How does an airline make the big strategic decisions?

The are few major airlines not forced into major strategic decisions in the last few weeks. All of them essentially use the same basic data. Some of them may have specific issues and specific markets they have to factor in.

One very visible, yet relatively small airline, with a crisis on its hands, is almost a miniaturised version of every other long haul airline, because the realities are consistent, the maths don’t change much, its decisions are as vast on its own scale as they for BA or Lufthansa. But its size makes it easier to explain; Virgin Atlantic.

Like all airlines, Virgin Atlantic went down the path, later than most, of swapping to twin engine aircraft. That process would have been complete by 2023.

Covid-19 has accelerated everything, and made it look hard at its entire operation, in ways that probably would never have happened had the process of competition carried on as it was.

First what are the motivations? In Virgin Atlantic’s case its the same as every other business – it wants to carry on trading. Secondly, the company has a very strong attachment to the principle of being more of a large family business than a faceless corporate, and its staff and keeping them employed are a huge part of its purpose.

When you see an airline buying new aircraft you might think its expanding, doing well. Not necessarily so. For example in 2010 the airline offered 4.5 million seats at Heathrow – in 2019 it only carried 4.7 million, pretty minimal growth for ten years. It had gone about improving its revenue by raising load factors and increasing how much customers would pay to fly with them, not just in terms of ticket prices, but ancillary optional services. That’s a fairly risk-prone strategy. Post Covid-19, its going to be impossible in the next 18 – 36 months.

The peak in 2013-15 was caused by the Little Red domestic service, which failed

The airlines business at Gatwick had actually decreased even as income per passenger rose. Gatwick had been around 25% of the airlines business, but in 2019 it dropped to 22%., just 1.3 million passengers. Competitors like BA and Norwegian were having an impact – mostly Norwegian who also ate away at BA’s share of the market.

Overall Virgin Atlantic’s market share at Gatwick was just 2.2%. Compare that to Norwegians 4.6% and BA’s 8%. easyJet is the airports biggest operator by far, at some 44%.

Gatwick operations for the airlines were mostly for the Virgin Holidays sub brand – thats about to be rebranded as Virgin-Atlantic Holidays and its operations moved to Heathrow.

Gatwick

Making a decision was therefore considerably easier on statistical grounds, but painful in human terms.

Cut the 7 744’s to save costs because there just weren’t going to be enough passengers to need that size of aircraft was easy. They were going anyway.

Cut down the operation and fees of working at Gatwick, when there again, just weren’t going to be enough passengers, an easy decision to make. That cut was however so sharp, so deep that even holding onto a basic level of services would be cost prohibitive.

The problem was how many staff would this mean loosing? Could any of them be moved to Heathrow? Cabin crew and some pilots certainly could, but 7 744’s weren’t being replaced in the short term, so inevitably, crews and pilots would have no future, never mind the support staff at the airport.

The other issue was preserving the landing slots and facilities at the Heathrow side of the business, by far the most important. Shifting the entire fleet there, some of which had already started as the airline began services to Havana and Orlando from Heathrow last year.

The airline operates 17 787-9, 10 A333’s, 4 A332’s and 4 A350-1000’s.

Right now the airline is facing 8 more A350-1000’s – 3 are already in build, along with 10 A330-900’s which were to replace the A333’s one for one as their leases end. The plan is to retire the A332’s which are elderly and were only a stop gap in the first place, brought on by the Rolls Royce Engine issue on the 787-9, by the end of 2022.

So, cutting the 744 was clearly almost too easy. But slashing Gatwick completely – the airline was founded there in 1984, that was a tough call, but there just wasn’t the business to sustain it.

There are times, when as a leader, the options are stark, it becomes obvious what you have to do, and while you could fudge a compromise, compromises have a downside. They don’t always achieve what you need to at the speed you have to.

Consolidating all of the airlines operations at Heathrow will balance the books in theory and with luck. Its real future will depend on what deal can be made with Airbus for the slow down in deliveries of the A350’s, without loosing sight of the need for the A339’s, as the A333’s do need to go.

However Virgin Atlantic made public yesterday, that it was still holding its slots open at Gatwick, and essentially might, one day return. It recently spent a lot of money there, on a clubhouse and facilities, but those will for now be mothballed. Frankly, I doubt the airline will ever go back.

Financial concerns will still be there, and a long slow return to flying will not work in the airlines favour. Future ownership by third parties cannot be ruled out, the company needs investment. Delta has been a disappointing partner when things got bad, and international law still applies, preventing it taking a wider share holding – at least until the UK Government changes the rules after the EU exit transition period ends at the end of December.

And if it wasn’t bad enough, the chances of government aid are minimal, and even if it was RyanAir is making a wide-ranging legal challenge across Europe against every bailout so far granted, saying they’re basically against the EU’s own rules. And they’re not actually wrong, strictly speaking they are.

The end of the 747 fleet is also a 36 year old relationship with the airline