlantic Airways was planning to launch an all-premium-class carrier within 18 months, the high-profile billionaire now says Virgin is in no hurry to do so.

Branson and Lyell Strambi, Virgin Atlantic Airways' chief operating officer, admit that at this stage the airline is merely maintaining a watching brief on the all-premium-class market and has no plans to begin such an operation in the near future.

"At present, all-business-class airlines are losing their shirts — literally," said Branson. "A huge amount of value has been lost" recently by all-premium-class airlines' shareholders.

"It's not easy to make money out of all-business-class carriers," added Branson. "What we believe is that it's better to have cargo, economy and premium economy passengers along with business-class passengers. We will wait and see what happens to all-business-class (airlines) with interest."

Several of the recent all-premium-class start-up airlines have used older aircraft to launch transatlantic service, Strambi pointed out. Initially this made sense, because while these aircraft were more expensive to operate than newer models, the start-ups still could generate high profits as long as they could fill their aircraft with premium-fare passengers.

However, the Open Skies deal soon to come into effect between Europe and the United States could create new problems for the all-premium-class start-ups, said Strambi. "It will be interesting to see. As the market changes they will find it harder. It will make life very interesting and very tough. It will make the going hard for them," he predicted.

Strambi says that, as the March 30 start date of the landmark U.S.-European Union 'Open Skies' agreement nears, market uncertainties are the primary reason for Virgin Atlantic's change of heart regarding premium-fare operations. Virgin also is concerned about possible aircraft shortages because of the highly publicized delays that Airbus and Boeing have encountered with their latest aircraft models.

"We're a little nervous about (U.S.-EU) Open Skies Phase 1," which could bring a sizeable amount of "additional capacity" into the transatlantic market, said Strambi. Additionally, "with aircraft delivery issues, a lot of planes are perhaps not available" any more for niche, all-premium-class operations.

"We have looked at it a couple of times" since Branson first made public Virgin Atlantic's interest in the all-premium-class transatlantic market, said Strambi. "Richard is still very keen on it … but it's all about timing and doing it properly. You have to do it right from the go-get."

An important factor in deciding whether to launch an all-premium airline in the near future is the potential for the airline industry to consolidate globally over the next three years, said Strambi. "If global aviation is going to consolidate, you could do a number of things" in setting up premium-class services. "You could do it very small or very big."

Global consolidation a factor
The possibilities for global consolidation, in turn, depend partly on whether or not the European-U.S. Open Skies deal lasts beyond 2010. Some airlines might be unwilling to invest money and resources in launching all-premium-class operations across the Atlantic if there is a real chance of the Open Skies deal collapsing and the additional market access it allows vanishing.

Branson says Virgin was disappointed that the initial phase of the U.S.-EU Open Skies deal didn’t go further in giving European airlines rights to fly between American cities, when U.S. carriers were given the right to fly between cities within Europe.

But the key issue for the future of the Open Skies deal will be whether the U.S. Congress allows European airlines to buy U.S. airlines, said Branson. If Congress doesn't let them do so, the EU has the right to kill the deal outright in 2010 — and the EU's Transport Commission has frequently said that it will end Open Skies if Congress doesn’t offer real concessions.

"Do I think Phase 1 will collapse? It depends, I suspect, on the American Congress and whether it will be protectionistic … or be brave and truly open the skies," said Branson.

"That protectionism is so misplaced, in that the consumer will benefit from American carriers being able to fly anywhere in Europe and European carriers being able to fly anywhere in America," said Branson. "Fares will come down, and jobs will be created, more than by (Congress) protecting a few flag carriers."

Because the U.S.-EU Open Skies situation is so complex, particularly for all-premium operations, "timing is absolutely key" in deciding when to launch such an airline, said Strambi.