Virgin's man sees bigger future for world airlines

As international airlines jockey for position with mergers, alliances and code shares the industry could be heading for an era of super-carriers.

"That's the theory," says Virgin Atlantic marketing director Paul Dickinson.

"There's been a lot of discussion over the years about airlines getting together to form bigger alliances and we've seen increasing amounts of that activity in the last year."

Recent moves include United Airlines and Continental Airlines agreeing to merge in October, and British Airways joining forces with Iberia Lineas Aereas de Espana.

Virgin Atlantic and Air New Zealand last month signed a code share which starts next week.

Air New Zealand passengers will be able to book on Virgin Atlantic's services from London Heathrow to San Francisco and between Hong Kong and Sydney.

Until now Virgin Atlantic has not been promoting New Zealand as a destination, Dickinson says.

"It's a big story for us in the UK because we've got a big franchise there and for Air New Zealand ... at the moment it flies people up to San Francisco and it can't take them beyond there at all," he says.

The code share is expected to boost performance by several million dollars and will benefit from big events such as the Rugby World Cup and next year's London Olympics.

New Zealand, Australia and Britain operated in an open-skies environment, which encourages competition.

"We think the rest of the world is dragging its heels, it's ridiculous," Dickinson says.

"We should be able to go and set up wherever we like and compete and if we don't succeed, fine, we go out of business.

"But we don't get any Government subsidies or support from anybody so why the hell should any other airline?"

Dickinson says in the history of global aviation, airlines between them have lost up to US$40 billion ($52.5 billion).

"Terrible way to make money," he says. "There's an old saying: how do you become a millionaire? Start off as a billionaire and then set up an airline."

The current structure did not work for the macro economics of the airline industry.

"There's too many protected carriers, too many carriers who go to chapter 11 bankruptcy and suddenly emerge out the other side to live another day," Dickinson says.

"Our view is in the end that will stop and airlines will be allowed to just get on with whatever it is they want to get on with, like any other industry in the world, and compete.

"In the end what will happen is some airlines will go out of business and probably airfares will rise in due course because at the moment they're at a level, with the price of fuel as it is, which is uneconomical."

Virgin Atlantic started flying 27 years ago with a return fare to New York of £208 ($434 at today's exchange rates). Nearly three decades later it has risen only to £315 ($672).

The industry is unable to increase its prices at a economic rate, he says.

Airlines could operate most profitability when oil was US$70 a barrel.

"At US$85, which is what it was most of this past year, you can make a go of it, at US$100 a barrel you're talking a huge cost burden."

It is the cost of fuel which has airlines hanging out for Boeing's much vaunted, and delayed, high-tech 787 Dreamliner.

About half the Dreamliner is made from lightweight composites, such as carbon fibre, and Boeing says it is 20 per cent more fuel-efficient than other similar-sized planes.

"Fuel is US$100 a barrel [and] if you can get 5 per cent to 10 per cent efficiency, that is worth a huge amount to airlines," Dickinson says.

"If they can deliver everything they promise it's going to be the game changer they said and that's why so many airlines are hanging on."

But Boeing's delays are helping rival Airbus close the gap.

Boeing plans to deliver its first Dreamliner in the third quarter of this year, while Airbus expects to start shipping its A350 - also made using carbon-composite materials - in 2013.

"It was many years behind when we started but now is only several years behind and if more delays happen who knows, some airlines might decide to cancel their 787 orders and go with Airbus," Dickinson says.

International Air Transport Association forecasts last week said 3.3 billion travellers would take to the skies by 2014 - 800 million more than in 2009.

In five years, "the metal" and routes will be similar, while products on board are pushing the limit, Dickinson says.

"The only thing in five years we'd like to make sure of is that we see Boeing 787s in service," he says.

"I think the biggest potential change is how many colours you see on those tail-fins - are there more merged airlines, are there fewer, bigger airlines, are there more global brands?"