A MAGAZINE FOR 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 NSIDE

g overnment regulations 6 affect globalization

l atin American carriers 42 grow regionally

AirAsia overcomes challenges 50 to its t hai-based subsidiary

© 2009 Sabre Inc. All rights reserved. [email protected] industry

PUSHING THE BOUNDARIES

Photo by Philippe Noret/AirTeamImages.com

18 ascend industry When the European skies were deregulated beginning 19 years ago, some experts predicted the move would open a world of possibilities for and travelers. Has the reality met the expectations? Photo by Derek Pedley/AirTeamImages.com Derek by Photo

By Richard Castle | Ascend Contributor

ow boarding, British Airways flight 999 to Marseille,” comes the announcement ,N ’ 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 In 1992, British Airways acquired a 49 percent stake in a local German car- Gains Speed: the Sky is Falling in Europe,” rier called Delta Air and renamed it Deutsch BA, one of the first moves by a the International Herald Tribune predicted European flag carrier to take advantage of the newly deregulated airline industry such announcements — a foreign flag car- in Europe. Five years later, BA took a majority stake in Deutsch BA. However, rier flying domestic routes in another country after years of losses, BA sold the airline, which is now known as dba. — 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, identified Delta Air, a regional airline based at Friedrichshafen, Germany, namely cabotage, or the eighth freedom of the air, that would allow air- as a vehicle for its plans, acquired a 49 percent stake, and renamed it lines of one country to fly domestically within another country. Cabotage Deutsche BA. In 1997, it bought the remaining shares when the final put in a nutshell the broader changes taking place in the European single package of European deregulation permitted British Airways to take a market — companies that had for many years plied their trade within majority stake. In parallel with its efforts in Germany, British Airways and from their home market could compete openly in a completely made similar moves in another major European market — France. In different country. The belief then was that this package would quickly 1992, it bought 49.9 percent of French carrier TAT, completing the increase competition among airlines, thereby delivering a wider choice purchase in 1996. At the same time, the carrier invested £630 million of carriers, lower prices and better service on domestic routes. (US$122 million) in another French carrier, Air Liberte. Those who looked forward to soon enjoying, for example, Nearly 10 years after the deregulation process had started, British Lufthansa’s service on a flight between Rome and Milan, Italy, would Airways had delivered on the early promise of European liberalization be disappointed. Nothing much changed through the mid ’90s. The — it was flying domestically within Germany and France — and com- International Herald Tribune continued to bang the drum in an article peting head to head with Lufthansa and Air France on routes such as in March 1997 to coincide with the completion of the deregulation in Frankfurt-, Germany, which until then had been the preserve of Europe. It lamented that “many airlines still are not fully taking advan- the German national carrier. Would this be the opportunity for British tage of the freedoms they acquired in 1992, such as cabotage rights in Airways to successfully plunder the most lucrative domestic city pairs foreign countries.” of its main competitors? How has the air travel market in Europe changed since 1997? If British Airways considered it important to push the boundaries It’s clear that the changes have been gradual, with false starts, U-turns of European deregulation, there was little appetite to do so from other and experimentation over the years. Only now, nearly 20 years after the major European carriers. Lufthansa started to sell aggressively priced process started, is it becoming clear how the market is developing, and tickets between Marseille and Bordeaux, France, as part of an opera- in such a way that, at the beginning, was not anticipated at all. tion originating in , Germany, but this was about the extent of it. Perhaps the reluctance of the continental European flag carriers to Early Moves by European Flag Carriers follow in the footsteps of British Airways was well founded. Indeed it First attempts to take advantage in a deregulated environment proved to be so. happened early, and they were very much in line with the original The arrival of Rod Eddington as British Airways’ chief executive thinking. British Airways was a prime mover in this respect. In 1992, it officer heralded a major review of the airline’s strategy in Europe.

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Although British Airways’ subsidiaries were cantly more options than they had for many Lessons Learned competing strongly against Lufthansa and Air years. And since then, VLM has expanded What can be deduced from the various France and had a share of close to 40 percent its U.K. domestic flying to include Liverpool, attempts at cabotage during the past 15 years? in the German domestic market, they were England; Jersey and the Isle of Man from From the outset, many said that shortage of generating substantial losses. British Airways City. slots at major congested airports in Europe was persuaded that its cabotage experiment would prevent new entrants from entering. had failed. In 2000, Air Liberte and TAT were LCCs Embrace Cabotage But there is no evidence to suggest that sold to the Swissair Group, and after an As VLM built a steady bridgehead at this was in any way a contributor to British unsuccessful attempt to sell Deutsche BA to London City during the early years of the 21st Airways’ problems in Germany and France. It easyJet, British Airways finally closed the door century, domestic flying in other areas was had the necessary slots at major German and on its unhappy experiment to fly domestically moving ahead quickly. In 2001, low-cost car- French airports via its subsidiaries. in Germany in mid 2003 with the sale of its rier Ryanair created its first hub in continental Operating domestically, neither German subsidiary to the Intro Group. Europe in Charleroi, just south of Brussels, Deutsche BA, TAT nor Air Liberte could inte- Belgium, and easyJet was quick to follow. As grate into British Airways’ major Heathrow VLM: a Notable Success of the middle of the year, both Ryanair and hub. As the economics of network carriers are British Airways’ acquisitions in Germany easyJet had 16 bases around Europe. Neither to a large extent based on generating transfer and France represent the only attempt by show any signs that they will slow down traffic, this was always going to be a problem. a major European flag carrier to challenge this expansion. From the start, both low-fare Although British Airways couldn’t make it work another in its home market. And it failed. But, airlines have used these bases to fly domesti- in France or Germany, in a ground-breaking in this decade, there is one notable success- cally as well as abroad — Milan to Naples, Italy, move, Air Berlin is building a transfer hub at ful airline in the traditional/hybrid space and Paris to Toulouse, France. Neither airline would Stansted to create feed from its Manchester its efforts have been remarkable. That airline refer to this flying as cabotage — such an old- and Glasgow services, thereby improving the is VLM, a Belgian airline based in . fashioned term would not fit their style — but chances for profitability. This is important Since its creation in 1992, VLM spent the that is what it is. because it represents a morphing of the tradi- Photo by Danny Hill/WorldAirlineImages/Airliners.net Danny by Photo Krupka/Airliners.net Martin by Photo

Manchester Liverpool Amsterdam London City Rotterdam Southampton Antwerp Brussels Jersey Luxembourg

VLM Airlines, based in Brussels, Belgium, capitalized on the deregulated European market to build a hub at the , from which it flies to U.K.-based has discussed setting up 11 destinations in Benelux, the United Kingdom, additional bases of operation in other E.U. Germany and France as well as the crown countries such as Spain and France from dependencies of Jersey and the Isle of Man. which it would fly mainly domestic routes.

’90s predominantly building services from a More recently, Air Berlin has followed, tional low-cost model, which says that airlines variety of airports in Benelux into London City building bases outside Germany, from which should steer clear of transfer traffic because Airport. By mid 2002, it had a sizeable pres- it does some significant domestic flying. of the complexity and cost that it adds to their ence at London’s niche airport. This gave it From London Stansted Airport, it flies to operation, into a more hybrid space. the sound base to take advantage of the liber- Manchester, England, and Glasgow, Scotland Critical mass in another’s market can be alized air market. In September 2002, it started — not only competing with British Airways enough to give an airline a chance of succeed- flying several times a day between London City and bmi but also easyJet and Ryanair. And ing. VLM may not expect feed onto its U.K. and Manchester, England. For a small Belgian this pattern looks as though it will continue: domestic routes from the rest of its network, airline, this was a brave and momentous recently, United Kingdom-registered flybe has but as the largest airline operating at London step. Here, finally, was a foreign-registered talked about establishing up to five bases City Airport, it has gradually built a strong airline competing head to head against in either Spain or France, where it might level of awareness that itself adds further British Airways and bmi on the London to station up to 20 aircraft to fly on mainly momentum. The same applies to easyJet and Manchester route, giving customers signifi- domestic routes. Ryanair — it does not take long for the local

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Highlight element in the mix — in-flight product. Serving full, hot English breakfasts would appear to be a master stroke in linking itself to the … brand recognition is enormously important, local market. In the end, an aggressively low cost base probably guarantees success more than and there is clearly a big risk in exporting any other element. Is dba really that much different in any of the above respects than a brand overseas. 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 market to become aware of their wide range Maatschappij. A past advertising campaign in 40 next-generation 737s on order and 500 of destinations when they open a new base. the United Kingdom asked, “Do you speak new jobs created, enabled by a profitable Mike Rutter, chief commercial officer at flybe, VLMish?” — a play on its Flemish links — may cost base. understands this, too: “To start with one base well have worked for customers wanting to fly So what of the International Herald [in Spain or Germany] would be irrelevant. to Benelux but is unlikely to resonate with a Tribune’s 1992 prediction that British Airways We’d be picked off too easily, so we’d start Liverpool businessman needing to visit a client would one day compete with Air France with at least two.” in London’s Docklands. between Charles de Gaulle and Marseille? Brand awareness is obviously closely Perhaps it is disappointed this hasn’t happened Creating Brand Awareness linked to distribution strategy. If an airline and likely never will. But it can be satisfied that Increased awareness might be possible wants to sell predominantly via the Web, then it foresaw correctly that there would be com- by adding volume in the hub, but whatever the it can’t rely on travel agents to get its route petition with Air France between Paris and size, brand recognition is enormously impor- network across to potential customers. And the south of France (easyJet to Nice), that it Photo by Tobias Rose/AirTeamImages.com Tobias by Photo of courtesy Photo one world

A shortage of slots at major congested European airports, such as London’s Air Berlin has been building bases of operation outside its home country of Germany in an Heathrow, has been identified as a possible effort to improve its profitability. The airline is building a transfer hub at London’s Stanstead stumbling block to further liberalization Airport to create feed from Manchester, England, and Glasgow, Scotland. of the region’s air transport industry.

tant, and there is clearly a big risk in exporting if the Web is the main sales channel, to what was indeed British Airways that paved the a brand overseas. Even if potential customers extent can the airline rely on the online brand way for this situation via its experimental based in Glasgow have heard of Air Berlin, strength in its home market being replicated acquisitions in the ’90s, and that today we what are the chances they will consider the far from home? Flybe may well be able to sell have a much better idea than we did then of airline for a flight to London — without the 85 percent of its U.K. domestic seats via its what is the likelihood of success for those airline spending vast amounts of communi- Web site, but if it starts flying domestically airlines that desire to challenge others in their cation cash on getting that particular mes- in Spain, it will certainly need the help of the own back yard. a sage across? Non-geographical, non-national global distribution system to distribute its prod- names (easyJet or flybe for example) would uct widely enough to fill those seats. Richard Castle is an account director for be expected to fare better — it’s not surpris- If Air Berlin struggles to generate traf- the Sabre Airline Solutions® business ing that VLM builds brand awareness in the fic from Glasgow or Manchester to London with responsibility for airlines in the United Kingdom based on its acronym rather because of the implication it flies to Germany, United Kingdom and Benelux. He can be than its full name — Vlaamse Luchttransport it demonstrates the importance of another contacted at [email protected].

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