The Global Advocate a Conversation With
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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 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 airlines and travelers. Has the reality met the expectations? Photo by Derek Pedley/AirTeamImages.com 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-Berlin, 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 Munich, 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. ascend 19 industry 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 London 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 Antwerp. 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 Photo by Martin Krupka/Airliners.net Manchester Hamburg 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 London City Airport, from which it flies to U.K.-based flybe 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.