31 JULY 2017

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Article from BTNews 31 JULY 2017

COMMENT: Changing of the guard

Last week’s announcement, reported elsewhere in this issue, by the Air France-KLM Group, Delta Air Lines and Virgin Atlantic that they were expanding their strategic partnership was at pains to stress Virgin Atlantic would retain its independence as a UK airline with a UK operating certificate, and would continue to fly under the Virgin brand. 

The finer details, however, were not so reassuring. The first point is that the package involves Air France-KLM acquiring a 31% stake in Virgin Atlantic for £220m. That stake is currently held by Virgin Group. Delta already has a 49% stake in Virgin Atlantic and will retain it. The announcement added that the Virgin Group would keep a 20% stake in Virgin Atlantic and – crucially – the chairmanship. 

Behind the business-speak, however, a larger question lurks. As Fortune magazine put it: “Sir Richard Branson surrenders control of Virgin Atlantic”. Air France-KLM and Delta now have a commanding influence over a UK airline with every incentive to force through change to their advantage. Branson has just passed his 67th birthday (18 July, in case you want to send a card); still young in international tycoon terms, but that and the new developments beg the question of just how long he will – or wants to – pilot Virgin Atlantic in its new clothes.

This in a year in which we have already seen the impending departure to pastures new of easyJet CEO Carolyn McCall.

Attention has now switched to British Airways, which has achieved the remarkable turnround from being a media darling a decade back to the company people love to hate. The largly forgotten T5 move fiasco started the meltdown and things have not improved.

A surge of hostile coverage culminated eight days ago in the Sunday Times magazine with a detailed breakdown of what in the publication’s opinion is going wrong and blaming senior management for the crisis. BA is perceived as having handled the IT meltdown in May badly and is now in the middle of a damaging cabin crew strike where the question of who is at fault has, as with the earlier muddle, again been obscured by the airline’s failure to communicate. 

CEO Alex Cruz is in the hot seat but many observers see a lack of investment by BA’s parent company, International Airlines Group, run by former BA chief Willie Walsh, as the problem. The creation of IAG, which followed BA joining forces with Iberia in a £5.6bn merger, has meant BA resources, management and finance have been used to help to prop up the Spanish airline, which is only now after seven years making any real profits. IAG, in a cost cutting move, has retreated from its Bath Road offices, relocating the 100 staff to Waterside. 

Questions raised by all this may well be on the back burner for now after IAG last week reported a respectable financial result for the six months to 30 June. Operating profit was €975m before exceptional items, compared with €265m for the same period last year. Iberia’s contribution was a profit after those seven lean years of €84m, compared with a loss in 2016 of €6m. BA itself made a profit of €741m before exceptional items, compared with the 2016 figure of €631m. Aer Lingus produced a €59m profit, against €42m in 2016, while Vueling made a loss of €6m compared with a loss of €54m in 2016. 

However, as many businesses know to their cost, one set of healthy figures is not a sound platform for the future. Larger forces at work may yet dictate easyJet’s McCall is not the only one on the move, voluntarily or not.

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