COMMENT: The British Airways / Iberia Merger

Willie Walsh has stuck his neck out this time.  If the emerging British Airways/Iberia (BA/IB) consolidation goes ahead as planned by next June, he should emerge as one of the great leaders of the airline industry.  If it fails it will be interesting to see if his five-year contract is extended.  The excuse is already built in.  BA’s pension fund, a historical liability.

Walsh has experience with dealing with Spaniards, CEO of the now failed Futura a decade back when Aer Lingus was a major shareholder, and of course with Ferrovial, his present landlord at Heathrow Terminal 5.  Both relationships can be questioned.

Iberia is the latest partner in a series of abortive attempts over the years by BA to seek an international marriage with all the synergies it brings.  Memories are short in the airline business but past possible relationships have included Qantas, US Airways and Swissair, plus the disastrous purchase of a couple of French airlines.  In whatever business we have all read the immediate platitudes concerning takeovers or new found partnerships.  But there have been very few success stories.

British Airways has in the past had a reputation for quality and service.  Yes it was “The World’s Favourite Airline” and it still is always a relief to arrive at an airport somewhere around the globe and to see the Chatham flag on the tail plane.  It helps to sell Britain. Any dumbing down will undoubtedly drive passengers away.  By comparison Iberia is poor, its Business Class never receiving any awards, and its Economy cabin not a particularly pleasant experience.  It is for Iberia to go up, not for BA to go down!

At the end of the day it is the commercial part of an airline that is the engine room.  Without passengers nothing will happen.

BA dominates the North Atlantic.  Love it or hate it Heathrow is the gateway for Europe, and the United States too.  Madrid should do the same for the southern oceans but somehow misses out.  South America is a major market for the future.  But will travellers from that continent want to route via Spain?  With the very long range aircraft now available it makes much more sense going direct to Heathrow (or Paris for that matter).  If BA were to put efforts in that direction would an Iberia partnership be needed?

In this issue Tim Clark of Emirates makes the point talking about Africa (see WTM) but the same goes for South America.  “As we started to connect these points, people started to flow in ways that we had not seen before.  More fool those who do not harness what is going on.”  Is BA going to throw away Brazil, Argentine and the rest in return for a few slots to the USA?  Long haul flights make money, short haul, typically the feeds into Madrid, for the most part don’t.

In the past, part of the success of British Airways has been a salesman chairman, backed up by a chief executive who played a more chief operating officer role.  Under the present regime this has not been the case and whilst Martin Broughton is undoubtedly a very successful businessman his part time role has been questioned.  Under the new arrangement he remains, part time of course, accompanied by three other non-executives.  Curiously Antonio Vazquez, Chairman and Chief Executive of Iberia, and Chairman Elect of TopCo, the official name for the merged company came from the tobacco company, Altadis, which was sold to Imperial Tobacco in 2008.  Martin Broughton was Chairman of British American Tobacco until 2004.

Both BA and IB are losing money but the argument that all airlines are in dire financial peril does not stand up.  Air France, Lufthansa and Korean have recently posted positive figures.  They seem to have got it right.

In the main analysts have supported the new tie-up, at least at this stage.  The problem with the city folk is that for the most part they do not understand the nuances of airlines and seem to take for granted the information (spin) being offered by whoever they are scrutinising.  For them only a theoretical bottom line counts.

The new proposed structure is extremely complex but is not unlike AF/KLM which has been largely a success, with Paris definitely dominating at all levels.  Will a British/Spanish partnership work so well?  Who leads?  Madrid or Waterside? Both of the commanders wish to remain in their own castles.

Neither BA or IB have been considered success stories in recent times.  Sir Stelios Haji-Ioannou has described the arrangement as “two drunks that believe they can walk together by supporting each other,” whilst Sir Richard Branson has pointed out that the combined airline would have 44% of Heathrow, conveniently forgetting that Air France and Lufthansa have a higher factor of their hub airports.

The history of Britain over the last 150 years is fascinating.  We lead the world with engineering, railways and ships during Victorian times.  In the 20th century our cars were outstanding for many decades, and the Viscount was the exceptional aircraft of its era.  British Airways (including BEA and BOAC) has been one of the finest air carriers of the last 50 years.  Is it all, like everything else above, going to come to a messy (and expensive) end?  Mr Walsh says the brand will remain.  Mr Royce would be proud of his heritage today.  Let us hope the same can be said in the decades to come of Mr Walsh’s airline.

MALCOLM GINSBERG

Editor in Chief

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BAA raises funds

BAA LTD has taken steps to ensure it has sufficient cash funds to backup its current development plans, which mainly revolve around Heathrow’s T2.  The injection will consist of £200m of new equity from shareholders and £300m from BAA Airports Ltd and FGP Topco Limited, the ultimate holding company of BAA, which is jointly owned by BAA’s three controlling shareholders, Ferrovial of Spain, CDPQ of Canada and GIC Special Investments Pte Ltd, located in Singapore.  BAA now effectively owns six UK airports having recently agreed to sell Gatwick airport to Global Infrastructure Partners for  £1.5bn.  www.baa.com

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Business Travel Show gets new name

THE BUSINESS TRAVEL & MEETINGS SHOW is the new name for the Business Travel Show, which started life in the Business Design Centre Islington 16 years back, moved to Olympia and is now at Earls Court 2.  The show has been reduced to two days and runs parallel with the Travel Technology Show in the same venue.  For both events the dates are 9-10 February 2010. www.businesstravelshow.co.uk

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easyJet and Ryanair battle it out

EASYJET is to increase its Basel Airbus A319 fleet from four aircraft to five next summer following Ryanair’s (FR) decision to close its base at the multi-nation airport from 2 December.  Using a rare opportunity to gloat, easyJet says that this decision will more than compensate for Ryanair’s withdrawal.  No new destinations have been disclosed as yet, the FR routes going being Alicante, Cagliari, Marseille, Porto, Skavsta and Stansted. www.easyjet.com

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Heathrow builder moves on

TONY DOUGLAS, the very personable former Chief Executive of Heathrow, has stepped down as Chief Operating Officer of construction company Laing O’Rourke.  Where he re-appears in the future is the subject of considerable speculation.  An engineer by training Mr Douglas was very much the friendly face of Heathrow Terminal 5 as it arose from a Thames Water sewerage works “on time and on budget”.  He left the employ of BAA some six months before the terminal ingloriously opened. www.laingorourke.com

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Lufthansa and the future of bmi

BMI has a less than assured future according to The Times.  Last Wednesday (11 November) “The Thunderer” was telling readers tales of woe concerning the Lufthansa-owned airline and its future prospects.  It ran more or less the same story the following day for some unexplained reason. The essence was that the new German owners would not stand by the carrier in what everyone calls “difficult times”.  Clearly the value in both financial and operational terms of its 14% of Heathrow slots are not the same as two years ago, but like anything else it is always a question of supply and demand.  A sharp statement by bmi said it has adequate resources to continue operational existence in the future.  www.flybmi.com

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Stansted a worry

BAA has published the October passenger traffic figures for the seven airports it currently owns.  Overall numbers fell by 1.4%, the best performance since June 2008.  Heathrow was up 1% for the same month last year and small increases were noted for both Edinburgh and Gatwick.  Stansted is still the major problem with seats on offer down by 11.7% and actual numbers falling by 10.1%.  The airport is due to be sold unless an appeal is successful.  Glasgow (down 9.2%), Aberdeen (down 8.3%) and Southampton (down 6.4%) also all continued to see passenger traffic fall. www.baa.com

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ON TOUR: World Travel Market

In spite of the gloom enveloping the world’s airlines, especially the less efficient ones, World Travel Market (WTM) has successfully taken place for the 30th time, with people seriously talking about “green shoots”.

Once again the DLR “played up” with a train breaking down at Bank station during the peak period of the first day (Monday) causing problems but to be fair to Transport for London they did have many more operatives around than in previous years, their technique for getting people into the carriages worthy of Tokyo.  It was also apparent that most of the platform extensions along the line are now nearly complete allowing for a 50% increase in capacity, due to be implemented shortly.  The new line from Canning Town to Stratford International, the 2012 Olympic site, is clearly nearly complete.

In truth WTM is now more of a leisure travel fair than a “not to be missed” business travel opportunity.  The halls were full with both stands and people but for the most part the major airlines gave it a miss.  Some 40 carriers were listed but rather than exhibiting on their own they mostly formed part of a National stand, typified by Kingfisher,  part of the Indian Tourist Board consortium.  On display was a Formula One car and beer was in full supply too!

London Mayor Boris Johnson opened WTN by highlighting how tourism and travel can bring people together in shared appreciation and understanding.  In reference to the Olympic Games, Johnson stated that he was optimistic about the impact of the Games and wants to use the £9.3bn investment to boost bits of London which have been neglected for ages.  He also brought attention to the benefits of tourism, saying that it would not be short term but will benefit the city for years to come, with the enormous infrastructure project being the biggest change to London’s infrastructure in over 70 years.

Continental’s new BusinessFirst

By far the most important airline event was the unveiling of Continental’s BusinessFirst flat seat module with Senior Vice President (Sales) Dave Hilfman coming over specially from Houston for the event.  It is a very well thought out unit, perhaps not as extravagant as some of the offerings from the Middle East carriers, but clearly very efficient in offering all that is needed on long haul overnight flights.  The seats could well be seen on the airline’s regional 757 routes out of Newark to Birmingham, Bristol, Manchester, Edinburgh and Glasgow before it is fully implemented at Heathrow and the 777. 

Continental emphasised that the very recent joining of Star Alliance was already having an effect with the airline probably announcing a fourth Heathrow – Newark frequency for next summer.  The move from Gatwick to Heathrow had been a big success.

With Emirates and Etihad again with massive stands Oman Air’s more modest offering showed a very well thought out Business Class seat, one which many carriers would have been proud of in First. 

Parallel to the show is always a whole series of travel related seminars held in the labyrinth of rooms that is all part of the Excel complex.

The air travel component was headed by John Strickland, now a consultant but whose CV includes British Caledonian, British Airways, KLM uk and Buzz.  John lead discussions with Emirsyah Satar, President and CEO of Garuda, who are now back into Europe, and chaired an environmental panel which included Richard Vaughan, Divisional Senior Vice President, Commercial Operations Worldwide, Emirates; Dr Andy Jefferson, Head of Environment, BAA Stansted and Dr Callum Thomas, Manchester University.

Tim Clark and Emirates

However the star of the week was Tim Clark, a resident of Dubai for 24 years and President of Emirates Airline.  His theme was that air carriers must develop new routes in emerging economies if they want to survive.  “Africa is an enormously powerful and potentially very strong continent.  The Chinese influence in Africa is more obvious,” he explained to a packed audience.  “As we started to connect these points, people started to flow in ways that we had not seen before.  More fool those who do not harness what is going on, including the European carriers.”

Clark warned that those who were “disingenuous” about Dubai’s growth – particularly the UK press – “do so at their own peril.”

“It is an open economy and suffered in the recession.  We have taken stock and slowed down but watch this space very carefully,” he explained.  As well as its key geographical location and hub operation, Emirates’ results have been boosted by a programme of cost cuts and lower fuel prices.

Clark said Emirates will close the financial year significantly up on previous profit forecasts, thanks to the quality of its brand, a fall in the oil price and favourable exchange rates.

Seat factors remain “in the 80% region” albeit with a lower yield per seat and the carrier has taken 16% off its unit costs, thanks to a recruitment freeze and efficiency drive.

He also questioned the value of airline alliances and warned that the recession should not be a “smokescreen” that allows consolidation and anti-trust immunity to be granted to rival airlines.

Another welcome guest at a session was Emirsyah Satar, President and CEO, of Garuda Indonesia, who seems to be well on the way towards turning around a once “basket case” into a top class airline.  Already planning to re-introduce a Jakarta – Amsterdam service he spoke of safety approvals restored, and fleet renewals with Airbus A330, Boeing 737-800 and 777.  He wants to improve the product and says with the Indonesian economy looking up all the targets should be achieved.  As he pointed out Indonesia has a population 240m making it it is the world's fourth most populous country.

In another session Caroline Bremner, Head of Travel and Tourism Research at Euromonitor International, said Low Cost Carriers (LCC) accounted for 22% of the market in 2008 but that would rise to 25.4% in 2010.  Strickland pointed out that with certain European markets the LCC penetration was even higher, reaching 35-40%, although he pointed out that in the case of BA it was boosting load factors by taking out capacity from its fleet.

“Legacy carriers are seeing a structural shift because of the loss of their most profitable passengers paying premium fares – these have declined about 14-15%,” he said.

WTM took place prior to the BA/Iberia announcement and therefore, whilst noted at the time, the lack of appearance by Willie Walsh can be forgiven.  Perhaps not so BA itself although very senior individuals from the airline were noted looking around.  Walsh did appear in video recorded during the what was termed “The Global Economic Forum” noting “The turmoil in the financial services had a direct impact on numbers in our premium cabins.”  Hardly mind boggling news.  The BA vote by cabin crew today (16 November) over strike action regarding pay and conditions was a topic much discussed.  Would passengers look elsewhere for their pre-Christmas travel. www.wtmlondon.com

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