Maybe BA has found a new way

With our last blog in July we questioned British Airways´(BA) strategy and its focus. Apart from the intended, now cleared, merger with Iberia to form International Airlines Group (IAG) there seemed to be no clear way forward for the company to compete with its two Europe main rivals Air France/KLM and Lufthansa.


In this summer period several movements have taken place which have altered the picture. Either BA has changed its ways or its incorporation into IAG has made it rethink its strategy. Before we comment let us look at what has happened in two months.

At a news conference on 27th July last "oneworld" members American, BA and Finnair announced the incorporation of "Air Berlin" into the alliance planning to complete the process early 2012 just before the opening of the new Berlin Brandenburg hub airport.

Air Berlin´s Austrian affiliate (49.9%) "NIKI" will become an associate member of "oneworld" while no mention is given to AB´s Swiss affiliate(49%) "Belair" nor to its German subsidiary "LTU".

Air Berlin´s sponsor is BA. While this incorporation will be tremendously beneficial to "oneworld" - filling a huge gap in Central Europe with its large affluent population in the three countries - it is not so easy to see the benefits for IAG.

Speaking in Mumbai on September 5th to announce the codeshare agreements made with "oneworld" partner Kingfisher, BA´s CEO, Willie Walsh, also announced IAG´s intention to take over and/or merge with several other airlines. From an initial list of over 40 candidates this has been reduced to 12 probables. Though WW did not mention any airline by name he suggested the main areas to be looked at were China and India.

As a result of this speculation became rife. The Guardian , Airline News, Breaking Travel News, among a host of other news sources, including Arabian Business.com, all provided lists of candidates for joining IAG.

To understand what is going on all these manouvers should be looked at as a whole not in isolation. The invitation to Air Berlin to join "oneworld" is a surprise to most people. "Oneworld" up to now has been looked upon/ or presented as an exclusive alliance of the best full service airlines. AirBerlin has been looked upon as a low-cost carrier which has moved up-market but is far from being a quality full service carrier. Maybe our perception is now wrong. However, without doubt it offers to fill up that empty space in central Europe which has been "oneworld´s " Achilles´ heel. It has been mentioned as a candidate for IAG thus providing a strong presence in Central Europe, however, it would be a very big mouthful to swallow, at least initially.

On the other hand other factors may have made BA look at the market in a different way. Way before it went bust Mexicana announced it was in difficulties which suggested that the full service airlines were not immune to problems even in such a large market as Mexico. On the other hand it has subsequently been revealed that Malev was days away from closing meaning that Central Europe could well have been left without any "oneworld" members. The partners in the alliance had no control over the events but surely had knowledge that one, or both, of its members was in difficulties.

Now it appears that Aer Lingus(EI) is talking to different alliances with the idea of joining one. "oneworld" is at an advantage as BA already codeshares with EI on the London-Irish routes and it was a member of this alliance previously. However, it is not the only suitor as EI´s CEO, Christph Mueller said to Bloomberg recently(14-9-10).

Whatever the state of the game let us look at what has been mentioned and try to put things into perspective.

Firstly in Europe.

Iberia has a large minority shareholding(45.85%) in VUELING. This has its main base at Barcelona and is a hybrid with low-cost flights combined with codesharing with Iberia. It is Iberia´s second carrier supplementing in Europe what Iberia cannot or will not provide.


AIR NOSTRUM - Iberia Regional is a francisee but does a good service for Iberia in supplying passengers from lesser airports both in Spain and in Europe.This is a strong candidate to be incorporated into IAG to protect Iberia´s backyard.

FLYBE. It claims to be the biggest regional airline in Europe. It has a strong presence at lesser airports in the UK while it has just signed an agreement with Finnair to provide regional services in Finland and across the Baltic. BA has a 15% shareholding which was obtained by selling BA Connect to Flybe. BA has had a hands off approach codesharing some flights while, inexplicably, permitting Flybe to negotiate a wide ranging code sharing agreement with Air France to feed passengers on to its flights. Maybe BA has decided to pull in the reins.


SUN-AIR Scandinavia is a BA francisee based in Billund (Denmark). The agreement was originally signed in May 1996 for Sun-Air to operate as a licensee linking BA services at Copenhagen, Oslo and Stockholm. It does not seem to have fulfilled the original intentions. The company did not even fill in the gaps left by the demise of Sterling in Denmark. However, the potential still exists to be a link between BA and Finnair in Scandinavia.

FINNAIR. This is an airline with good connections to the Far East. Now that it has signed the aforementioned agreement with Flybe it could find itself with better feeds for its long distance services. It is too small to continue on its own so is a strong candidate to enter IAG.

MALEV. This airline has been mentioned as a candidate for IAG but with its financial problems being aired recently probably nobody would want to touch it with a barge pole.

MERIDIANAFLY. The link with BA is very tenuous as BA only has one codeshare agreement with Meridiana between London and Florence. However, the company has a strong presence in Italy, both domestically and with European and Intercontinental leisure flights, which is an appealing market for IAG. This company must be on the shopping list.

The Americas.

American Airlines has always been looked upon as a strong candidate to merge with BA. However, the US government has not made any moves on the limitation of foreign airlines having no more than a 25% shareholding. This is something BA has already experienced with its attempted investments in US Air and UNITED. The Americans would undoubtedly want to be top dog in any merger. Hopefully, the Iberia part of IAG would put a damper on that.

Another question is LAN(now established in Chile, Argentina, Peru and Ecuador).












It has just decided to merge with the Brazilian airline TAM to form a holding group called LATAM while retaining their own brands. There might well be reticence on the part of both to immediately submerge into IAG without enjoying the benefits of the merger and the possibilities of expansion as a South American group. While LAN has been a member of "oneworld" for some time TAM has only just entered into Star Alliance(May 2010). One can see a big battle between the alliances to incorporate the other member. LAN is extremely important for "oneworld" while TAM is the only Latin American member of Star - all this is more important since the demise of Mexicana. This will be a battle to watch and is certainly not decided as yet. It could be a candidate for the future.

Africa.

South African Airlines has been mentioned as a candidate for incorporation into IAG. Though it is a very interesting morsel we doubt if the SA government would want its flag carrier to be swallowed up. It is already a member of Star Alliance.
BA on the other hand has an 18% shareholding in Comair of South Africa. This airline provides domestic and regional flights connecting to BA´s services at Johannesburg and Cape Town. It also has a low cost airline, Kulula.com working mostly in the domestic market. It seems logical that IAG would take advantage of the stake to build up its presence in South Africa.


Middle East.

Royal Jordanian is already a member of "oneworld" but has not been mentioned as a takeover candidate as yet. However, Gulf Air was mentioned in Arabian Business.com(23-9-10)

With Emirates, Qatar Airways and Etihad making concerted, and so far quite successful, attempts to become important airlines with hubs in the Gulf, the other Gulf airlines are feeling the squeeze. That does not mean that "oneworld" or IAG should ignore the Gulf. Quite the opposite. It is another area where a presence is necessary. There is also a history of BOAC having a shareholding in Gulf Air. Therefore, maybe the mention is not so much wishful thinking as at first it appears to be.


Asia-Pacific.

The first candidate to be mentioned in all the press was QANTAS. The reasons for this are twofold. Firstly in March 1993 BA invested in a 25% stake in the airline - which it subsequently sold. More relevantly, though, in 2008 while negotiations between BA and Iberia were going on, Qantas proposed merging with BA. This seemed logical but irked Iberia and came to nothing.
Now Qantas seems not to want to merge with BA but go it alone in Asia. (according to Airline news of 22-9-10)


Notwithstanding that, there may be a future in a merger if both Qantas and IAG are looking at Asia for expansion. Qantas has two lost cost affiliates called Jetstar. The Australian company is 100% owned while the one based in Singapore is 49% owned - as required by local law the majority has to be owned by Singaporeans. These provide for Qantas to extend its reach in (South East) Asia.


Air Asia, which is a low cost carrier flying out of Kuala Lumpur to regional destinations together with its transcontinental subsidiary Air Asia X (flying to London and soon to Seoul,Tokyo and Paris(?)) have been mentioned as candidates for takeover. One analist suggested that such a move was unlikely while Malaysia Airlines was a better fit for IAG.


Cathay Pacific,together with its subsidiary Dragonair, a founder member of "oneworld" was mooted and flies out of Hong Kong. The problem in this case is the position of the Chinese government. As any investor in HK over the years since the return of HK to China have found that despite the economic system in HK being different to the mainland they have been "persuaded" to reduce their shareholdings in HK businesses to less than half.


If such is the case in Hong Kong then the other Chinese candidates mentioned,

"Air China, China Southern and China Eastern as willing recipients of foreign investment", then IAG will come up against the barrier of a 25% investment as a maximum.


The other market which has been focused on is India. Kingfisher has been accepted as a candidate for entry into "oneworld" with BA announcing codesharing agreements with the airline. Probably for that reason it has been looked upon as a takeover target. However, at the moment the Indian government does not, as yet, permit any foreign participation in its airlines. Thus this company is not an immediate target.

Whatever the future decision of the Indian government to allow foreign shareholdings, it is likely to be a minority foreign participation - probably 25% initially.

That being the case in both China and India, does IAG want to be a minority shareholder of any such airline? or will it be looking more longer term when such restrictions might well be eliminated?

We can now say that though BA seemed lost in July its new grouping, IAG, seems to be more focused in September. Time will only tell what IAG will do but without doubt the merger will be and has to completed before anything noteworthy happens - are we looking at two years down the line, 2012?

British Airways has lost its way

On the day(Tuesday 13th July 2010) that British Airways´ affiliate company FlyBe signs an agreement to codeshare its flights with Air France it seems to us that BA has lost its way with its obsession with the US market and its desire to form ever closer links to American Airlines. Let us look at this tragic comedy of errors which has turned Britain´s main flag carrier from the most important European carrier into the third bit player trying to survive with no coherent strategy.

1-With the inheritance of the occupiers´ German routes into Berlin, Deutsche BA was formed to try and build on that experience. The results were not to its liking so short termism prevailed and the subsidiary was taken over firstly by "easyjet"(a wierd arrangement) and then by AirBerlin. Thus BA withdraws from the German market(Europe´s biggest) just as all Europe´s markets are about to be opened to free competition.

2-BA built up a subsidiary in France called Air Liberté. The results were not to its liking so short termism prevailed and the subsidiary was sold. Thus BA withdraws from the French market just as all Europe´s markets are about to be opened to free competition.

3- KLM twice offered itself for merger with BA which fell through. Then it suddenly decided to merge with Air France which apparently has proved more successful than anticipated. Previous anti-monopoly worries suddenly went out of the window thus opening the whole European market for consolidation.

4- Swiss was handed on a plate to BA and was set to join oneworld but then (through frustration??) changed its chairman and fell into the lap of Lufthansa. This airline was the perfect fit for BA and its partners in oneworld at a crossroad in Central Europe providing two potential hubs (one in a French speaking market while the other is in a German speaking market). The results for Lufthansa have proved tremendously beneficial with regard to revenue and traffic.

5- BA´s licensee BMED was snatched from under its nose by BMI. This reduced BA´s attraction through Heathrow to the benefit of the Star Alliance through BMI.

6- BMI was subsequently bought by Lufthansa and now serves LH´s interests.

7- BA´s licensee GBAir was similarly bought by "easyjet". This reduced the number of slots available at Gatwick and destinations on offer in the southern Mediterranean. Also the company lost a possible vehicle to run BA´s regional services.

8-Some of BA´s regional operations from less important UK airports were sold off to Eastern Airways

9- BA Connect was set up in a half hearted attempt to consolidate(what remained of) BA´s regional operations from Birmingham, Manchester and Glasgow.

10-Without being given a chance to work short termism prevailed and the operations were handed over to Flybe in exchange for a paltry 15% of its equity. The franchise agreement with Loganair is broken thus leaving BA with no offers north of Edinburgh and Glasgow. Loganair subsequently signs a codeshare agreement with FlyBe. (so there must still be business to be had)

In our view it would be more logical to build up the stake to at least 40% to safeguard the investment while pushing Flybe into being a better service airline thus becoming an honorable representative of and for BA. (Air Nostrum does a good job for Iberia)

It cannot be understood how Lufthansa has been able to build up regional services in Europe while BA turns its back on the British regions. The connections from the UK to the European continent are now effectively offered to European full service competitors especially when these passengers want to fly long distance but not through Heathrow(as has been shown by FlyBe´s announcement of extensive codesharing with Air France). BA´s Manchester -New York service inexplicably closed down emphasising this lack of support for the regions while Continental, American Airlines fly transatlantic from Manchester as well as other airlines.

11- Brussels Airlines (in the backgarden and a natural ally of BA with tremendous untapped potential) sold a majority stake in itself to Lufthansa.

12- Aer Lingus was offered for sale by the Irish government which thankfully did not let Ryanair take a majority stake. BA handed over the UK/Irish routes to Aer Lingus some years ago which was not problematic when AL was in oneworld. AL subsequently left oneworld while under the direction of WILLIE WALSH (now the CEO of BA)!!!

Now BA must take over AL to secure its own back yard. If any non-British airline has any chance of competing with BA at Heathrow or anywhere else in the UK it is Aer Lingus. Most Brits will fly Irish with no second thoughts(look at Ryanair´s success in the UK) while we would look hard at a foreign airline.(What success has Air France had with its Los Angeles flight from Heathrow?). Can you imagine the aggressive Ryanair fully taking over Aer Lingus and running low cost long distance flights from Heathrow? It is one airline that must be won.

13- "BA´s" CEO walked away from the bidding for Austrian saying it was a better strategic fit for Lufthansa. We cannot understand how he just wanted to hand it to Lufthansa. What better strategic fit is there for BA in Central Europe after the loss of Swiss? Has Malev been proven a better substitute?

14- Alitalia was on the rocks and nobody wanted a lame duck. However, then the proposal was to merge it with Air One (also participated in by Lufthansa). Alitalia is given the "kiss of life" and now survives in the SkyTeam alliance. Only Lufthansa takes advantage of the weak Alitalia restructuring situation by setting up its Lufthansa Italia subsidiary. BA nothing.

15- BA´s CEO states in each case that BA is only looking for a commercial alliance - this has got BA nowhere as has subsequently been proved.

16- BA sets up a subsidiary "Open Skies" very timidly in 2008 as an all business airline just when other similar concerns are going out of business(EOS, Maxjet and Silverjet). "Open Skies" takes over L´Avion to obtain access to Paris Orly and an up and running business with flights to NY-Newark. After initial attempts to fly Orly to Newark and JFK and from Amsterdam to New York(susequently suspended indefinitely), now it flies Paris Orly to Newark while it has just introduced a Paris Orly - Washington Dulles flight. The chic image and name of L´Avion is lost and submerged in the insipid image and ridiculously cheap name of "Open Skies"
However, where are the connecting services to BA, its subsidiaries and its partners in "oneworld"? They do not exist. OS is not in "oneworld" and cannot offer the services of a full service airline in an alliance. To us this seems to be cutting your own throat. American Airlines flies from NY-JFK not Newark, nor does it fly from Dulles. In Paris, of the "oneworld" European partners only Iberia and Vueling fly into Orly; Finnair, Royal Jordanian, Malev, BA and FlyBe fly into CDG.

17- BA´s CEO expressed a desire to take over BMI "to consolidate BA´s position at Heathrow". We all knew that this was a nonstarter because Lufthansa (with its 20% stake) would not permit it, and the competition authorities would be against any control by BA of more slots at Heathrow.

18- BA has just been given the go-ahead by the European Commission for its transatlantic alliance with Iberia and American Airlines. The US authorities have given provisional approval to the alliance while are still prevaricating. The price to pay will be for 8 landing/take off slots to be ceded to competitors. This tends to show that the "desire to take over BMI" as expressed in the previous paragraph as being knowingly unachievable and thus a smokescreen

19- BA announced the start up of a twice daily business service(similar to "Open Skies´") to New York from London City(from October 2009). Then to eveyone´s surprise BA announced the service would land at Shannon to refuel and invent an excuse that US passport formalities will be done there. The real reason is only that the aircraft cannot take off from London City with a sufficient load of fuel for JFK. What is gained by the immigration process at Shannon is lost by the length of the stopover.

20-Now BA announces that its London City services are so successful that it is thinking of introducing more business services to Chicago, Washington and Boston. It cannot fly further with the A318 (from Shannon).

All these are illustrations of what concerns us about BA. It seems to have no logical strategy. A merger with Iberia(not takeover - under less favourable conditions than before) only seems logical as the Spanish can maintain the identity of the airline and direct its operations into Central and South America. But what else? Are you not looking at the possibility of another airline in Central Europe (CSA or LOT)? What plans are there for Eastern Europe , the Balkans, Greece, Turkey. Is RJA a sufficiently connected airline? What about the Gulf airlines to join oneworld? Should it not be better to have Etihad, Emirates or Gulf onboard than being competitors? It is just as well that S7(Russia) and Kingfisher (India) have been sought as suitable partners for oneworld. Thanks be that JAL (Japan) decided to stay in oneworld and not defect to Skyteam. But where is BA going in Africa? - at the moment nowhere. That is one reason why Brussels Airlines(with its partner in the Congo) was important.

The only strategy the airline appears to have at the moment is to turn British Airways into London North American Airways for high flyers in Business class. This is not good enough,especially when it flies from an airport which will not be expanded (at least at the moment) and where it cannot get more slots but has to give up some present slots. This is plain madness. We expect better.

Luton - The Next Best Bet ?

The new coalition government has stated that it is not going to permit the building of a third runway at Heathrow airport nor second runways at Gatwick and Stansted airports.This is despite the fact that as long ago as 2003 it was recognised in the report "The Future of Air Transport " (16-12-03) that "two new runways will be needed in the South East over the next three decades." The government, however, is offering us none, or is it?

A brief comment should be made on why the announcement was made and in the terms used. The 2010 election was the one to be won at all costs by the Conservative Party. They had been out of power for 13 years and were desperate to regain it. The decision had already been made to cancel the third runway at Heathrow just because Labour supported it and it was a vote winner. The LibDem. attitude only reinforced the argument and so the coalition did not think twice about it - at least for the next 5 years(!!). Gatwick and Stansted were added to the list to satisfy the LibDems. though the decision certainly benefited the Tories since the two airports are in highly affluent True Blue country. Cost was not a reason at all because the runways would be privately financed. Noise and exhaust pollution were pushed as reasons but those are smoke screens. Reality would be different with stricter regulation and newer engine efficient aircraft being imposed as the only operable vehicles. The nimbys have won the day without even starting the battle - for a comparison the reactions started over HSR2 have been in True Blue Chiltern country. Thus go back to basics and fight one battle at a time.

What should be noted is what was left out of the statement. Luton airport is without doubt a London airport but it lies in the only Labour strongholds in the region. Thus this is the door left ajar for future use. It is also a potential vote provider, since (to quote the report again),  

"Luton/Dunstable is identified in Regional Planning Guidance as a Priority Area for Economic Regeneration and, along with Bedford, is designated as a Growth Area in the Communities Plan. The continued expansion of Luton Airport has the potential to play a key role in delivering employment-led growth in this area."  What better for the government than to show it is creating employment. Thus we come to the conclusion that Luton airport is going to be the solution of the runway needs for South East England.

However, political considerations are not the only factors. Even though  the report indicates that Luton was the last and least likely option for expansion, in the new circumstances other reasons come into play which make Luton much more attractive as an airport for expansion than any of the others.

1)- As we have already indicated Luton is an area ripe for development, especially since the decline of the auto industry. 

2)-There is an already electrified line from Bedford through Luton Parkway into central London and south to Brighton offering excellent connections both north and south of the Thames for a large number of potential clients.

3)-First Captial Connect trains run from Bedford through Luton to St.Pancras(for the services to Paris and Brussels) and south to Gatwick airport and Brighton.

4)-East Midland trains run services from St. Pancras through Luton to Leicester, East Midlands airport, Derby, Nottingham, Sheffield and onwards to Leeds.
5)-Road access to the M1 is literally "on the doorstep".
6)-Road access to the A1(M)would need the construction of a new road link to Stevenage.(about 11kms. away in a direct line).

The connections are, therefore, much better than any other London airport - to both Gatwick and East Midlands. The access to the airport is good or very good for a large proportion of the Midland and Yorkshire population without having to pass through Central London.

As can be seen from the Google map the runway alinement is WSW-ENE. In the airport´s plans, as published in the said report in 2003, the idea was to either extend the present runway or move it a little southwards and use the present one as a taxiway.Thus increasing the capacity for take-offs and landings. 


The development plans published on the airport´s website at present indicate a date of September 2001 which co-incides with the government´s original plans in 2003 to give the airport a minor role in London´s air traffic. However, it should be said that these plans replaced a much more ambitious plan to develop the airport with two runways (Published in October 2005 and withdrawn in July 2007).


However, if the only alternative for the increase in demand in air in South East England is to develop Luton then the old plans should be dusted off and looked at again. The effects of such a change in policy would go into other areas.

If this option is taken up then the electification of the Midland Main Rail Line(MML) to Leeds is more than likely while being less costly than HSR2 to Birmingham from London. We suggested in our blog Fast Track 3 (points 4 & 5) (28-02-10) 

that with new improved lines from East Midlands airport to Derby-Stoke-Manchester, and to Nottingham-Sheffield-Leeds the service to the Midland cities and those on both sides of the Pennines could provide an excellent frequent and competitive (alternative) service to London and much more accessible to a major airport which Luton could become (and all without threatening to throttle London). 

Part of the problems of the WCML and ECML are the bottlenecks where the lines are not four-tracked(at least) and the lines become clogged with mixtures of long distance, regional and local passenger traffic with freight all vying for access. With an electrified MML, as we indicate in the aforementioned Fast Track 3,  upgrading the MML and being able to put on fast trains to Derby, Stoke and Manchester on one hand , while to Nottingham, Sheffield and Leeds on the other, would aleviate capacity on both the WCML and ECML, provide competition and give direct acces to potential clients in the East Midlands, the North West and South and West Yorkshire to Luton airport - all at a lower cost and greater benefit for a greater number than the proposed HSR2 (which will not go anywhere near an airport except Birmingham International). 

Is it not time to think of these alternatives and put them into practice?

We must finish by saying, as we did in Runways in South East England (24-3-10), that we support all the main four London´s airports wishes to increase runway capacity - including a third runway for Heathrow - as we argue in that blog. And we are not alone.