By Matt Smith
DUBAI (Reuters) - Virgin Atlantic (VA.UL) founder Richard Branson dangled the carrot of further investment in the British airline's domestic carrier Little Red as he stepped up the campaign for a third runway at London's Heathrow airport.
Warning that Britain is in danger of "slipping into the dark ages" without additional capacity at Heathrow, Branson said Virgin would look to expand Little Red into Europe only after a third runway is built.
Little Red was launched by Virgin last year, offering routes from Heathrow to Manchester and the Scottish cities of Aberdeen and Edinburgh, after rival British Airways (IAG.L) bought short-haul operator British Midland.
Some analysts had suggested that Little Red would increase its routes to attract transatlantic feeder traffic after Delta Air Lines (DAL) acquired a 49 percent stake in Virgin Atlantic in 2012.
But Virgin has suffered a difficult past few years in the face of soaring fuel costs, increased competition and the global economic downturn. Its 2012/13 results showed a loss of 93 million pounds ($141.6 million), against an 80 million pound loss a year earlier.
"Little Red was some crumbs we were given when British Airways bought British Midland - it's very difficult to get slots at Heathrow so we grabbed them," Branson told reporters at a news conference in Dubai on Monday.
"We don't have any plans to expand it until a new runway is built at Heathrow. Then we will want to set up a much bigger short-haul operation into Europe and one or two other cities in the UK, but there is still a lot of politics to go before a new runway is built."
Heathrow, Europe's biggest airport, was shortlisted last year as a location for a new runway, but its site near residential areas west of London makes its expansion a toxic issue for local voters, green groups and the Liberal Democrat political party, which is part of Britain's Conservative-led coalition government.
Different expansion plans for airport capacity around London have been on and off the table since the 1970s, but with demand for air travel expected to double in Britain to 300 million passengers a year by 2030, the crunch is coming to a head.
"There's a danger of slipping into the dark ages - we haven't had a new runway in Britain since 1945 and we have only two runways at our main airport," said Branson, owner of 51 percent of Virgin Atlantic.
But it is by no means certain Virgin would expand its Little Red network even if Heathrow gets a third runway.
"I'm very skeptical that domestic short-haul flying is economic out of Heathrow unless you have the critical mass of British Airways," said Peter Morris, chief economist at aerospace industry consultancy Ascend Worldwide.
"However, having complained about the dominant position of BA and made such a fuss about slots at Heathrow, Virgin couldn't then say it didn't want to operate these."
The next routes Virgin will look to introduce are almost certainly going to be long haul, Morris added, pointing to a sustained squeeze on short and mid-haul flights out of Heathrow.
Branson said that the tie-up with Delta has enabled Virgin Atlantic to win corporate accounts and predicted that his airline's next financial results would show the benefits of the U.S. carrier's involvement.
He also confirmed that Virgin would set up its own cruise ship division, having been quoted in an Abu Dhabi newspaper as saying he was seeking investors for a $1.7 billion project.
"Most of the money is now committed," Branson said. "We will start by building two big ships from scratch and feel the Virgin brand will work very well in cruises."
(Editing by David Goodman)