22 JUNE 2009

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Article from BTNews 22 JUNE 2009

COMMENT: British Airways transatlantic gamble

LONDON CITY and GATWICK

At a time when CEO Willie Walsh is calling for staff to work for free British Airways is gambling on a new transatlantic route that at best could be marginally profitable, and will, without question, dilute revenues at Heathrow.  BA is expected to announce imminently fare and schedule details on its innovative twice daily London City – Kennedy New York service, westbound via Shannon.  The route will be flown by 32-seat Airbus A318 aircraft, kitted out in the latest version of the airline’s successful Club World business class featuring a flat bed.

Why do we describe it as a gamble?

Let us start by quickly telling the history of London City Airport (LCY).

When LCY was originally opened by the Queen in November 1987 its principal protagonist, Brymon Airways, was 40% owned by BA, by then privatised.  The airline turned down any deeper involvement but did allow the Plymouth-based carrier to seek a partnership with Air France.  AF remains at the airport to this day acquiring KLM, VLM and CityJet along the way and now accounts for 50% of the airport’s traffic. 

AF has in the past claimed that LCY is very profitable.

In any event, with the upgrading of the airport for full jet operations in 1993 Brymon pulled out, BA itself returning ten years later and has steadily expanded its operation.  The arrival later this year of the exciting Embraer ’e’ series aircraft in BA colours ought to be icing on the cake.  BA now has 25% of the airport traffic, Lufthansa /SWISS taking most of the balance. 

BA did not pursue an interest in purchasing KLM, was rumoured to have been outbid by AF over VLM and clearly, and quite righty, sees LCY as a flagship operation.  AF is of the same ilk regarding the airport and with the A318 already in service was whispered to be putting together a London City – New York operation, although sceptical over costs.  Trial flights in October 2006 proved the concept of the aircraft’s operation and a much needed expansion of the airport’s apron provided urgently needed extra aircraft parking space.

BA jumped in very quickly with the announcement of a New York route and the acquisition of what is a new aircraft designation for the carrier, two Airbus A318s, much to the chagrin of AF.  Now, having burnt its figures with an abortive Heathrow – Los Angeles service, Air France's thinking has probably changed.

For London City Airport a Kennedy route is only a matter of prestige, the numbers very small, the loss of the Manchester service, 50 passengers per rotation and at one time eight flights per day, much more serious.  Yes the airport will sell a little more Duty Free.


The operational scenario


Eastbound the case for London City is easy.  With prevailing winds the A318 can fly non-stop.  Whilst the aircraft is slower than the Boeing 777 the chances of it being put in the holding pattern at LCY are much less than Heathrow and passengers, even with hold luggage, should be on their way within ten minutes of the aircraft actually touching down.  New York to The City could not be quicker.

Only time will tell but westbound, even with the Shannon stopover, it is likely that a passenger originating say in Whitehall would make Wall Street faster via LCY than LHR.  Heathrow T5 is twice as far by road as London City (20 miles v 10 miles).  With strong nerves, and a fully flexible ticket, it is possible to allow less than three hours from your scheduled departure time from Westminster.  By the same token one hour is possible to LCY.  The east London airport offers a 15-minute check-in as against 35 at T5.  But if you miss the aircraft, that’s it.  The alternative is back to Heathrow.

The Shannon fuel stop remains the biggest hindrance to the whole operation.  The airport authorities say that passengers will have to deplane, a completely unnecessary exercise which BA needs to lobby against at the highest US level.  With all the data regarding those on board already to hand it should not take a pair of US immigration officials more than ten minutes to quickly walk through the aircraft and appreciate that the customers are as per the manifest.  Even the seat numbers will be shown.  BA has also failed in its choice of airports at New York.  La Guardia would have made for a far better destination, minutes from Manhattan and already the recipient of cleared flights from Canada.


The commercial case

Who is the biggest competitor for BA at LCY?  And who is the biggest loser?  For both answers it is BA at Heathrow.  The BA fares out of London City need to be very carefully assessed against the full Club World level and could be 20% more.  However prices have dropped dramatically and even BA sells a next day return ticket for UKP2,565.  Even at that level BA at London City will not attract C Class travellers from competing airlines who are charging less than half that price.  The service might interest BA First Class passengers, the loser, again BA.  Without doubt there is a call from Canary Wharf types for the service regardless of the cost.  But how many will that be and once the novelty wears off will they stay committed?  When BA originally did its sums the fares were substantially higher.  Readers might note that Virgin Atlantic is still quoting UKP5,211 for its competing Upper Class and whilst it published a debatable profit for last year the airline has confirmed it will make a loss in the current 12 months.

According to OAG, BA currently has 38% of 6,700 daily seats between London and New York and 57% if you include its oneworld partner American Airlines.  Whatever happens at LCY will make little difference to these figures.


So where now?

The question is does a one class high quality airline work?  Attempts in the US coast to coast have failed and even before the current credit crunch Maxjet (December 2007), Eos (April 2008) and Silverjet (May 2009) have gone to the great hangar in the sky.  It can be argued that L’Avion (now Open Skies) in France was saved by “guess who”, British Airways.  Lufthansa has experimented with various business class only operations in recent years but all that remains is Munich to New York and Frankfurt to Dubai and to Pune (India).

KLM still flies a daily service (every evening – except Wednesday) between Amsterdam and Houston using a chartered Boeing 737 (Privatair) but even here the aircraft offers 44 seats.  SWISS, part of Lufthansa, has a similar operation from Zurich to Newark New York.

It has been proven time and time again that small jet aircraft are not viable, certainly when flown as part of a large mainstream operation.  Lose a group of four in a fully booked 32-seat aircraft and you are talking big money.  Lose the same group with 28 passengers confirmed and you are in serious trouble.  There will be no standby passengers ready to jump on board.  Would you go to London City without a firm seat?  At Heathrow you can miss a flight and very quickly find a substitute service.

BA had a choice.  Let Air France steal a few passengers, win some prestige, and lose money.  Or dive in and attempt to achieve something.  At the time our opinion was that it took the wrong decision and the financial woes of the last six months have not helped matters.

The marketing effort and management time that has gone into the London City operation could have been used far better promoting one of the new Boeing 777 routes, with far more income and much more chance of profitability.  In these difficult times BA needs to be proactive in every sphere.  The airline has quietly dropped its Gatwick – Kennedy flight for the winter leaving that airport bereft of any New York services.

In the latest edition of British Airways News Willie Walsh writes that its (similar) Open Skies operation is not profitable “Whilst Open Skies losses are said to be small we expect that its negative margins are probably not small at all and we would be surprised to see this operation endure as its strategic relevance will evaporate if BA gains anti-immunity trust with American Airlines.”  Last weekend he was busy ‘flying the flag’ talking to his customers at an open London event.  It’s also good to be seen for staff moral.

At the end of the day London City is hardly a speck on the British Airways horizon and the success will make little difference to the bottom line.  Failure will be expensive and not only in financial terms.  Writing in the Sunday Times last week, Irwin Stelzer, the newspaper’s American-based business correspondent paraphrased Gordon Bethune, responsible for the highly successful turnaround at Continental Airlines in the 1990s.  “Take too much cheese off the pizza and you won’t have any customers left.”  BA is working very hard in many areas to ensure its survival.  Gordon Bethune was right. 

Malcolm Ginsberg
Editor in Chief

PS: One remedy.  Throw out the expensive flat seats and go for 80 superior premium economy, Atlantic Special Class.  More flexibility and more income, no heavy passenger tax/duty.  The high yield travellers can still use the Heathrow red eye.  Outbound it does not matter and on the way back it is only a six-hour flight.  Or take the bold decision and delay the service due to the unique economic conditions.  The seats can be used elsewhere and an arrangement come to with Airbus regarding two aircraft which do not fit into BA’s fleet flexibility.

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