Tuesday, 28 September 2010

Not so Global Brand?

Last Sunday's papers carried an eyecatching full page ad announcing a tie-up between the rapidly growing Etihad and the three Australasia Virgin-related airlines,Virgin Blue, Virgin Pacific and V Australia. It showed graphically the extended reach into Australia and the western Pacific that the arrangement gives Etihad. A clear and useful message, but wait a moment, how does this read with Virgin Atlantic who operate a daily London-Sydney flight in direct competition with Etihad? Wouldn't one have expected strong promotion of all four Virgin branded airlines flying in formation rather than the three Australasian brands standing with their arms around a very effective and fast growing competitor?

On the subject of new generation Australasian airlines, a recent observation of Virgin Blue cabin crew pausing at an airside coffee stall en route to their first flights of the day was illuminating and cheering. Bright young people, pleased to see each other. Lots of chat and cheerful expressions. They were out to have a good day which meant a good day for the customers too. Not a mutter about " Managment, rosters, "imposition" and the like. They will fit well with the high standards of on board service provided by the Gulf airlines.Together they have an attractive and powerful customer proposition.Others beware!

Sunday, 26 September 2010

Spanish Omelette

Press Reports last week carried the news:"Iberia agreed not to block the merger with British Airways after reviewing BA's pension recovery plan".

How good of them.Very considerate.Surely they can hardly wait for the two companies to be wrapped into one Spanish omlette, the 60/40 holding company?

Amazingly ever since the merger was first mooted there has hardly been a bleep of a query, let alone a challenge from "analysts", BA's shareholders or anywhere else. Many have fallen over themselves to praise its supposed merits and not an eyebrow has been raised. The line has been that this is a "must do" as it opens up wonderful opportunities for BA without which the company will be lost for ever.

Why? Why? Why?

Let's examine the entrails more closely.

Until the 1990s, BA had the world's most extensive international network bar none. Its range of destinations and frequencies made it "The World's Favourite Airline" in terms of passengers carried across international borders, even though its service levels and style were hardly ever "favourite" particularly from the day Malaysia-Singapore Airlines started flying to London in the late 1960s.Bit by bit this network dominance has been imitated and eroded by the growth of codeshares (one of the greatest customer cons of all time but we will come back to that another day), frequent flyer programmes and more recently alliances, all things which the airline should have strenuously fought against from the outset.

There have been possible mergers which would have made good sense for BA, notably the twice aborted one with KLM, its most natural partner. KLM fitted in nearly every way, culturally,geographically and networkwise. Amsterdam and London are near neighbours, just an hour apart.Flowing transfer business between pleasant easy-to use-Schipol and BA's excellent Heathrow Terminal 5 is simple. Just look at a map.

Seemingly thanks to a breakdown in the chemistry between BA's Chairman Lord King and then CEO Sir Colin Marshall and the KLM leadership who saw them as arrogant ,KLM eventually went off with Air France. Lufthansa, the other big hitter in Europe, is far too independent minded and has ploughed its own furrow in expanding through aquisitions, not mergers.

Iberia, with its main base Madrid in the south west corner of Europe sits two hours from Heathrow and away from the shortest routes to anywhere apart from Europe to South America and southern Europe and parts of Africa to North America.Flowing business from the UK and central/northern Europe to other places in the world via Madrid means extra time spent en route while competitors flying nonstop will be well on their way home by the time the BA/IB option is back in the air again from Madrid. Why, other than a lower price, would anyone choose the indirect option? Talk of great new network opportunities therefore looks over optimistic. What is Iberia's network? Very good to Spanish speaking and USA orientated South America but BA covers the main cities nonstop from London anyway. A bit to North America and a lot all over Europe from Spain. South America is interesting but is unlikely to be big in terms of BA's network needs in the next ten years.Why would BA be interested in a share of Iberia's European routes? Do they make a lot of money? Unlikely as they are up against shoals of low cost and charter carriers. Why put BA's much more profitable long haul routes into a revenue pool in exchange for a share of that and primarily Iberia's business to South America?

What then does Iberia bring to the party in efficiency, costs,innovation, product or service style? Something new and dynamic that BA desparately needs or is it just a distraction? Iberia is a legacy carrier, unionised,not low cost, not known for outstanding service and has a limited international network. Would the merger bring most Spanish business heading to other destinations to travel via Heathrow,- and is there a lot of it? In relative terms it looks unlikely and how much is there to play for in total? Silence.

There is cheerful talk of huge management,overheads and joint purchasing savings from the merger.Several hundred million a year even after BA's own slimming purges. Well exactly where? Already both carriers will have been big enough to get the best purchasing deals available and the other savings are notoriously difficult to achieve through mergers .They should not be taken as guaranteed.

Very simplistically, just take BA's financial results and combine them with Iberia's. Look at the revenue of both companies,deduct the costs, add in some inefficiencies and cost increases of a 2 base operation, throw in some identifiabhle savings and then split the result 60/40. What does the current BA gain as a return per anything from the new joint holding company? How does this compare with what BA could achieve if instead of a merger it spent its management resources,time, energy and money sorting itself out, making its products and style second to none and resuming profitable growth,- while retaining control of its own destiny?