(Reuters) – Virgin Atlantic may need to merge with a rival or join an airline alliance to survive in the increasingly competitive world of aviation, which has been changed by the advent of cross-border super carriers.
After falling behind in European consolidation following Air France‘s (AIRF.PA) merger with Dutch-based KLM, Lufthansa’s (LHAG.DE) recent tie-ups and last year’s BA-Iberia (ICAG.L) merger, Virgin needs a partner or else could be left behind.
The airline, formed in 1984 by British billionaire Richard Branson, who still owns a 51 percent stake through his Virgin Group, has attracted admiring glances from a number of rivals.
Singapore Airlines (SIAL.SI) is looking to sell its 49 percent stake in Virgin, which has hired Deutsche Bank (DBKGn.DE) to conduct a strategic review that could lead to a whole or partial sale or to Virgin joining an airline alliance.
Here are some scenarios for how events could unfold:
Virgin could face a takeover approach, with industry analysts seeing a bid as most likely to come from combination of Air France-KLM — Europe’s largest airline by revenue — and U.S. carrier Delta Air Lines (DAL.N), which has been working with Goldman Sachs to identify possible targets for several months.
Air France-KLM and Delta would be keen to get hold of Virgin’s 288 takeoff and landing slots at London’s Heathrow airport — 3 percent of the airport’s total — to help them add more services to the United States and Asia from Europe’s busiest hub.
Abu Dhabi’s Etihad Airways has also expressed interest, though European Union EU.L rules state the region’s carriers must be under European control, meaning any move for Virgin would have to involve an EU airline.
JOIN AN ALLIANCE
Virgin, the second-largest long-haul carrier at Heathrow, could also join a global alliance, a deal which would be attractive to Branson because it wouldn’t end his control. It has a choice of the three: SkyTeam, Star Alliance and oneworld.
Air France and Delta’s SkyTeam may be Virgin’s most likely alliance as it does not have a UK partner and holds just 5 percent of the slots at Heathrow, compared with oneworld’s 47 percent and Star Alliance’s 25 percent.
Virgin, which has no agreements in place with oneworld or SkyTeam members, already has codeshare agreements with Star Alliance members, including Air China, bmi and U.S. Airways.
Star also includes Air New Zealand, Virgin’s partner on trans-Tasman routes, and Singapore Airlines, its part owner.
Oneworld, which already has IAG-owned British Airways as a member, looks to be the least likely destination.
Virgin Group and Singapore are willing to sell at least part of their stakes, though Branson wants to retain an interest.
However, Singapore is keen to sell all of the stake it bought in 1999 for around 600 million pounds, according to an aviation banker who wished to remain nameless.
“There’s a book on it (Virgin Atlantic) … all (the stake) is worth is what they can sell it for because it’s not making them any money,” said the banker.
Ireland‘s Ryanair (RYA.I) and Dubai’s Emirates are also keen on buying a stake, according to UK press reports.
REVISIT LUFTHANSA DEAL
Another option for Virgin would be for it to get Lufthansa back to the table. Talks between the pair over the potential merger of Virgin with UK carrier bmi failed in 2009 with bmi being taken over by Lufthansa without Virgin’s involvement.
A merger would have helped Virgin better compete with its main rival BA, allowing it use bmi’s short-haul network and slots at Heathrow to further international expansion.