IAG looks to expand as Virgin profits vaporise

Richard Branson has had his wings clipped after high fuel prices pushed Virgin Atlantic into loss, while IAG eyes up American Airlines.

by Michael Northcott
Last Updated: 19 Aug 2013

International Airlines Group only just got EC clearance to buy BMI a couple of months ago, but is clearly on full throttle: today it emerged that the firm also wants to make a play for American Airlines. The aviation industry has been battling rising fuel prices and the bite of recession, so you’d think that they’d be toning down the expenditure. But when the market is subdued, then the smaller guys’ shares are going for unmissably low prices. Meanwhile, Virgin Atlantic has been pushed out of profit in its latest results. A bit of turbulence on the Virgin balance sheet, you might say.

IAG’s plans for American Airlines would only involve acquiring a minority stake according to chief executive Willie Walsh, but strategically, it would bring American into the fold of the Oneworld alliance of airlines that IAG is already part of. Importantly, British Airways is a subsidiary of IAG, and already has a joint venture with American offering transatlantic long-haul flights. So if we were to get all corporate and jargonese about it, we could say there are already ‘synergies’ between the two firms. Oh yeah. 

Today is not such an uplifting day for Virgin Atlantic however. The firm, which Richard Branson started back in 1984, has always been at loggerheads with British Airways. Branson even sold his inaugural company, Virgin Records, to raise cash and keep the airline afloat many years ago. But despite a 2% rise in passenger numbers and a 3% rise in revenue to £2.7bn, Virgin made an £80.2m loss for 2011-2012. This contrasts with an £18.5m profit in 2010-2011. The airline’s profits have been sent into freefall (like others in the industry) by massive rises in the cost of fuel and fuel duty. Fuel costs rose 32% and air passenger duty rose by 25% for Virgin in the last 12 months alone. 

Another part of Virgin’s problem is BA’s pesky alliance with American Airlines – the two firms have been working together and co-ordinating schedules and fares to maximise revenues from business customers. The North Atlantic long haul flight is one of the most lucrative in the business and Virgin is finding itself pushed to the sidelines. And that’s after it was pipped at the post early this year by IAG on a bid for BMI – very frustrating for challenger-brand Virgin. The firm’s CEO, Steve Ridgway, remains positive however. He said: ‘We have had an encouraging start to the year, continuing to grow our passenger numbers and our revenue. Our new route launches to Vancouver and Cancun will strengthen our position as the number one UK long haul leisure airline.’ The word ‘leisure’ is tricky when a recession is keeping your customers’ wallets firmly shut, Ridgway…

Elsewhere in the industry, easyJet remains on an upward trajectory, today announcing that the number of books for July rose 8% compared with July 2011. That’s around 5.9 million bookings, and the load factor (number of passengers as a proportion of seats available), rose 0.8 basis points on the previous year, to 92.5%. In its first half results published in March this year, revenues were up 15.7% to almost £1.5bn. EasyJet CEO, Carolyn McCall, will no doubt be popping a champagne cork as we speak.

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