Virgin Atlantic expands into Scotland as Branson looks to give up control

Airline's move into short-haul industry questioned by IAG boss Willie Walsh, while Virgin chief in talks to sell part of 51% stake

Virgin Atlantic is to start operating flights between Heathrow and Scotland in a deal with Aer Lingus expected to be announced on Monday.

The move into short-haul and domestic destinations, made possible as a result of taking over key Heathrow takeoff and landing slots from British Airways that the flag carrier was forced to relinquish to assuage competition concerns as a result of its merger with bmi, comes as Virgin boss Sir Richard Branson is set to give up control of the airline he founded in 1984.

He is in talks with US group Delta Air Lines and Air France-KLM after Delta approached Singapore Airlines, which owns 49% of Virgin Atlantic, with a view to buying its shareholding, As part of the deal the European carrier would also buy part of Branson's 51% stake. The new ownership structure could be unveiled this week.

Virgin is expected to operate nine daily services to Scotland, starting in the spring, but its ambitions to enter the short-haul and domestic market could stop there. Three other prized takeoff and landing slots that were up for grabs after BA's £186m acquisition of struggling bmi from Lufthansa are to be returned to International Airlines Group – the parent company of BA and its own merger partner Iberia.

IAG's chief executive, Willie Walsh, said he was "surprised" that Virgin had not taken the full complement of slots, but added that he could not see the airline making any money from the domestic business.

Virgin will operate six round-trip flights daily from London to Edinburgh and three daily round-trips to Aberdeen starting in April 2013, with fares from £99 return.

The planes will be branded with Virgin's red livery, and passengers served food by crew in Virgin uniform, but the 174-seat Airbus 320s will be leased from Aer Lingus and operated by the Irish airline's employees.

Virgin said its domestic services, plus three daily round trips also starting from Manchester to the London hub in the spring, will create more than 150 new jobs in the UK.

"Throughout our history, Virgin Atlantic has successfully fought British Airways all over the world and has offered passengers a compelling alternative through our renowned product and service," said its chief executive, Steve Ridgway.

"We will look to replicate that in our short-haul flying and challenge the current BA monopoly on these routes which is causing serious consumer harm.

"This is a robust business model that will protect competition to and from Heathrow for the long-term."

But Walsh warned: "From a business point of view I can't see any logic. I think it's going to be a drain. I don't think it's going to generate any profits for them."

But, he added, "they need to do something to reinvigorate themselves".

Commenting on speculation that Delta may purchase Singapore's stake in Virgin, Walsh suggested the deal could ultimately see the end of the Virgin Atlantic brand.

Although Delta cannot own more than 49% owing to foreign ownership rules, Walsh said it could take effective control through a partnership with Air France-KLM . "They'd be buying the slot portfolio at Heathrow. But I can't see Delta operating the Virgin brand – Delta believe they are the number one airline in the world."

Virgin has abandoned the other three Heathrow slots as under the competition authorities' directive they had to be used for either Scotland or certain other named destinations. One possibility was Moscow, a destination Virgin has long wished to serve, but Branson's airline was thwarted by a decision by the Civil Aviation Authority to give the flying rights – limited by a bilateral agreement with Russia – to BA and EasyJet.

BA could still be obliged to give up the slots from 2014 should another airline decide it wants to offer competing services to Scotland or fly to one of Nice, Riyadh or Cairo, the other possible destinations for the remedy slots.

IAG boss condemns government's economic policy

Walsh has lashed out again at the government's economic policy, saying George Osborne's austerity plans would not lead to growth and accusing the government of deterring foreign investment.

Commenting on the autumn statement and wider austerity, he said: "You can't downsize a business to long-term profitability. You have got to create an environment where you can pursue growth.

"I can't disagree with reducing the cost base, but I don't see an agenda for growth, and some of the measures that have been taken are making us less competitive."

Walsh said Britain was overly focused on US and European export markets, while "the world is changing".

He said air passenger duty and a restrictive visa regime were damaging the UK and making it less attractive to investment. "It requires brave decisions on the part of government and I don't see this is as a brave government.

Contributor

Gwyn Topham, transport correspondent

The GuardianTramp

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