Virgin Atlantic In Talks to Buy Flybe: Analysis

In the UK, long-haul airline Virgin Atlantic has emerged as the front-runner airline in talks for a potential takeover of Europe’s largest regional airline, Flybe — according to Sky sources in the City of London.

Britain’s Flybe operates 218 routes in 10 countries, and carrier flies domestically within the UK, as well as to European cities — with a specific focus on smaller, secondary airports.

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Last week, Flybe announced it was ‘up for sale’ after pre-tax profits for the six months to 30 September fell by 54% to £7.4m, and revenues had fallen by 2.4% to £419.2m. As a result, Flybe’s shares have fallen by almost 75% since September. The airline is now valued at approximately £25m, far below the £215m it was valued at when it floated on the London Stock Exchange in 2010.

For Virgin Atlantic, Flybe would be of interest given the feeder-opportunities, whereby Virgin Atlantic’s passengers (along with partners Delta, and Air France-KLM) could travel across the long-haul network, connecting on to a UK domestic airline potentially owned by the Virgin group. Furthermore, Flybe has access to valuable take-off and landing slots at London Heathrow, which ironically was previously operated by a Virgin Atlantic UK domestic airline.

Virgin Atlantic’s interest in Flybe comes just four years after the closure of its UK domestic airline ‘Little Red’.

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Valuable Heathrow slots (which have now emerged as attractive to Virgin Atlantic some four years later) were originally allocated to Virgin Atlantic in 2012, and used to launch domestic flights from Aberdeen, Edinburgh and Manchester under a Virgin Group domestic UK airline known as ‘Little Red’

While there’s certainly a demand for domestic air travel within the UK, Virgin’s domestic venture (using leased Aer Lingus Airbus A320s) suffered from very weak load-factors, with aircraft often being just 30% full. In fact, during Little Red’s operations, I flew multiple flights to/from Edinburgh from London Heathrow — and on one of my flights, there were just 16 passengers onboard, leaving around 160 empty seats.

Virgin Atlantic’s chief executive, Craig Kreeger, blamed Little Red’s failure on the “totally inadequate number” of Heathrow slots, which British Airways was forced to give up to appease competition authorities over its takeover of the loss-making UK carrier, “BMI”

Mr Kreeger said “The time lag between the takeover of bmi and our entering the market also meant Little Red initially faced an uphill battle to win recognition and convert customers to its services.”

Following Little Red’s closure, the domestic slots were reallocated to Flybe, which boosted its domestic UK flights from Britain’s hub airport.

Fast forward to 2018, the only formal relationship Virgin Atlantic and Flybe maintain is a codeshare agreement, whereby passengers feed to/from local regional airports on to Virgin Atlantic’s long-haul flights via Manchester, Glasgow and London Gatwick, and vice versa.

Given Flybe’s established presence across the UK, including at Heathrow — a Virgin Atlantic acquisition of Flybe could allow it to tap into the UK domestic market (again) in a more significant, strategised way than its previous venture.

For Flybe, a buyer is needed — and soon.

A weak British pound (due to uncertainty over Brexit) has continued to cause financial difficulty. Factors including a higher fuel price and strong US dollar have eroded at the profits of the UK airline — leaving it in a fragile position.

Stand-alone airlines face fierce competition from airlines belonging to major airline groups. In European aviation, consolidation is key to survival. Without the backing of a parent group owner such as IAG (which owns British Airways, Iberia, Aer Lingus, Vueling, Level, and a small stake in Norwegian Air), the airline has continued to struggle with its battle for profitability.

Flybe is often caught between the established business models of low-cost airlines such as Ryanair, and flag carriers such as British Airways, who compete with Flybe on domestic routes within the UK — except BA have both the cost advantage, and the ability to feed its own passengers from its long-haul services onto its own UK regional domestic flights, and vice versa.

Final Thought

The potential takeover of Flybe has seen an interesting new development, and while the not-so-distant memories of Virgin Atlantic’s failed UK domestic airline ‘Little Red’ will be on the minds of several investors tonight, parts of Flybe could prove valuable to the Virgin group.

At Heathrow, Flybe’s current slots are more conveniently timed, and strategised, compared with the slots ‘Little Red’ was given. Virgin Atlantic also have the knowledge of passenger traffic performance to/from Flybe domestic services from its Virgin Atlantic/Delta flights (and vice versa), given the codeshare partnership in place.

Finally, it’s also worth highlighting that Virgin Atlantic currently has an unused slot-pair at Heathrow, previously leased to Cypriot airline, Cobalt Air — which collapsed last month, following the sudden withdrawal of its largest investor.

I’ll be following developments carefully on the potential purchase of Flybe, stay tuned on aviationanalyst.co.uk for more.

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