The past week has seen three events in the airline world that suggest it could be high time for Virgin Atlantic Airways finally to relinquish its independent status as a carrier not aligned with any of the three major global airline alliances ― and, should Virgin Atlantic decide to offer up its maidenly honor, the nature of the events suggest which suitor it would pick.
The three events in question are as follows. First, Delta Air Lines and the Virgin Blue Airlines Group announced that, subject to approval from the Australian and U.S. governments, they would begin a codesharing and cooperation agreement on flights between the United State and Australia, and throughout the South Pacific.
Delta ― which, one should remember, now boasts the huge transpacific network owned by its merger partner Northwest Airlines ― began operating nonstop flights between Los Angeles and Sydney during the week, using Boeing 777-200LR ultra-long-haul jets. Earlier this year, V Australia, the long-haul arm of Australia’s Virgin Blue Airlines Group ― which also includes the Australian domestic airline Virgin Blue and New Zealand-based Pacific Blue, both of which also fly to other island nations in the South Pacific ― began flying Boeing 777-300ERs nonstop from Sydney and Brisbane to Los Angeles. V Australia also plans to launch Melbourne-Los Angeles flights this autumn.
As a result, a codesharing and cooperation agreement between the two airline groups, if approved, would represent serious new competition to the two long-time incumbents on the prime Australia-U.S.West Coast route, Qantas (a member of the oneworld alliance, along with British Airways and American Airlines) and United Airlines. United is a founding member of the huge Star Alliance, easily the largest and most effective airline alliance in the world, though United itself gets little but bad press these days for its poor labor relations and often-aberrant customer service attitude.
The day after Delta announced its planned partnership with the Virgin Blue Airline Group, Virgin Atlantic Airways ― the airline that began the entire round of Virgin airline franchises worldwide ― announced a codesharing and frequent-flyer program-reciprocity deal with V Australia. Virgin Atlantic already had in place a cooperative relationship with Virgin Blue itself and saw an additional cooperation with Virgin Blue’s new long-haul arm as being particularly valuable for passengers buying the two airlines’ combined ‘Virgin Round the World’ fares. That’s because the Virgin Atlantic-V Australia cooperation would allow passengers to combine in one frequent-flyer program all the mileage they accumulated on their globe-circumnavigating trips.
The third event that could strongly influence Virgin Atlantic’s future is that on Friday, July 10, the U.S. Department of Transportation (DOT) announced that ― despite objections from the Department of Justice ― it would give its final seal of approval to applications by a group of nine of the 21 (soon to be 22) Star Alliance airlines for immunity against U.S. antitrust law for joint discussions and commercial actions throughout their international markets. (Remember, antitrust law is designed to protect the public against anti-competitive actions that companies are deemed to have taken illegally as a result of their colluding as cartels.)
Although the DOT was careful to exclude certain important city-to-city international markets (and all routes from the US to Beijing) from its final approval, the department also approved Continental Airlines’ application to join the other nine airlines in their antitrust immunity, effectively allowing the creation of a 10-airline alliance-within-an-alliance.
Furthermore, the DOT additionally approved antitrust immunity for the application of four of the airlines ― Air Canada, Continental, Lufthansa and United ― to create a joint venture (to be known as ‘Atlantic-Plus-Plus’) for their combined transatlantic operations. Although, again, the DOT excluded certain very important transatlantic city-to-city markets from its blanket approval ― thus creating what are known as “carve-outs” ― its approval for the Atlantic-Plus-Plus joint venture effectively will allow the creation of an alliance-within-an-alliance-within-an-alliance.
But what has all this to do with the notion that it might well be time for Virgin Atlantic Airways to join an alliance, careful though it has been never to dilute its uniquely innovative service offering throughout its 25-year history by doing so?
The answer lies with the U.S. Department of Transportation. Under the impetus of the Obama Administration the Department of Justice has revealed new qualms about the advisability of blithely conferring antitrust immunity on vast sectors of US and international business, as happened routinely in the time of the very business-friendly Bush Administration. However, the DOT appears to have dug itself into a bit of a hole regarding the application earlier this year by the big oneworld alliance airlines American, BA and Spain’s Iberia for antitrust immunity for a transatlantic joint venture that they propose to create.
Several years ago, during the Bush Administration, the DOT happily gave antitrust immunity for a similar transatlantic joint venture involving Delta, the then Northwest Airlines, and Air France-KLM. All of them were, and still are, members of the SkyTeam Alliance, which is the third of the three big global airline alliances. (Star and oneworld are the other two.) By most measures, Delta/Northwest and the Franco-Dutch Air France-KLM Group are now the two biggest airline groups in the world. And ― unless the newly contrite Department of Justice has its way and succeeds in requiring the DOT to review these airlines’ antitrust immunity every three years ― Delta/Northwest and Air France-KLM are totally immune from prosecution for any anti-competitive actions they might choose to take.
Now, also, the DOT has decided it has no problem with a group of 10 of the Star Alliance member airlines enjoying the same kind of immunity from prosecution under US anti-competition laws, and a group of four of the same 10 airlines enjoying further protection for a joint venture they want to operate on transatlantic routes. So why on earth would there be any reason now for the DOT not to approve the application of American Airlines, British Airways and Iberia to create a similar joint venture?
But the thought of these three airlines doing so has always been ― and still is ― anathema to Virgin Atlantic Airways, focused as it is on protecting its main base at London Heathrow Airport. For years Virgin’s founder Sir Richard Branson has argued forcefully and effectively in the corridors of power in Washington, D.C. and London that any AA/BA joint venture would be too anti-competitive to contemplate. And for years, he has been successful in his efforts: American and British Airways have applied at least twice before for antitrust immunity for joint transatlantic operations, and twice the DOT has rebuffed them.
Now, however, the equation looks to have changed. Should the DOT disapprove the latest application of American, BA and Iberia, they will be able to appeal the decision with direct evidence that the department is discriminating against them. After all, the DOT has awarded antitrust immunity to an alliance that is much bigger than oneworld ― the Star Alliance ― and to international joint ventures among airlines that are as large or even larger, and as powerful in major transatlantic markets, as are AA, BA and IB.
While the DOT found compelling for years Sir Richard’s argument that American and BA dominated the biggest transatlantic market ― Heathrow-New York ― and therefore conferring antitrust approval upon them would be enormously anti-competitive, the UK government’s repeated and bizarre increases in taxation on air travel from the UK are making Heathrow and all other UK airports increasingly irrelevant as gateways to Europe. Amsterdam Schiphol and Paris Charles de Gaulle ― both dominated by Air France-KLM and Delta ― and Frankfurt (dominated by Lufthansa and Star) are set to assume the mantle traditionally worn by Heathrow. Even Virgin Atlantic Airways agrees that this is the case, creating a website page specially to make the point that the UK government’s taxes on passengers are hurting UK air travel badly.
So it seems a distinct possibility that, this time, Sir Richard won’t get his way. But if the DOT does approve the antitrust-immunity application of American, British Airways and Iberia for their proposed transatlantic joint venture, what is Virgin Atlantic Airways to do?
For many years Virgin Atlantic was closest to Continental Airlines, codesharing with the US airline on each other’s transatlantic flights. But Continental is now leaving Delta Air Lines’ SkyTeam sphere of influence to join the rival Star Alliance instead. (Given the poor service reputations of the existing US members of Star, United and US Airways, and Continental’s excellent reputation for service, one wonders if a few sighs of relief are making themselves evident in Star Alliance’s Frankfurt headquarters.)
Star Alliance already has a UK member, bmi, now majority-owned by Lufthansa and with lots of Heathrow take-off and landing slots with which to begin service to places like New York and Los Angeles. So it seems unlikely Virgin will try to protect itself by lining up with the Star Alliance. But can Virgin go it alone, in the new world of antitrust-immune transatlantic joint ventures? Very possibly not.
Virgin Atlantic once was quite close to Delta Air Lines, using Delta’s terminal at New York JFK and codesharing with the big US carrier, but eventually the cooperation fell away. In recent years, however, Delta’s transatlantic marketing efforts have appeared increasingly clueless to industry insiders despite its vast transatlantic network ― hence its recent, unpublicized decision to cede nearly all marketing of its transatlantic services to its joint-venture partner Air France-KLM. Delta’s transatlantic efforts to the UK could do with beefing up, industry observers argue ― but Air France, which recently began and then just as quickly dropped a Heathrow-Los Angeles service, may not be the answer in marketing terms.
Now, however, there is the strong chance that throughout the South Pacific Delta could become closely involved with a Virgin franchisee with which Virgin Atlantic Airways itself is becoming increasingly involved. What better opportunity exists for both Virgin Atlantic and Delta to strengthen their transatlantic positions to and from the UK ― and possibly elsewhere, too ― by deciding to help each other out? And in a time of alliances and anti-trust immunity, what better opportunity is there for Virgin Atlantic Airways, and indeed the entire Virgin airline franchise, to ally themselves closely with the world’s two largest, most powerful airlines rather than dwindle away gradually as others grow more powerful?
Virgin Atlantic surely needn’t be afraid of becoming subsumed and lost within Skyteam: It brings to the table a unique record of service innovation that ― if Virgin Atlantic and other Virgin franchisees became members ― should make any global alliance, if it had any sense, immediately agree to let Virgin handle the marketing and customer service aspects of the business.
Throw into the mix two other factors which are highly relevant in the context of increasing cooperation among the various Virgin airline franchisees throughout the world. Virgin America, which by now most US flyers know has established a reputation as being the very best US airline there is for service, recently agreed to codeshare and link frequent flyer programs with V Australia.
Virgin America has also indicated publicly that it wants to agree a similar cooperation deal with Virgin Atlantic Airways. Although no timeline for such cooperation has yet been agreed, Virgin America already has a deal in place for its passengers to buy access to Virgin Atlantic’s lounges in three US cities. Just imagine what the linked networks and linked frequent-flyer programs of Virgin Atlantic, Virgin America, V Australia, Virgin Blue and Pacific Blue could bring to any alliance.
So, from the point of view of Delta, Air France-KLM and the other SkyTeam members (which include Aeromexico, China Southern Airlines, Korean Air and Spain’s Air Europa, as well as others), enticing the Virgin franchise into the fold could make compelling sense. Of course, suggesting a possible tie up between the Virgin airlines, Delta and the Skyteam Alliance is all just speculation at this point, but the argument can be made more forcefully and logically now than perhaps ever it could before.