Virgin Atlantic 1 Virgin Atlantic: Airline Performance Report Joe Halpern ASCI 602, Section 03D4 Dr. Gallogly October 11, 2010 Virgin Atlantic 2 Virgin Atlantic: Airline Performance Report Virgin was founded in 1984 with the intention of undercutting the established competition, namely British Airways, in the U.K. trans-Atlantic market. Starting flights during the “summer rush” and the backing of the larger corporation ensured that the airline was immediately profitable. Virgin Group’s capital infusion also allowed the airline to overcome typical start-up costs for an airline in grand fashion, with its first aircraft being the iconic Boeing 747 jumbo jets. Starting relatively small, with only a few routes, the upstart airline grew rapidly. It introduced the Virgin Freeway frequent flyer program in the U.K. in 1990 (ATI, 2010). In 1991, the airline was given the go-ahead to commence operations from London Heathrow Airport (Compare Airport Parking, 2008). Throughout the history of the aviation industry, the major airlines’ balance sheets have largely ebbed and flowed with the global economy and the same can be said for Virgin Atlantic with a few notable exceptions. First, the airline was built around routes from the U.K. to the U.S. – an international route that subjects them to higher levels of scrutiny and regulation by both nations’ aeronautical governing bodies (the U.K. Civil Aviation Authority and the U.S. Federal Aviation Administration in this case). The same is largely true for their other international routes (Compare Airport Parking, 2008). Second, Virgin is privately owned by the Virgin Group and Singapore Airlines Group with fifty-one percent and forty-nine percent shares respectively (ATI, 2010). This means shares in Virgin Atlantic are not traded on any world market and the airlines profits can potentially be bolstered by either owner investing more capital from another source. Contributing factors to an airline’s profits have historically included the price of jet fuel and the willingness of individuals to fly, both for leisure and business. The impact of a down Virgin Atlantic 3 economy on the airlines is exaggerated by their tendency for growth during times of economic prosperity (Wensveen, 2007, p. 190). This is where Virgin Atlantic’s private ownership has bolstered the company’s bankroll in order to ensure its continued operation. Over its short history, Virgin Atlantic has appeared to handily survive some of the years that were considered the worst by its major competitors. Despite showing relatively high takes for the first years following several major collapses, Virgin’s profits eventually dropped off like those of their larger competitor British Airways. As an example, let us look at the years 1990, 2001, and 2008. In 1990, the crisis in the Persian Gulf (including the Iraqi invasion of Kuwait and the subsequent U.S. action) caused fuel prices to sharply increase. Rising debt, fare wars, and a slowdown of the U.S. economy all contributed to a severe slowdown in the market for air travel. British Airways, Virgin’s largest competitor, had profits decrease by $221 million (a fifty-six percent decrease) in 1990 alone (International Civil Aviation Organization [ICAO], n.d.). The high cost of fuel associated with the uncertainty in the Persian Gulf was considered to be the primary cause of the recession in air travel, but somehow Virgin Atlantic only posted an eight percent decrease in profits. As can be seen in Figure 1, trends in jet fuel prices closely mimic trends in crude oil prices (International Air Transport Association [IATA], 2010). Virgin Atlantic 4 Figure 1. Jet fuel and crude oil prices in the long term (IATA, 2010). Figure 2 shows the spike in crude oil prices that contributed to the 1990 crises (TomTheHand, 2008). Figure 2. Brent Spot annual crude oil prices. Normalized for 2009 USD. As can be seen in Figure 3, Virgin’s seeming immunity to the 1990 crisis didn’t last long as they posted a loss of $29.3 million in 1992 (ICAO, 2010). This resistance to the market forces is probably best explained with the small size of the Virgin fleet and schedule during 1990. The company was simply not serving very many markets at that time, as their operations out of Heathrow were not approved until 1991(Compare Airport Parking, 2008). The introduction of their frequent flyer program, Virgin Freeway, in the U.K. around the same time also likely contributed (ATI, 2010). Also, Virgin at the time was still largely a trans-Atlantic only operation. In fact, in 1990, Branson chose to discontinue two of the airline’s smaller efforts (Compare Airport Parking, 2008). The fact that both the U.S. and U.K. governments tightly control the number of carriers with licenses to fly the major connecting routes that Virgin almost exclusively serviced at the time was undoubtedly a major factor in their initial resilience. Virgin Atlantic 5 Net Profits as Reported to ICAO 200 Millions USD 150 100 50 0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 -50 -100 -150 Figure 3. Virgin Atlantic annual net profits as reported to ICAO (ICAO, 2008). In 2001, the September 11th terrorist attacks caused another major setback for the market. As can be seen in Figure 3, Virgin Atlantic was no different, logging a loss of $114 million for that year. Interestingly, only $6 million of that was an actual operating loss. The rest is likely related to the accompanying economic slowdown following the attacks. By 2001, Virgin had also successfully spawned a leisure subsidiary, Virgin Sun, and added both domestic and intra- continental routes to the principal airline (ATI, 2010). The events of September 11th caused consumer fears regarding the safety of flying that certainly effected leisure operations to a greater respect than routes based on business travelers. Even business travel slowed more than ever before in history, with a loss of 5.9 percent of total revenue passenger miles across the industry (Business & Company Resource Center, 2010). Having sold Virgin Records in 1992 (Compare Airport Parking, 2008), Branson and the airline’s parent company relied more on the airline for income than in the past. The mid to late nineties had been boom years for the company and it is likely that Virgin Group was left without much ability to absorb the vast deficit that resulted after this recession. Virgin Atlantic 6 By 2008, the aviation industry had taken on an entirely different character. High fuel costs, airline bankruptcies, overcapacity, and pressure from low-cost upstart carriers reshaped the way that the major carriers did business; focusing on cost cutting and optimization of the equipment and routes they were currently operating (Business & Company Resource Center, 2010). Again, Virgin survived the start of recent rises in the cost of jet fuel in 2004 (see Figure 1), faltering slightly in 2006 and 2007, but overall posting a profit of almost $61 million in 2008 (ICAO, 2010). This might seem modest at best but when compared to the extreme rise in fuel costs at the start of the current crisis in 2008, this clearly represents improvement for Virgin Atlantic. The airline has achieved this through various non-price competitive means. In 2003, Virgin received an award for best in-flight entertainment (Compare Airport Parking, 2008) and in 2007 it introduced a dedicated business class service for flights between European and U.S. locations (ATI, 2010). It also appears that the company’s private owners have developed a further ability to counterbalance some losses, as only a quarter of its profits were gained from operating yield (ICAO, 2010). As for the way ahead, Virgin’s success in 2008 portends good things. Their largest competitor, British Airways lost $675 million in 2008 – a $1.8 billion drop from the year before (ICAO, 2010). Virgin will continue to be competitive as a low-cost airline, and by increasing its non-price competition with the majors will continue to gain market share. In 2001 Virgin was named the Official Airline Guide [OAG] Airline of the Year and subsequently became a roll-out customer for Airbus’s new passenger liner, the A340-600. With the demonstration of the use of bio-fuel in 2007 (Compare Airport Parking, 2008), Virgin’s executives are intentionally attempting to show that the company is on the leading edge of the airline market, just as it was in Virgin Atlantic 7 1984 when it was founded. If the year 2008’s profit is any indication, Virgin will persist through the current fuel crisis as well as continue to provide legitimate competition for British Airways. Virgin Atlantic 8 References Air Transport Intelligence. (2010). ATI – Airlines Profile. Retrieved August 13, 2010, from Embry Riddle Aeronautical University, Hunt Library: http://www.rati.com/airlines/ AirlineDetails.asp?ID=1225 Business & Company Resource Center. (2010). Air Transportation, Scheduled. Retrieved August 28, 2010, from Embry Riddle Aeronautical University, Hunt Library: http://galenet.galegroup.com.ezproxy.libproxy.db.erau.edu/servlet/BCRC?vrsn=unknown &locID=embry&ste=1 Compare Airport Parking. (2008, April 25). History of an Airline Feature: Virgin Atlantic. Retrieved August 13, 2010, from http://www.compare-airport-parking.co.uk/news/546/ History-Of-An-Airline-Feature-Virgin-Atlantic.html International Air Transport Association. (2010). Jet Fuel Price Development. Retrieved August 30, 2010, from http://www.iata.org/whatwedo/economics/fuel_monitor/Pages/ price_development.aspx International Civil Aviation Organization. (2010). Air Carriers: Financials: Search. Retrieved August 28, 2010, from Embry Riddle Aeronautical University, Hunt Library: http://www.icaodata.com/modules/ airlines/Financials/search.aspx Virgin Atlantic. (n.d.). Company overview / history. Retrieved August 15, 2010, from http:// www.virgin-atlantic.com/tridion/images/companyoverviewnov_tcm5-426059.pdf Wensveen, J. G. (2007). Air Transportation: A Management Perspective (6th ed.). Burlington, VT: Ashgate Publishing Ltd.
Pages to are hidden for
"Virgin Atlantic Performance.docx"Please download to view full document