There is a sense of almost comic frustration at Virgin Atlantic Airways' offices near London/Gatwick. Executive director commercial, Paul Griffiths, is reading out the results of the carrier's latest application for slots at London/Heathrow. His conclusion: there are no slots available that make any of the destinations viable commercial routings.
'We are being forced into an uncompetitive situation because of the monopolistic approach to slot allocation,' says Griffiths. His words may well echo a well-worn line at Virgin but they retain some resonance when the focus is the world's leading international airport, where the only challenge to British Airways' dominance of slots comes from British Midland on European trunk routes.
Frustrated in its attempts to expand westwards to the US, Virgin has had some success to the East where it has received slots for two Gulf destinations for the 1995-6 winter season. In addition, Griffiths believes the Johannesburg route may work out although the carrier wants a daily service. Virgin is also looking away from London and is considering launching a scheduled Manchester-Orlando service next year, which would primarily be supported by its sister company Virgin Holidays. But this is not necessarily an idea that Virgin will expand on.
The flamboyant entrepreneurial chairman of the Virgin Group, Richard Branson, has ensured that the airline and the brand name have remained in the foreground of media attention, especially in the UK. The well publicised claims about a 'dirty tricks' campaign by British Airways, and Branson's success in the UK have endeared him and his carrier to the many consumers who cheer for the Davids in a commercial world of Goliaths.
Indeed, the legal battle continues in the US courts, where it is currently in the discovery phase. While the costs of continuing may be high, Virgin feels it is still a worthwhile venture. 'We have taken into account the financial costs and are still pursuing the case,' says Griffiths. 'We think there is evidence to suggest we have suffered commercial damage as a result of action by British Airways.'
But there is more to Virgin than its ongoing legal battle with British Airways and its highly public chairman. Indeed, Branson's high profile does have its downside, says customer services director Stephen Ridgway, with some customer complaints blaming the chairman personally for the lack of pillows, blankets or earphones.
While most carriers talk of high quality service, Virgin's claims are somewhat justified. On the fiercely competitive transatlantic routes it was named Best Transatlantic Carrier in 1995 by Executive Travel magazine and Best Trans-atlantic Airline by Travel Weekly for the fifth consecutive year.
The carrier is a success because it is innovative and works on the details that large, major competitors are slow to copy, says Ridgway. It has given passengers choices they were not entirely sure they wanted, and by doing so has changed the perceptions of what air travel could be, he adds.
Take the Virgin lounge at Heathrow. In doing the typical customer surveys, passengers indicated they were happy with the lounges everyone else had developed. Asked if they would like a train set, a library, a music room, beauty treatment or massage therapy the passengers said 'no'. But Virgin went ahead anyway. 'When we did it people's perceptions changed,' claims Ridgway. 'So you have to be careful not to be driven by people's traditional marketing perceptions.'
Virgin is constantly updating and evolving its on-board and ground products. Currently it is working on a new ground product that will 'really push the debate of service forward', says Ridgway, without being more specific. The innovation is scheduled for an early 1996 launch, but this will depend on the appropriate regulatory approvals.
As the competition mimics the Virgin services, Ridgway believes the airline can maintain its edge by concentrating on its staff training. Redeveloping the customer service programmes is all part of honing what Ridgway believes is one of the carrier's prime advantages. 'We must allow for individuality and flare. We must allow [the cabin crew] to make judgements about the sort of attention an individual passenger wants,' he says.
The crews, lounges, and on-board products are all part of the marketing effort that is a critical element of Virgin's success. Griffiths estimates Virgin spends double that of the average US carrier on marketing costs, dedicating about 3 per cent of turnover.
But is it worth it? Does the extra spend really make a difference? Virgin says it does. But with undisclosed financial figures for 1994, and only the comment of 'significant improvement' this claim is unsubstantiated. Market share on the hotly contested transatlantic routes was up 0.4 percentage points in 1994 over 1993 from 24.38 per cent. But capacity share grew by 1.9 percentage points, not positive given the relatively stagnant market share figures.
Virgin compiles a ratio of market share to capacity share, with a quotient of more than one showing Virgin's share of the passengers is greater than the seat share in the market. But on the transatlantic markets even these quotients were virtually stagnant or had dropped in 1994 over 1993.
Passenger traffic did rise to 1.64 million in the 1993-4 financial year from 1.36 million the year before. Systemwide Virgin may be benefitting, but while it holds a respectable market share on the North Atlantic Virgin's claims of success there should be tempered against the statistics.
The carrier is also taking its ground products to the US. The codeshare with Delta Air Lines, which started in April on routes from London/Gatwick to Miami, Boston and Orlando, and from London/Heathrow to Los Angeles, New York/Newark, JFK and San Francisco has given Virgin access to space at New York/JFK and Newark. A Virgin lounge opened at JFK in June with one at Newark due to open later this year.
But the codeshare offers Virgin much more than just lounge space across the other side of the Atlantic. Virgin stands to gain $179 million in total revenue from the block space agreement on the codeshare routes, which has been upgraded since the original deal to include about 28 per cent of Virgin's Premium Economy seats. This upgrade is worth an extra $29 million in revenue. Griffiths says it is 'not unlikely' that the codeshare will become two way within the next year with Virgin codes appearing on domestic US Delta flights.
Its codeshare agreement with Malaysia Airlines, which started in May, finally gave Virgin direct access to the Australian market from London, after years of promising to launch services. Using MAS' new 747-400 Virgin codeshares from Kuala Lumpur to Sydney, Melbourne and Adelaide. Despite the carrier's marketing agreement with Ansett, Virgin could only connect with the Australian carrier over Hong Kong and so instead decided to use MAS' established services to try out a more realistic routing. 'Two carriers sharing costs and revenue give us an ideal opportunity to get the benefits of frequency without having significant commercial exposure to the route. It is already a mature market from MAS' perspective, so we are riding on the back of that, which is good for us and them,' says Griffiths. By late 1996 the plan is for Virgin to fly its own aircraft via Kuala Lumpur down to Sydney.
Virgin upgraded its marketing alliance with British Midland at the end of June to a codeshare agreement between some UK domestic points and Tokyo, New York, San Francisco and Los Angeles, providing Virgin with important feed at Heathrow. But Griffiths denies Virgin is jumping on the codeshare bandwagon and stresses that in all cases Virgin is willing to engage in alliances only where there is a clear commercial benefit. He points to the one-route codeshare deal with Midwest Express in the US, which feeds the carrier at Boston, as an example.
The Athens service, which Virgin took over from its original franchisee South East European Airways in January after the Greek carrier failed to maintain its aircraft lease, is now operated by Translift Irish Airlines from Gatwick. But Virgin supplies the cabin crew, a liveried A320 and 'contrary to some rumours' the slots, says Griffiths wryly.
Griffiths is less specific about plans to expand further into Europe, maintaining it will only do so if the there is sufficient commercial opportunity. 'In the Airline Business editorial of February 1995 there were 10 commandments for continued commercial success. These are very much the values and philosophy that we espouse. We are a very commercial entity,' Griffiths says.
Branson's impulsive actions, however, can sometimes give the impression that the carrier has no real strategic direction. One example was the speculation in April that Virgin was looking at taking an equity stake in Air Lanka. Branson has yet to tie the strands of the strategy together and Griffiths remains suitably vague about the progress of those talks. 'We will always be interested in exploring avenues that are to be enjoyed by linking up with carriers with complimentary route structures,' is his only comment.
But perhaps it is just this unconventional approach that has enabled Virgin to move from a fledging Gatwick-based carrier to, in Ridgway's words, 'a £400 million airline'. Griffiths says the structure of the carrier's executive board allows each of the six executives to take full responsibility for his or her actions. 'We all have total responsibility subject to the general guidelines of the chairman, who believes in a philosophy of achievement and ideas and fast moving actions,' he says. 'The key to success is pursuing as many things as you can. The more you pursue the more likely you will succeed.'
As Branson continues to pursue a variety of non-airline ventures, the Virgin name receives free exposure in the UK media, which would make a severe dent in any carrier's advertising budget if they had to pay for it. But does this mean Branson is too busy to be truly in touch with the airline any longer? Griffiths says no: 'Richard is very heavily involved in the running of the airline. His strategy is all about strengthening the brand to make the airline stronger,' he says.
But, adds Ridgway, the carrier has consciously developed its own brand image away from that of Richard Branson. 'Yes we had all the good parts of the Virgin name, but by distinguishing the carrier as Virgin Atlantic, we gave it its own set of brand values,' he says. 'I think it now works the other way round and other Richard Branson activities benefit from the Virgin Atlantic brand.'
On the financial side, the carrier is also posting an improvement. Finances for 1994 had not yet been released but Griffiths said the results were a 'significant improvement on 1993' and expected to report a net margin of 4 to 5 per cent - a dramatic improvement on the 0.1 per cent in 1993, when the carrier showed a $300,000 net profit on revenues of $614.9 million.
Griffiths says the carrier has not needed to cut costs - claiming of all long-haul carriers only Singapore Airlines has lower costs - and some savings have come from the new A340-300s, of which the carrier has four, and expects the fifth to be delivered in October 1996. On a London-Tokyo round trip, the A340 saves Virgin £42,000 ($66,815) over the B747-200. Virgin currently has two 747-400s, with a third to be delivered in 1996, five 747-200s, and a 747-100 to complement the A340 fleet.
The carrier has 6 options on the Boeing 777, and has until the end of 1995 to make a further commitment. Griffiths says the options are likely to be taken up, but suggests the stretch version is a 'more exciting possibility'. With slots a problem at Heathrow it is possible, he says, that Virgin will need to go with the largest, most economical aircraft available. 'We are a carrier that likes to keep our options open and get the best deal at the time. We like to hedge,' he says.
Aircraft may be available but the slots to fly the routes are clearly not. Looking down the road, Griffiths says that the planned fifth terminal at Heathrow offers no hope, as it will not create further runway capacity. 'We are in a position where the last round of slot [allocation] showed that something must be done to prevent London's airports from becoming an aviation backwater,' says Griffiths as he attacks grandfather rights and the current slot allocation process.
Moreover, British Airways' decision in June to move its African network, which has 'little competition', to Gatwick, while keeping the competitive Johannesburg route at Heathrow has not gone unnoticed at Virgin.
But Virgin's route network does not allow for this. For its high density long-haul routes Gatwick is not an option, says Griffiths. 'The difference in traffic between Heathrow and Gatwick is enough to make the difference between success and failure of certain routes.' Ridgway estimates in some cases this difference in revenue is between 10 and 20 per cent.
But no real answers to the carrier's problems are forthcoming. The slot allocation process is currently being reviewed by the European Commission and by the UK CAA. But regulatory reviews and subsequent alterations take time, which will mean missed opportunities for Virgin. 'Our success is wholly and inextricably linked to the availability of slots at Heathrow,' says Griffiths. It could transpire that Virgin's biggest 'hedge' has been its choice of airport, although without any Heathrow operation, the carrier would probably have missed out on success altogether.
Source: Airline Business
