Martin Needham considers the future of Flybe as it begins a shift from Europe’s biggest regional airline to Virgin Atlantic’s short-haul sidekick.
A year has passed since Flybe was acquired by Connect Airways, a Virgin Atlanticled consortium including Stobart Group and New York-based investment advisory firm Cyrus Capital Partners. Bar an October announcement that the Exeter-based carrier will be rebranded as Virgin Connect, little has been confirmed following the purchase. However, what we do know is that Flybe will shift from a standalone network, albeit one with a wealth of codeshare agreements, to bolstering Virgin Atlantic hubs at London Heathrow, Manchester and possibly beyond.
In a September 2019 statement calling for slot reform, Virgin Atlantic detailed its wish to fly to an additional 84 UK and international destinations from Heathrow, should a third runway be built. It also seeks to connect a dozen regional airports from the west London hub, including Newquay, Inverness, Newcastle and Liverpool, while further afield, links to more than 30 European cities are also proposed.
The press release was the opening salvo in a new offensive aimed at challenging the hegemony of British Airways (BA) owner International Consolidated Airlines Group (IAG) at the UK’s largest airport. Virgin Atlantic was quick to point out that IAG’s subsidiaries hold around 25 times as many slots as the next largest carrier, compounding issues surrounding competition at a complex flirting with full capacity. Demand for take-off and landing rights at the West London gateway is such that Oman Air reportedly paid $75m for Kenya Airways’ sole slot in 2016, leaving the African carrier to lease a replacement from KLM. A year earlier, SAS Scandinavian Airlines is understood to have sold one of its pairs to American Airlines for approximately $60m.
While increasing its destinations five-fold is certainly a bold statement of intent, the carrier’s hopes and dreams hang on Heathrow’s third runway getting the go-ahead, as well as the airline getting its own way when new slots are dished out.
Shaking Things Up
Shai Weiss, Virgin Atlantic’s CEO, believes a third runway at Heathrow “is a once-in-a-lifetime opportunity to change the status quo and create a second flag carrier,” adding that competition with BA would “lower fares and give real choice to passengers, as well giving Britain a real opportunity to boost its trade and investment links around the world.
Recent industrial action – which has taken the shine off the BA’s centenary year – has only strengthened Virgin’s call for action. Weiss commented in 2019: “Never has the need for eff ective competition and choice at Heathrow Airport been more evident than during this summer of disruption, which has brought misery for tens of thousands of travellers. Britain, and those who travel to it, deserve better than this.
Given the company’s bold vision for a future Heathrow, the Flybe transaction was not only the first major airline acquisition in Virgin Atlantic’s 35-year history, but a logical step for the carrier. While financially unstable and at risk of collapse prior to the January 2019 deal, Flybe has strong foundations on which Virgin can build the domestic and European network it desires. The groundwork is already largely in place thanks to the deal – Flybe is Europe’s largest regional airline, offering 189 routes from 71 airports in 12 countries – but the Gatwick-based airline can’t hit the ground running just yet.
Comparisons to Virgin’s last attempt to make a name for itself in the UK domestic market – the ill-fated Little Red – are inevitable. The 2013 startup, which connected Heathrow with Manchester, Edinburgh and Aberdeen, was created in reaction to the purchase of bmi by British Airways. The deal resulted in Virgin losing an important source of connecting traffic and handed BA a monopoly on connections between Heathrow, Manchester and Scotland.
Virgin scrambled to put up a fight against its old rival – wet-leasing Airbus A320s from Aer Lingus and off ering domestic connections from March 31, 2013 – less than a year after BA had been given regulatory approval to swallow up bmi.
After little more than 18 months and with reported load factors as light as 37. 6%, Virgin acknowledged it had failed to loosen BA’s iron grip on the UK short-haul market and pulled the plug. Manchester was dropped in March 2015, with the Scottish services soldiering on until that September.
Speaking at the time of the decision to cease operations, Sir Richard Branson, Virgin’s president and controlling shareholder, commented: “We were offered a meagre package of slots [by the competition authorities] with a number of constraints on how to use them. The odds were stacked against us and sadly we just could not attract enough corporate business on these [short-haul] routes.
This time, Virgin is on the front foot, and the acquisition and rebranding of Flybe is a far more measured approach. Saving Flybe from the administrators has also negated the need to start from scratch. Aircraft, slots, a route network and more are already in place, with a careful rebranding underway. Also proving an additional advantage is the wider Virgin Group’s loss of the East and West Coast Mainline rail franchises – any bid made by Virgin Connect to challenge the dominance of IAG and British Airways will mean the carrier won’t be competing with one of its sister companies. While no real indication of the new airline’s pricing structure has yet been given, should it want to really shake things up and start a price war with IAG, it won’t be harming any rail-based interests.
Return to the Regions
Having sidestepped an uphill struggle to gain a foothold in the UK market, there are other challenges to face. Flybe’s extensive schedule will need streamlining in line with a revised strategy tailored to Virgin’s vision of a return to the regions – abandoned by an increasingly London-centric British Airways when it sold its BA Connect subsidiary to Flybe in 2007 – along with building a greater presence in Europe.
Also requiring attention is Flybe’s wealth of codeshare agreements, which include tie-ups with IAG’s Aer Lingus, oneworld members Finnair and Cathay Pacific, and Star Alliance’s Singapore Airlines. It is possible that many of these will be severed as the Exeter airline begins its transformation from regional powerhouse to part of the wider Virgin brand. However, links with Alitalia and Air France, both members of the SkyTeam alliance with which the Crawley-based airline is closely aligned through Delta Air Lines’ 49% share in the company, are likely to remain, if not strengthened.
A top priority for Virgin and Delta will be joined-up thinking at Heathrow and Manchester, from where most of the former’s long-haul flying takes place. At both airports, the two airlines share a terminal – T3 at Heathrow and T2 at Manchester – while Flybe centres its operations elsewhere. All three carriers will be keen to consolidate their operations under a single roof in order to strengthen their offerings and leverage reduced transfer times.
This is perhaps of greatest importance at Manchester, where connecting passengers face a walk of around 15 minutes between Terminals 2 and 3, used by Flybe and Virgin Atlantic respectively. Recent moves point to the creation of a Northwest hub, a logical step given the stronghold both airlines have there.
The September 2019 collapse of Thomas Cook points to less competition on routes and has prompted Virgin to increase frequencies on its services to Orlando, Barbados and Las Vegas. Adding to this, joint venture partner Delta is to take on Virgin’s existing Boston route, increasing the link from thrice-weekly to daily in May. Manchester could more than prove itself a viable alternative should all not go to plan in West London. While the capital’s two largest gateways are struggling to keep up with demand, the Northwest hub is widely considered to be the largest airport in the UK with significant spare runway capacity.
A return to Gatwick for the former Flybe is also cause for consideration, with domestic destinations comparatively underserved and the added incentive of feeder traffic bolstering loads on existing long-haul connections to the Caribbean and USA from the West Sussex facility. This is a more remote prospect, given Gatwick’s current capacity conundrums, however interest from WestJet wanting to tap into additional UK traffic could make it more lucrative.
In 2014, Flybe sold its slots to easyJet and walked away from the hub, blaming an 102% increase in airport charges and the government’s policy on Air Passenger Duty. Speaking at the time, Flybe chairman and chief executive Jim French commented: “No business can swallow such a massive increase in such a short period of time… We have to accept the ugly reality that Gatwick simply doesn’t want smaller, regional aircraft at their airport.
With significant restructuring needed to mould Flybe into Virgin Connect, codeshares, routes and potentially even bases could be shaved. No confirmation has yet been given of the future of the Exeter airline’s extensive domestic network, beyond the grand vision outlined in September. The Devon site is likely to remain a focus for the carrier for the time being, if only given the existing maintenance, repair and overhaul (MRO) facilities and offices located there. In contrast, rotations from Cardiff, Birmingham, Newquay, Guernsey and the Isle of Man could be reduced.
Whatever the case, overcapacity is an inevitability. Flybe operates 73 aircraft, making it the UK’s fourth largest airline by fleet size. Streamlining had begun prior to the Connect Airways buyout, with four of the airline’s E190s having been withdrawn since last December, leaving just three examples in use. Two of the smaller E170s were also phased out in November 2019, while five ATR 72-600s previously operated on behalf of SAS Scandinavian Airlines have been leased out to Loganair. The backbone of the fleet remains the De Havilland Canada DHC 8-400, and while the current 54 examples may be a far larger number than is required in future, Flybe’s continued use of the type since April 2002 is testament to its value on services within the UK and thinner European links.
Unsurprising given the airline’s close association with Delta Air Lines – thought to have had an influence in last June’s order for 14 Airbus A330900s – Virgin was rumoured to have been in discussions with the European aerospace giant for up to 20 A220s during the second half of 2019. Should it want to realise its plans to connect Heathrow with up to 30 destinations across Europe, then a larger aircraft type is needed to meet potential demand on routes including Madrid, Barcelona, Paris-CDG, Geneva, Amsterdam, Stockholm and Rome/Fiumicino.
While many mergers simply involve one carrier absorbing the other, Connect Airways’ acquisition of Flybe is an entirely different animal and requires much more than repainting a fleet. Unlike Little Red, Virgin is on the front foot and has a real opportunity to leverage Flybe’s existing route portfolio to strengthen its position within the UK market and make an impact in mainland Europe.
Hurdles to overcome include trimming down the number of services offered, renegotiating or ending codeshare agreements and adjusting schedules to integrate with long-haul offerings, and it is for this reason that the lids have stayed on tins of scarlet paint for as long as they have. Branson has never had a better opportunity to take the fight to his neighbours at Terminal 5. Armed with a UK domestic network IAG can only dream of, he’ll want to make this one count.