Michael O’ Leary, chief executive of low-cost airline Ryanair, certainly has a way with words. His description of the rival Go operation as “a doga chronic lossmaker” which will “not get sold for very much” was a gift of a sound bite. Just the sort, in fact, which will come back to haunt him if his judgement on the matter proves flawed.
So what is the truth about Go, that curiously innovative piece of BA new product development set up two-and-a-half years go? To begin with, O’Leary’s suggestion that it is being sold primarily because of serious losses is either rhetorical exaggeration or wishful thinking.
Competitors in this cut-throat market of wafer-thin margins have always resented the fact that Go was developed under BA’s ample wing – the implication being that it enjoyed unfair advantage through access to the global airline’s corporate treasure chest and prized landing slots. Though this charge has some foundation, it needs to be treated with circumspection. The founder of easyJet was not wholly without financial help when he got started, although in his case it was family, not corporate wealth. Nor was Ryanair, for all O’Leary’s personal input, exactly a backstreet start-up. The important point about Go is not that it has proved an immense financial drain on its parent company (although, inevitably, start-up losses were involved) but that it has become a victim of its own success. Go was set up as a strategic outflanking manoeuvre to combat the increasing number of budget operators taking share from BA’s short-haul operations. In this it has proved effective: it is forecast to carry 2.7 million passengers in the current year on its 20 routes. Unfortunately for its progenitor, ex-BA chief executive Bob Ayling, this not so much knocked out the competition (both Ryanair and easyJet have gone from strength to strength) as opened up the market, cannibalising some of BA’s own business in the process.
With clearer vision, incoming chief executive Rod Eddington has concluded that premium long-haul traffic is the future for BA, and reviewed all its short-haul operations accordingly. Go is not going because it is unprofitable. On the contrary, it has made an operating profit over the first six months of this financial year, and is ahead of target in its three-year plan to break even. It is going because it makes little strategic sense belonging to BA.
All well and good, say the critics, but surely it cannot survive without BA patronage? That rather depends on its destination. BA has ruled nothing out: flotation, management buyout or trade sale. A flotation, however, is expensive, long-winded and precarious and Eddington is a man in a hurry. A pure management buyout may seem desirable to the present Go management team; but it risks being outbid by an interested competitor – and there will certainly be no shortage of these. So the best compromise seems acquisition by a competitor who will respect Go’s independent branding, effective Internet sales operation and strong consumer franchise. Paradoxically, this is most likely to be provided by a rival airline. What the current management must fear most is one of the tour operators cutting the deal. That would most probably result in Go being relegated to an off-the-peg charter operation – something likely to spell disaster for Go’s branding, its positioning as a low-cost scheduled airline, and its current business model.