With the Virgin Group's takeover of 90 per cent of Euro-Belgian Airlines (EBA), continental Europe is getting its first taste of the US low-fare, short-haul carrier craze. In return, the US management team of Brussels-based Virgin Express is getting its first taste of the vagaries of the European market.

The deal was finalised in April, with the purchase price of some $60 million financed entirely with cash from Virgin Atlantic's coffers. New chief executive Jonathan Ornstein, ex-president of Continental Express, says the airline has the benefit of 'growing from profitability rather than growing to profitability.'

The carrier, which turned in a pre-tax profit of $10 million last year on revenues of $200 million, will remain independent of Virgin Atlantic under the holding company Virgin European Airways Ltd. The carrier should remain self-financing, but Virgin Group chairman Richard Branson points out that 'one of the benefits of the Virgin structure is moving money to where it may be needed.'

The carrier has $20 million in cash - its largest asset, says Virgin Express chief financial officer James Swigart. The 12 Boeing 737-300s and -400s are on leases averaging 3.5 years. The fleet size is expected to grow to 20 aircraft in the next three years, but a total fleet replacement is envisaged after that with a minimum order for 25 new aircraft.

With 70 per cent of operations dedicated to IT charter business (currently operating under the EBA-Virgin Express name), Ornstein plans to double scheduled services in the next two years by adding city pairs and bring the scheduled-to-charter ratio to 50:50. Virgin has taken over scheduled EBA routes to Barcelona, Madrid, Milan, Nice, Rome and Vienna.

Virgin Express will have to fight hard against the impediments of the 'pseudo-deregulated' European marketplace to maintain its low-fare, no-frills identity. The US management is already experiencing the frustrations faced by other private European airlines, including ground handling restrictions and a slot allocation process that is controlled by airport committees comprised of competing carriers' employees. Recently in Milan, 150 new slots were allocated with Virgin Express awarded only one, Swigart complains. 'Our patience will be sorely tested unless this type of thing changes,' he says.

Initially, Houston financier David Bonderman, whose Air Partners investment group brought Continental Airlines out of bankruptcy in 1993, was part of the Virgin Express venture. However, he and Branson parted ways just before the deal's conclusion.

The real sticking point was Bonderman's insistence that what was to become Virgin Express comprised not just EBA, but also Irish independent Ryannair. The Dublin-based low-fare carrier was amenable to a takeover, sources say, but Branson wanted to make the new operation as simple as possible. Reports now link British Airways with the Irish carrier.

Also influencing Branson's resistance to Ryanair was Virgin's equity stake and management role in Eurostar - the train operator that connects London to Paris and Brussels via the Channel tunnel. Branson wants to avoid competition between the two and it is unlikely Virgin Express will feed Virgin Atlantic in London. 'We would only want to do something with the UK if it is compatible with the train,' says Branson.

Mead Jennings

Source: Airline Business