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Competition on the world's busiest long-haul route, London-New York, remains robust in spite of double-digit average ticket price increases and last month's launch of a joint venture between British Airways and American Airlines, according to rival carriers and travel management companies.
According to Delta Air Lines EMEA vice president for sales and staff Frank Jahangir, average yields across all airlines on London-New York have risen more than 25 percent year-to-date from 2009 levels, resulting from a mixture of passengers upgrading and airlines closing low-fare buckets earlier. Carlson Wagonlit Travel told The Transnationalthe average fare for its United Kingdom-based customers is up 10 percent so far in 2010.
"There has been a hardening in price," confirmed Continental Airlines senior director for the United Kingdom and Ireland Bob Schumacher. "There are fewer special fares in place and we have gone back to revenue-managing our cabins."
The overwhelming reason for the higher fares is a surge in demand. CWT UK director of program management Nigel Turner said customer bookings are up 39 percent, with first class down 5 percent but business class up 43 percent, premium economy up 40 percent and economy up 33 percent.
With the addition of a third daily service by Delta on Sept. 20, there are now 17 flights per day between London Heathrow and New York JFK. About 242,000 passengers flew on the route in September, according to Heathrow operator BAA. In addition, 104,000 passengers flew from Heathrow to Newark, now served by 10 departures daily following the launch of a fifth daily service by Continental on Oct. 31. BA also flies twice daily on weekdays and once on Sunday between London City Airport and JFK.
New joint venture partners BA and AA account for 16 of the 29 daily departures from London to New York (including Newark) but Turner does not expect that to be problematic. "No one quite knows about AA/BA at the moment, but there is a good mixture of U.K. and U.S. carriers, and a good range of products and prices," he said. "In the U.K. market, the U.S. carriers tend to be cheaper. Delta is beginning to increase its marketshare and is offering some good prices. That is good for all customers because it means the biggest carriers cannot charge too much of a premium."
Turner also praised the U.S. airlines for improving the quality of their product. AA, Continental and Delta all now offer lie-flat seats in business class. "That has been the big story for us in 2010, and we are winning corporate customers as a consequence," said Delta's Jahangir. "We are competitive on price, but we are not trying to be the price leaders."
Although Delta offers only three flights daily compared with AA/BA's combined 16, Jahangir said, "Heathrow-JFK is the jewel in the crown, but the strength of Delta is the network we can offer in addition to that." Delta only started operations at Heathrow in 2008 following Open Skies deregulation, but now flies 11 times weekly from Heathrow to Atlanta, 10 times weekly to Detroit and daily to Minneapolis, and has applied to fly twice daily to Boston and once daily to Miami using slots BA and AA relinquished to obtain antitrust immunity. Delta also operates one of the most extensive route networks between the United States and the rest of Europe.
Schumacher is sanguine about the AA/BA tie-up, too. "I don't think the dynamics are going to change that dramatically," he said. "We have no objection to vibrant competition." Schumacher said more than 30 percent of Continental's traffic on its Heathrow-Newark service is now U.K.-originating, up from 25 percent when it entered the route post-Open Skies in 2008. It has a high proportion of transfer traffic from Heathrow at Newark (40 percent, compared with 28 percent for Delta at JFK), and Schumacher said the connectivity at its hub across the Hudson is a key selling point.
Conversely, sources suggested that anti-Newark prejudices remain for some Manhattan-bound or originating point-to-point passengers, but Schumacher said this perception is waning. "Those that know New York are comfortable with Newark instead of JFK," he said.
Another key player in the London-New York market, Virgin Atlantic confirmed reports that it hired Deutsche Bank to conduct a strategic review of its business. Sources told The Transnationalthat they were not surprised Virgin founder Sir Richard Branson is considering the airline's future after losing a 15-year battle to prevent a joint venture between transatlantic rivals AA and BA. Branson in May disclosed that consolidation of the airline industry could render his airline's independence unsustainable.
"We have seen from various comments over the last few months that Virgin is considering its options," said one aviation analyst who requested anonymity. "The nature of the market has changed because of the AA/BA tie-up."?
Partnership Travel Consulting CEO Andy Menkes concurred. "No matter how good a brand you have, from a strategic purchaser's viewpoint you are looking not only at the service over the Atlantic but the network that joins up with it," said Menkes, who served as a sales executive at Eos Airlines, which briefly competed in the transatlantic market against Virgin and its rivals. "Virgin has the lead in product, service and offering, but when buyers sit down with them, the ability of Virgin to fill in spaces in the client's network is limited. It would be right for Virgin to align with one of the alliances."
Assuming the choices exclude the Oneworld alliance led by AA and BA, several factors point in favor of Star Alliance over SkyTeam. Star Alliance member Singapore Airlines has a 49 percent stake in Virgin, although it has been looking to sell for some time. Furthermore, Lufthansa, a founding Star member and the alliance's European anchor, is one of the few airlines--along with those in the Middle East--with the cash reserves to take the equity in Virgin that would likely form part of any deal. Lufthansa also owns British Midland, which is struggling to turn around but could provide an effective feeder network at London Heathrow.
Menkes also noted Lufthansa's minority ownership in JetBlue Airways, which has a similar corporate culture to Virgin's and a domestic network in the United States emanating from the New York JFK gateway. "There is no overlap between Lufthansa and Virgin on any nonstop citypairs," Menkes said. "With JetBlue as well, it could be a winning combination."
The main problem Menkes sees in any Virgin tie-up with the Star Alliance is potential conflict with Continental Airlines, which recently upped its Newark-Heathrow frequency to five daily. Virgin flies twice daily to Newark and three times a day to New York JFK. Continental has a long-standing "hard block" arrangement on Virgin's three JFK departures and one of the Newark flights, whereby it owns the inventory for a set number of seats.
Newspaper reports on Friday suggested the strategic review would lead to Branson selling some or all of his 51 percent stake in the Virgin Atlantic business. In a written comment, Cass Business School professor Joe Lampel noted: "His reported exploration of selling his controlling interest in Virgin Atlantic suggests that he has accepted the inevitable: The airline does not have the resources to compete effectively against BA without becoming part of a larger entity. Given his business style, and his deep identification with Virgin Atlantic, he is clearly unwilling to maintain involvement in the management of Virgin Atlantic once its independence is lost."
An official statement from Virgin on the review said: "Deutsche Bank is working with Virgin on an assessment of the aviation marketplace and to seek growth opportunities for the airline. The study is at a very early stage, so there is no further comment to make."
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