ECONOMY CLASS

British Airways is considering launching a low-cost airline to stem the rise of budget operators. But with staff already up in arms over new pay and conditions, can it slash its costs enough to compete?

In the past four years 88 airlines have been set up across Europe. More than 30 have subsequently gone bust. So when British Airways says it has hired advertising agency HHCL & Partners to study the “emerging European leisure air travel market” and research the emergence of low-cost carriers, it is the success of those 56 surviving airlines – the sort of low-cost, no-frills airline which BA has previously derided as operating for “peanuts” – that it is interested in replicating.

The revelation comes only weeks after BA spent 60m on rebranding its existing fleet – a move design-ed to stress its upmarket global position.

The objective of the HHCL study is to give BA a clearer idea of what kind of brand it needs to succeed in this “no-frills” market. And while BA stresses that it is only at a very early stage of research into the possibility of launching a new airline, it is recognition that, along with other traditional airlines, it is feeling the pressure from these new rivals.

The European airline market has been in the process of gradual deregulation for the past two years. The aim is to make it easier for new airlines to set up by allowing greater access to the continent’s airports and opening up the number of slots available for take-offs and landings.

The 56 airlines which have survived tend to share a number of similar characteristics. First, they use less expensive airports, where competition for slots is less fierce and ground charges are cheaper – easyJet, perhaps the best known UK-based airline of this type, operates out of Luton Airport, for instance.

By reducing the number of aircraft, they can save money on maintenance costs; likewise by selling tickets direct to passengers they cut out travel agents’ commission; but the most noticeable change as far as the passengers are concerned is that many of the airlines don’t provide meals and drinks on flights.

They also aim to use the fewest number of cabin staff allowed by air transport regulations, different indeed from the emphasis on on-board care and service that BA and traditional airlines have long promoted. These no-frills operations also tend to pay their staff less than the established airlines – perhaps the most crucial factor of all for BA, embroiled as it is in an increasingly vicious dispute with its employees over pay and conditions.

A BA director once derided such airlines as operating for “peanuts”, but that accusation sounds increasingly hollow. EasyJet has carried 1.6 million passengers in the past year, while the Irish airline Ryanair, a similarly low-cost operation run by US entrepreneur David Bonderman, floated on the US and Irish stock exchanges in May for $157m (95m) – the listing was 18 times oversubscribed.

But in the same way easyJet openly admits it drew inspiration from the low-cost US carriers which began operating in the Eighties, BA can learn from the situation in the US. Under pressure from new low-cost carriers, leading US airlines like United and Delta decided to take on the interlopers at their own game and launched their own low-cost operations: Shuttle by United and Delta Express.

Ironically, perhaps the best model for BA is Richard Branson’s Brussels-based Virgin Express. Its other airline, Virgin Atlantic Airways, operates primarily as a long haul carrier. And so far the two airlines appear to have successfully maintained separate brand propositions and Virgin Express has shown how much money there is to be made in low-cost travel.

The airline says its growth this year will be in excess of 40 per cent in turnover – last year it was about $200m (121m). Virgin Express was created when Branson bought Euro-Belgian Airlines (EBA) in 1996.

BA already operates extensively across Europe both as British Airways and also in its capacity as full or majority owner of large airlines and some of the low-cost operators it is now studying.

Its current partners include the French-based TAT and low-cost operator Air Liberté, which it is in the process of merging; and Deutsche BA in Germany (in which BA has a 49 per cent stake). In Denmark its franchise partner is Sun Air.

BA is also understood to be in negotiations to buy the Italian airline Air One, a low-cost carrier which has picked up a near 30 per cent share of the lucrative Rome-Milan route, since launching in November 1995 to compete with the state carrier Alitalia.

Airline analysts believe the most sensible course for BA, if it decides to set up a low-cost operator, could be to bring its various franchise operations under one umbrella brand. “It could be done as an extension of its franchise system. After all, in theory, there’s no reason why Deutsche BA couldn’t fly from London to Glasgow now, so why go to the cost and trouble of setting up an entirely new airline when you could rebrand the ones you’ve got?” says one.

The airline has already hinted it might rebrand some of its European operators to make better use of the BA name. “If you were Coca-Cola but had to call yourself something different at first in a new market, you’d probably have a long-term aim of calling yourself Coca-Cola,” says BA director for Europe George Cooper.

There is a clear danger that any new low-cost airline could take business away from the established BA scheduled services. There is also concern that it may damage the existing BA positioning. But BA says it is studying the “leisure” market and the idea behind low-cost airlines is that they bring air-travel within reach of less affluent consumers, thereby building the overall air travel market.

For instance, Deutsche BA’s price cuts over traditional airlines in Germany have stimulated demand by 15-20 per cent on routes between Munich and Hamburg and Cologne – though not markedly on other routes.

Air France, Lufthansa and Alitalia have all suffered from competition from lower cost operators in their sectors. There are, however, indications from existing operations that the lucrative business market is likely to remain loyal to traditional airlines. Virgin Express’ code sharing partner Sabena admits it has lost some business class passengers – unhappy with Virgin Express’ service – to its competitors.

Both Air Liberté and Deutsche BA are moving towards the basic requirements of a low-cost airline. But the first aim will be to make a profit. These French and German subsidiaries lost $111m (67m) between them in the year to March 1996, on top of $270m (163m) in the previous two years. The French airline should breakeven in two years’ time, while Deutsche BA aims to make it into profit in 1998/99, having been in the red since its launch in 1992.

To run a low-cost airline, BA will have to pare costs to the bone, raising the significance of its current staff dispute over pay and conditions. The company wants to cut starting pay and impose a two-year wage freeze – it has already said it aims to save 1bn over the next three years.

At the same time BA is coming under increasing pressure from a new generation of “no-frills” rivals. That is the motivation for its investigation of a second airline. But whatever it may have said in the past, BA will be determined not to operate for peanuts.

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