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ANALYSIS: Virgin Atlantic Restructures Network to Focus On Delta Relationship

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ANALYSIS: Virgin Atlantic Restructures Network to Focus On Delta Relationship

ANALYSIS: Virgin Atlantic Restructures Network to Focus On Delta Relationship
September 04
13:29 2014

MIAMI — Virgin Atlantic will cut four cities from its route network in order to expand service to the US, feeding into its ever growing relationship with Delta Air Lines. Virgin Atlantic will eliminate Vancouver (October 14th), Mumbai (February 1st, 2015), Tokyo – Narita (February 1st, 2015), and Cape Town (April 27th, 2015) from its network, opening up aircraft availability landing slots for expanded service to the United States. 

Virgin Atlantic faced fierce competition from Middle Eastern carriers and rival British Airways for traffic to Mumbai and Cape Town, while routes to Vancouver and Tokyo struggled due to weak demand and high competition respectively. Virgin Atlantic did, however, leave the door open for a resumption of service to Vancouver and Mumbai if a third runway were added at London Heathrow.

In lieu of the cancelled routes to Asia and Africa, Virgin Atlantic is sharply increasing its capacity and presence in the United States and restructuring its operation to better integrate with minority shareholder Delta Air Lines, who owns 49% of Virgin. Virgin Atlantic and Delta have antitrust immunity for a joint venture partnership between Europe and the United States, which allows them to coordinate schedules, jointly dictate pricing, and share profits on trans-Atlantic routes.

After the restructuring of its network, Virgin Atlantic will add new daily year-round service from London Heathrow to Detroit, an entirely new market. This flight replaces a summer seasonal nonstop on Delta, and thus increases year-round capacity on the route. The historical second daily nonstop between London Heathrow and Los Angeles will be resumed, and frequency between New York JFK and London Heathrow will be up-gauged to five times daily.

Services between San Francisco and London Heathrow will be up-gauged during the summer with five additional weekly flights, while services between Miami and London Heathrow will be up-gauged to twice daily during the summer. The already-announced but yet-to-commence daily service to Atlanta will be up-gauged to twice daily during the summer as well. Also from Atlanta, Virgin Atlantic will take over Delta’s current daily flight between Atlanta and Manchester (UK).

On the Delta side, the Atlanta-based carrier will re-start daily service between New York JFK and Manchester (UK). Delta will also take over one of Virgin Atlantic’s two daily flights between Newark and London Heathrow, adding to its existing Trans-Atlantic flights from Newark to partner hubs at Amsterdam and Paris Charles de Gaulle.

For Virgin Atlantic, the cancellation of three key long haul routes (Vancouver is more an underperforming route than anything else) is a signal that Virgin Atlantic’s strategy has inexorably shifted to focus primarily on the US-UK market with Delta. The Tokyo route authority and slots were amongst Virgin’s most prized historical possessions, and slot machinations at Tokyo Narita in the early 90s are often credited with being a trigger for rival British Airways’ famed “Dirty Tricks” campaign.

Even as late as earlier this year, Virgin Atlantic had outlined a plan to move its Tokyo Narita service to Tokyo Haneda, using the 14 weekly daytime slots awarded to airlines from the United Kingdom. But under Delta’s direction, that has changed. Once these routes are cancelled, Virgin Atlantic’s only destinations outside of North America will be Delhi, Dubai, Hong Kong, Johannesburg, Lagos, and Shanghai – not an inconsequential, but a far cry from Virgin Atlantic’s heyday.

From Delta’s perspective, Virgin Atlantic is emblematic of the growing dichotomy of its partnerships. In cases where Delta has either an equity stake (Virgin, Aeromexico, Gol), or joint venture partnership (Air France – KLM, Virgin Australia), it has moved towards greater coordination and mutually beneficial feed. In other partnerships (Alaska, Korean) it has slashed coordination and (often) increased head-to-head competition. For Delta, the most important piece of this news is probably the addition of another daily flight to New York JFK – London Heathrow market by Virgin Atlantic.

The move brings the Delta-Virgin partnership up to eight daily flights between JFK and Heathrow and ten between the New York City metro area (two from Newark). While they still trail the American – British Airways joint venture, which twelve and fifteen daily flights from JFK and NYC as a whole respectively, each additional flight brings the two carriers that much closer to parity.

The New York – London market is a key flashpoint for Delta in its quest to “Win New York.” Largely on the strength of that route, and a few others (such as the trans-continental flights to Los Angeles and San Francisco), American manages to capture a similar share of business and premium origin and destination (O&D) traffic and revenue to Delta despite a much smaller presence in the region. Virgin Atlantic’s pivot across the Atlantic will likely be margin-expansive for the carrier, but its real inducement is to strengthen Delta’s network.

 

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