IN FOCUS: Virgin Atlantic has high hopes for revised Upper Class

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Virgin Atlantic boss Steve Ridgway could be excused for feeling bitter or discouraged after failing to convince European competition regulators that International Airlines Group, parent of arch-rival British Airways, shouldn't be allowed to buy BMI from Lufthansa Group. Virgin's key argument, that the sale would undermine competition to the detriment of passengers, clearly held no sway with Brussels.

Had the sale not gone through, the block of coveted London Heathrow take-off and landing slots held by BMI would have given Virgin room to expand long-haul operations at its otherwise-full home hub. As things stand, Virgin will have to make do with a bid for some of the 14 daily Heathrow slot pairs for UK domestic routes that IAG is being forced to surrender as part of the takeover deal. Such so-called "remedy routes" are intended to ensure that key domestic feeder services are maintained.

Despite this apparent setback, Ridgway remains bullish. Speaking earlier this month at the recently-opened Grey Goose Loft meeting area in Virgin's Heathrow Terminal 3 Upper Class lounge before boarding a New York-bound service on the carrier's newest airliner - an Airbus A330-300 named "Miss Sunshine" which entered service on 21 April and features the first installation of Virgin's new Upper Class product - Virgin, said Ridgway, has a "very, very strong suite of products" to "give British Airways a run for its money on the New York route".

And, with the introduction of the 2012 winter schedule from 28 October, Virgin will be offering a fourth daily Heathrow-JFK service, taking its daily frequency on the New York route to six, including two existing flights to Newark.

The winter schedule also contains the introduction of a new London-Mumbai service to complement Virgin's existing Delhi flights. Ridgway is enthusiastic about the India connection, as London is both a key destination and a natural transition point to New York, Los Angeles and other North American destinations served by Virgin for travellers from that booming economy. Other new destinations for 2012 include San Francisco, Vancouver and Lagos, and Cancun.

In the air en route to JFK, Ridgway points with some justification to the pulling power of the new Upper Class product. A £100 million ($157.8 million) investment has produced a new lounge at JFK, with another to follow elsewhere later this year, and a new meal service. Also, Virgin's impressive new cabin - maintaining the carrier's claim to the longest bed in any business class and, now, the longest bar flying, at 2.7m and stocked with Virgin's new "icon coupe" champagne glass - is an impressive update of the existing Upper Class product.

The seat pod boasts an improved touch-screen control entertainment system. The seat itself is larger and more comfortable, and it's a track-mounted system with a manually-operated bed conversion mechanism, doing away with electric motors to reduce weight and cut maintenance. And, adds Ridgway, Virgin can fit more of the new pods in the cabin.

The Upper Class push and new routes highlight Ridgway's drive to make sure Virgin maintains its "flair for innovation". Business travellers want to be looked after, he observes, and they also value convenience. Virgin, he notes, is a point-to-point carrier and blessed to be based at such a key hub as Heathrow, which carries 24% of all transatlantic traffic emanating from the European Union. Traffic figures like that justify his excitement at opening routes between fast-growing India and London.

And further underscoring Virgin's strengths, Ridgway describes the carrier's Heathrow presence as relatively small but well-formed; with just 3% of the slots it commands 60% of the early morning arrivals.

But, because the carrier's growth prospects are constrained by the fact that Heathrow is at capacity, so much of its route development is about moving resources around. Ridgway says Virgin Atlantic would, of course, like to grow, but is "sufficiently large" at number six in Europe by capacity in available seat kilometres, and doesn't need to add dozens of flights yearly. One more at Heathrow, he says, "is significant".

The fleet, he adds, is an "efficient" mix of long-range big twins - all Airbus A330s - with high seating capacity, plus 23 A340s and 12 Boeing 747s as well. The current total of 38 in-service aircraft will rise to about 45 in 2015 as it takes 16 of 25 aircraft on order. Virgin will get its first Boeing 787-9s, he adds, "well into the second half" of 2014. Six A380s, dating from a 2001 order, remain indefinitely postponed.

Whatever its strengths, though, there is no escaping the fact that there are two Virgin Atlantics. One is the independent airline that has built an enviable customer loyalty by channelling Branson's fun-but-safe radical persona. But the other Virgin Atlantic has, essentially since its founding in 1984 with a London Gatwick to Newark service, been fighting to survive against much larger rivals.

Early success kept Branson in the airline business, and the carrier got a boost after UK deregulation allowed it into Heathrow from 1991. The recession of the early-1990s nearly spelled the end of the road, though. As Virgin Group's own history notes, 1992 saw its first flights to Orlando and also "a difficult day as Virgin Records is sold to Thorn EMI - saving Virgin Atlantic from the brink of collapse".

Ridgway notes that Virgin Atlantic has been profitable in all but a "handful" of years, but clearly some of those loss years have been severe. For its year to 28 February 2011 - the most recent period for which accounts are publicly available - the airline made a pre-tax profit of £18.5 million on turnover up 13% to £2.7 billion. But the year before, the carrier and subsidiaries lost £132 million. The accounts label the outlook for the year to end-February 2012 as difficult to predict, given rising consumer taxes in its home UK market, economic gloom and soaring fuel costs. However, the exact situation won't be clear until August, when Virgin files its accounts for the period just ended.

Meanwhile, Virgin's long-running and often acrimonious battle with British Airways may be reaching an end-game. But Virgin's ultimate loss of a nearly 15-year fight to stop BA from allying with American Airlines on transatlantic services has left a question mark hanging over the carrier's future. With a BA-AA tie up finally approved, Branson in late 2010 took the step of hiring Deutsche Bank to carry out a strategic review of Virgin Atlantic, which could ultimately result in the carrier being sold or joining an alliance, a move it has resisted to date.

Nearly 18 months later there is as yet no indication of how the process may end, but it would be no surprise if Branson sold out. In keeping with the Virgin practice of taking on partners, Branson sold 49% of Virgin Atlantic to Singapore Airlines in 2000 for £600 million.

What options are open to Virgin at this point are not clear. When the Deutsche Bank review kicked off, there was talk of a Virgin Atlantic-BMI merger, but that possibility is clearly now ruled out.

Virgin Atlantic's future may be determined by the answer to two related questions: how important are scale economies and how significant are network effects?

Branson's attempts to prevent British Airways from creating dominant positions across the Atlantic, with an American Airlines tie-up, and at Heathrow, by buying BMI, suggest that he considers size and connectivity to be genuine threats to his independent carrier.

Ridgway, however, maintains perspective. The scale debate, he notes, "is very interesting in aviation", with some benefits of size accruing to both headquarters and fleet. But he is not unduly awed by, say, the British Airways-Iberia merger that created International Airlines Group with a 350-aircraft fleet ten times the size of Virgin Atlantic's. "It's a question of how you set your stall out," he says.

Virgin Atlantic is well-placed in London, he says, with its total traffic equally balanced between destinations to the east, to the west, and for long-haul leisure. There's a good balance between these parts of the business, he adds, with Heathrow and the leisure business having balanced out each other's up- and downturns in recent times. Over the years, the airline has "restructured as we went", says Ridgway, to adapt to the changing environment. And, he says, implying that Virgin is well-placed for an upturn, the current plan was of course set during the pre-crisis boom years, but such plans take a few years to come together.

Ultimately, says Ridgway, Virgin Atlantic is an absolutely unique product of its "blessed" London location and its own hard work over the years: "There isn't another one anywhere in the world."