Virgin faces bumpy ride

RICHARD BRANSON called it "the merger from hell" - and now it is coming after him. After a two-year fight, European regulators said last month they will approve the planned alliance between British Airways and American Airlines. Peter Mandelson, the new Secretary of State for Trade and Industry, looks set to do the same. The alliance threatens Branson's Virgin Atlantic Airways, the most profitable part of his business empire.

Scheduled to start next summer, the alliance would have 60 per cent of the US-UK air market and a 460-route network that dwarfs Virgin's 15. With it comes another threat - an opening of Heathrow Airport to more US airlines, potentially giving the US travellers, who account for one- third of Virgin's ticket sales, more op-tions. The increased competition will also test whether a carrier like

Virgin, which draws customers with perks like limousine rides and a sense of fun, can compete with powerful partnerships that woo passengers with far-reaching networks and frequent-flier miles.

Virgin has managed well so far without a large network, grabbing an 18 per cent share of the US-UK market to rank number two after BA. It is one of the most profitable airlines in the world, with earnings of $85m (pounds 52m) on sales of $1.3bn in the year ended 30 April 1997, and flies only on highly lucrative routes like London-Los Angeles and London-Hong Kong.

Mr Branson has also avoided the mistake of his predecessor, Sir Freddie Laker, whose low-cost Skytrain went bust once the big carriers lowered their prices. Mr Branson has aimed for businessmen as well as tourists since starting Virgin in 1984 on a route opened by Skytrain's demise.

He charges fares akin to those of rivals, making them less likely to gang up on him, and tries to give customers better value with more flight attendants - double the typical rival's - and video screens in the back of every seat.

Still, analysts say the increasing dominance of large airline groupings like BA-AA and the six-carrier "Star Alliance", led by UAL's United Airlines and Deutsche Lufthansa, threaten Virgin.

The question is how Mr Branson will respond. He is already considering a sale of shares in Virgin Atlantic to raise cash for his records-to-cola empire. But he may not like that option. A ballooning enthusiast whose mother was briefly a flight attendant, Mr Branson views the airline with more passion than any of his other businesses. He might prefer to find a friendly investor.

For Virgin Atlantic, the most obvious partner is Continental Airlines. The number five US airline has had an arrangement with Virgin since February, in which it sells Virgin seats to US passengers.

Virgin might need something more as partnerships like BA-AA intensify. A deeper partnership with Continental is "something we might look at in the future," said a Virgin Atlantic spokesman.

But unlike other carriers, Virgin must tread carefully to avoid losing the lustre of its unique brand. It cannot jeopardise its main strength, loyal passengers. "People like an alternative. As the likes of BA and AA get larger, they become more bland," said Keith McMullan, director Aviation Economics, the London consulting firm . "It's supermarkets as opposed to boutiques."

Mr Branson had better hope Virgin shoppers stay selective.