A MAGAZINE FOR AIRLINE EXECUTIVES 2006 Issue No. 2 t a k i n g y o u r a i r l i n e t o n e w h e i g h t s the global AdvocAte A Conversation With... Giovanni Bisignani director general and CEO International Air Transport Association page 38 I N S I D E 6 g overnment regulations affect globalization 42 l atin American carriers grow regionally 50 AirAsia overcomes challenges to its t hai-based subsidiary 2009 Sabre Inc. All rights reserved. wearelistening@sabre.com
PUSHING THE BOUNDARIES Photo by Philippe Noret/AirTeamImages.com 18 ascend
When the European skies were deregulated beginning 19 years ago, some experts predicted the move would open a world of possibilities for airlines and travelers. Has the reality met the expectations? By Richard Castle Ascend Contributor,N ow boarding, British Airways flight 999 to Marseille, comes the announcement at Charles de Gaulle Airport near Paris, France. All passengers please proceed to gate 10. Fifteen years ago, in a March 1992 article titled EC Plan to Loosen Air Travel Gains Speed: the Sky is Falling in Europe, the International Herald Tribune predicted such announcements a foreign flag carrier flying domestic routes in another country would soon be common. The liberalization of air traffic in the European Union had begun in 1987. By 1992, there was considerable interest in the third package of the program, namely cabotage, or the eighth freedom of the air, that would allow airlines of one country to fly domestically within another country. Cabotage put in a nutshell the broader changes taking place in the European single market companies that had for many years plied their trade within and from their home market could compete openly in a completely different country. The belief then was that this package would quickly increase competition among airlines, thereby delivering a wider choice of carriers, lower prices and better service on domestic routes. Those who looked forward to soon enjoying, for example, Lufthansa s service on a flight between Rome and Milan, Italy, would be disappointed. Nothing much changed through the mid 90s. The International Herald Tribune continued to bang the drum in an article in March 1997 to coincide with the completion of the deregulation in Europe. It lamented that many airlines still are not fully taking advantage of the freedoms they acquired in 1992, such as cabotage rights in foreign countries. How has the air travel market in Europe changed since 1997? It s clear that the changes have been gradual, with false starts, U-turns and experimentation over the years. Only now, nearly 20 years after the process started, is it becoming clear how the market is developing, and in such a way that, at the beginning, was not anticipated at all. Early Moves by European Flag Carriers First attempts to take advantage in a deregulated environment happened early, and they were very much in line with the original thinking. British Airways was a prime mover in this respect. In 1992, it In 1992, British Airways acquired a 49 percent stake in a local German carrier called Delta Air and renamed it Deutsch BA, one of the first moves by a European flag carrier to take advantage of the newly deregulated airline industry in Europe. Five years later, BA took a majority stake in Deutsch BA. However, after years of losses, BA sold the airline, which is now known as dba. identified Delta Air, a regional airline based at Friedrichshafen, Germany, as a vehicle for its plans, acquired a 49 percent stake, and renamed it Deutsche BA. In 1997, it bought the remaining shares when the final package of European deregulation permitted British Airways to take a majority stake. In parallel with its efforts in Germany, British Airways made similar moves in another major European market France. In 1992, it bought 49.9 percent of French carrier TAT, completing the purchase in 1996. At the same time, the carrier invested 630 million (US$122 million) in another French carrier, Air Liberte. Nearly 10 years after the deregulation process had started, British Airways had delivered on the early promise of European liberalization it was flying domestically within Germany and France and competing head to head with Lufthansa and Air France on routes such as Frankfurt-Berlin, Germany, which until then had been the preserve of the German national carrier. Would this be the opportunity for British Airways to successfully plunder the most lucrative domestic city pairs of its main competitors? If British Airways considered it important to push the boundaries of European deregulation, there was little appetite to do so from other major European carriers. Lufthansa started to sell aggressively priced tickets between Marseille and Bordeaux, France, as part of an operation originating in Munich, Germany, but this was about the extent of it. Perhaps the reluctance of the continental European flag carriers to follow in the footsteps of British Airways was well founded. Indeed it proved to be so. The arrival of Rod Eddington as British Airways chief executive officer heralded a major review of the airline s strategy in Europe. Photo by Derek Pedley/AirTeamImages.com ascend 19
Although British Airways subsidiaries were competing strongly against Lufthansa and Air France and had a share of close to 40 percent in the German domestic market, they were generating substantial losses. British Airways was persuaded that its cabotage experiment had failed. In 2000, Air Liberte and TAT were sold to the Swissair Group, and after an unsuccessful attempt to sell Deutsche BA to easyjet, British Airways finally closed the door on its unhappy experiment to fly domestically in Germany in mid 2003 with the sale of its German subsidiary to the Intro Group. VLM: a Notable Success British Airways acquisitions in Germany and France represent the only attempt by a major European flag carrier to challenge another in its home market. And it failed. But, in this decade, there is one notable successful airline in the traditional/hybrid space and its efforts have been remarkable. That airline is VLM, a Belgian airline based in Antwerp. Since its creation in 1992, VLM spent the 90s predominantly building services from a variety of airports in Benelux into London City Airport. By mid 2002, it had a sizeable presence at London s niche airport. This gave it the sound base to take advantage of the liberalized air market. In September 2002, it started flying several times a day between London City and Manchester, England. For a small Belgian airline, this was a brave and momentous step. Here, finally, was a foreign-registered airline competing head to head against British Airways and bmi on the London to Manchester route, giving customers significantly more options than they had for many years. And since then, VLM has expanded its U.K. domestic flying to include Liverpool, England; Jersey and the Isle of Man from London City. LCCs Embrace Cabotage As VLM built a steady bridgehead at London City during the early years of the 21st century, domestic flying in other areas was moving ahead quickly. In 2001, low-cost carrier Ryanair created its first hub in continental Europe in Charleroi, just south of Brussels, Belgium, and easyjet was quick to follow. As of the middle of the year, both Ryanair and easyjet had 16 bases around Europe. Neither show any signs that they will slow down this expansion. From the start, both low-fare airlines have used these bases to fly domestically as well as abroad Milan to Naples, Italy, Paris to Toulouse, France. Neither airline would refer to this flying as cabotage such an oldfashioned term would not fit their style but that is what it is. Liverpool Southampton Jersey Manchester London City Hamburg Amsterdam Rotterdam Antwerp Brussels Luxembourg Photo by Danny Hill/WorldAirlineImages/Airliners.net Photo by Martin Krupka/Airliners.net VLM Airlines, based in Brussels, Belgium, capitalized on the deregulated European market to build a hub at the London City Airport, from which it flies to 11 destinations in Benelux, the United Kingdom, Germany and France as well as the crown dependencies of Jersey and the Isle of Man. U.K.-based flybe has discussed setting up additional bases of operation in other E.U. countries such as Spain and France from which it would fly mainly domestic routes. More recently, Air Berlin has followed, building bases outside Germany, from which it does some significant domestic flying. From London Stansted Airport, it flies to Manchester, England, and Glasgow, Scotland not only competing with British Airways and bmi but also easyjet and Ryanair. And this pattern looks as though it will continue: recently, United Kingdom-registered flybe has talked about establishing up to five bases in either Spain or France, where it might station up to 20 aircraft to fly on mainly domestic routes. Lessons Learned What can be deduced from the various attempts at cabotage during the past 15 years? From the outset, many said that shortage of slots at major congested airports in Europe would prevent new entrants from entering. But there is no evidence to suggest that this was in any way a contributor to British Airways problems in Germany and France. It had the necessary slots at major German and French airports via its subsidiaries. Operating domestically, neither Deutsche BA, TAT nor Air Liberte could integrate into British Airways major Heathrow hub. As the economics of network carriers are to a large extent based on generating transfer traffic, this was always going to be a problem. Although British Airways couldn t make it work in France or Germany, in a ground-breaking move, Air Berlin is building a transfer hub at Stansted to create feed from its Manchester and Glasgow services, thereby improving the chances for profitability. This is important because it represents a morphing of the traditional low-cost model, which says that airlines should steer clear of transfer traffic because of the complexity and cost that it adds to their operation, into a more hybrid space. Critical mass in another s market can be enough to give an airline a chance of succeeding. VLM may not expect feed onto its U.K. domestic routes from the rest of its network, but as the largest airline operating at London City Airport, it has gradually built a strong level of awareness that itself adds further momentum. The same applies to easyjet and Ryanair it does not take long for the local 20 ascend
Highlight brand recognition is enormously important, and there is clearly a big risk in exporting a brand overseas. market to become aware of their wide range of destinations when they open a new base. Mike Rutter, chief commercial officer at flybe, understands this, too: To start with one base [in Spain or Germany] would be irrelevant. We d be picked off too easily, so we d start with at least two. Maatschappij. A past advertising campaign in the United Kingdom asked, Do you speak VLMish? a play on its Flemish links may well have worked for customers wanting to fly to Benelux but is unlikely to resonate with a Liverpool businessman needing to visit a client in London s Docklands. Brand awareness is obviously closely linked to distribution strategy. If an airline wants to sell predominantly via the Web, then it can t rely on travel agents to get its route network across to potential customers. And element in the mix in-flight product. Serving full, hot English breakfasts would appear to be a master stroke in linking itself to the local market. In the end, an aggressively low cost base probably guarantees success more than any other element. Is dba really that much different in any of the above respects than its predecessor, Deutsche BA? Yet, in the financial year ending March 31, 2005, dba announced its first profit since creation in 1992. It appears to have a rosy future, with 40 next-generation 737s on order and 500 new jobs created, enabled by a profitable cost base. So what of the International Herald Tribune s 1992 prediction that British Airways would one day compete with Air France between Charles de Gaulle and Marseille? Perhaps it is disappointed this hasn t happened and likely never will. But it can be satisfied that it foresaw correctly that there would be competition with Air France between Paris and the south of France (easyjet to Nice), that it Photo courtesy of oneworld Photo by Tobias Rose/AirTeamImages.com Air Berlin has been building bases of operation outside its home country of Germany in an effort to improve its profitability. The airline is building a transfer hub at London s Stanstead Airport to create feed from Manchester, England, and Glasgow, Scotland. A shortage of slots at major congested European airports, such as London s Heathrow, has been identified as a possible stumbling block to further liberalization of the region s air transport industry. Creating Brand Awareness Increased awareness might be possible by adding volume in the hub, but whatever the size, brand recognition is enormously important, and there is clearly a big risk in exporting a brand overseas. Even if potential customers based in Glasgow have heard of Air Berlin, what are the chances they will consider the airline for a flight to London without the airline spending vast amounts of communication cash on getting that particular message across? Non-geographical, non-national names (easyjet or flybe for example) would be expected to fare better it s not surprising that VLM builds brand awareness in the United Kingdom based on its acronym rather than its full name Vlaamse Luchttransport if the Web is the main sales channel, to what extent can the airline rely on the online brand strength in its home market being replicated far from home? Flybe may well be able to sell 85 percent of its U.K. domestic seats via its Web site, but if it starts flying domestically in Spain, it will certainly need the help of the global distribution system to distribute its product widely enough to fill those seats. If Air Berlin struggles to generate traffic from Glasgow or Manchester to London because of the implication it flies to Germany, it demonstrates the importance of another was indeed British Airways that paved the way for this situation via its experimental acquisitions in the 90s, and that today we have a much better idea than we did then of what is the likelihood of success for those airlines that desire to challenge others in their own back yard. a Richard Castle is an account director for the Sabre Airline Solutions business with responsibility for airlines in the United Kingdom and Benelux. He can be contacted at richard.castle@sabre.com. ascend 21