The pressure on Belgium's two main airlines - SNBrussels and Virgin Express - to merge is building as the financial consequences of two carriers operating side-by-side at Brussels Zaventum airport become apparent.
Virgin Express has already looked, but been frustrated, in its attempts to expand outside its home base. It pulled out of a planned hub at Cologne in September 2002 as it realised the airport was poised to become the epicentre of a fierce battle in the German low-cost market, and failed last year in its bid to obtain enough slots to establish a base at Paris Orly.
However, fierce competition between Virgin Express and SN Brussels, the airline formed out of the defunct flag carrier Sabena - not to mention Ryanair's hub at Brussels Charleroi - is clearly taking its toll. Ever since Sabena went under in late 2001, observers have predicted that Virgin Express and SN Brussels will be forced to merge as Brussels is simply too small a market for two players now that its role as a hub has effectively been ended.
This is despite the different market profile of the two carriers, with SN concentrating on business passengers and Virgin Express on the leisure market. The two held merger talks in early 2002 but these fell apart primarily due to disagreements over valuation, with Virgin Express wanting a half share of a merged entity. A codeshare agreement between the two was ended in 2002.
Since then, SN Brussels shareholders have made no secret of their willingness to sell, and they have been in talks with the Virgin Group, 89% owner of Virgin Express, since September last year.
Both carriers have found the going tough recently. At Virgin Express, total revenue fell by 8% to €62 million ($78 million) in the third quarter of 2003. During the period, unit revenues at Virgin Express were down 22%, more than cancelling out a 17% drop in unit operating costs. Routes to Spain and Italy were particularly difficult. The carrier saw a post-tax profit of €1.7 million. SN also just scraped into the black, with a net profit of €2 million on revenues of €153.8 million during the third quarter.
Virgin Express is downsizing its fleet of Boeing 737s from 13 to 11 aircraft after the winter season, but emphasises that this does not represent a cutback.
The carrier says it will keep production levels at the same rate as last year through increasing utilisation - an exercise that will also help cut costs. It also says that it needed the two extra 737-400s last year as its fleet underwent a heavy maintenance programme.
Virgin Express chairman David Hoare says: "The fundamental problem of the Belgian market is a combination of overcapacity with consequent uneconomic discounting of fares." In addition to battling it out with SN Brussels, which he notes added three Airbus A319s in spring last year, Hoare points to competition from Ryanair as a reason for falling yields. The latter has been accused of receiving illegal subsidies at Brussels Charleroi, with the European Commission expected to deliver a final ruling on the issue in late February.
Virgin Express, meanwhile, is terminating its codeshare agreement with VLM on the Brussels-London City route, and as a result no longer has a London link. The carrier says the different market profiles, with VLM concentrating on business rather than leisure traffic, were behind the decision. VLM plans to add extra frequencies on the route.
Hoare says that Virgin Express is looking to expand its network but adds that these are likely to be on routes suited to regional aircraft rather than its 737s, and is in talks with a number of potential regional partners.
Virgin Express already codeshares with Malmo Aviation and buys capacity on the Brussels to Bromma and Gothenburg routes, while Malmo buys space on Brussels-Copenhagen.
COLIN BAKER LONDON
Source: Airline Business
