Friday, 4 November 2011

IAG/BA Bid for BMi. - A "must do".

BA watchers will be delighted to see that, if nothing else did it, UK Secretary of Transport, Justine Greening's statement last Monday that the proposed new 3rd runway at Heathrow is dead and buried has jolted IAG/BA into doing the only thing it can do to avoid continuing into further progressive relative decline. The holding company is bidding to buy failing BMi from Lufthansa who rather extraordinarily have always looked strangely short of ideas about what to do to reverse its aquistion's steadily and alarmingly increasing losses.Big bold moves and a possible move to strong Lufthansa or Lufthansa UK branding was expected but never happened.

BMi's wandering in the wilderness has continued with little sign of direction since the airline's founder and builder, Michael Bishop, bailed out by forcing the sale to Lufthansa. Since abandoning the simple British Midland tag, the brand has been weak in most respects and it has never really set out its stall as to what it really is. When relaunched as BMi most thought that it meant British Midland International. Strangely the airline denied this and said it didn't mean anything at all,-they were just nice initials. Its new light and lighter blue corporate scheme was nebulous and weak and the name BMi almost invisible and that became the character of the airline. Its trans Atlantic ambitions were never realised and its costs were high, a toxic and depressing mix. Although some redundancies are inevitable, BMi's remaining staff and particularly its pilots if they can obtain anything like the deal their Cityflyer Express colleagues obtained when taken over by BA in 2000, should be happy enough to be absorbed into BA despite the very different and not unproblematical big company culture they will now be entering.

For BA, the big prize for the modest outlay said to be around £300 million, is BMi's 53 slot portfolio which would take them and Iberia from 45% of the Heathrow total to around 53%. The inevitable shouts of "not fair" and "anti competitive" are already coming from the Virgin quarter and from others who don't like the idea of a dominant home based carrier, would like a few of those slots themselves or just see a weaker, more fragmented industry as more likely to deliver cheaper fares. The latter group have little to fear as even with 53% of total slots , IAG will still face enormous competition from an array of direct and high and better service quality sixth freedom alternatives on every significant route. A larger Virgin Atlantic,for some time touted for sale, would become more attractive. However as most of its own current activity duplicates the fatter bits of the BA network ,an expanded company would probably add little to the UK's overall strength in the air transport business notwithstanding the fact that the BA brand is not in fact British owned.

Taking over all or the core of BMi won't be all plain sailing for BA. It will need a very clear idea of how best to reorganise and absorb its new aquisition and its people and how to deploy the slots. Rebuilding its seriously depleted Asian coverage, substantially abandoned during the Ayling era, should be a priority but this will need the right aircraft in the right configurations. BMi's Middle East and African networks also fill a gaping hole in BA's portfolio and many of the routes could suit the substantial order for B787s,-particularly the -8,- very well indeed. If the Competition Regulator becomes involved they should stipulate that agreement to the takeover requires a guarantee that a percentage of the slots gained must be used for these routes rather than adding to BA's already disproportionate dependence on serving the USA.

The other problem for BA will be finding the managment expertise initially to run and then quickly absorb its new aquisition. The shadow of the Dirty Tricks allegations has hung over its corporate culture for at least twenty years and blunted its competitive approach to business. As result it has been the giver in the One World alliance and, amongst other things, more or less abandoned Australia and South East Asia to Qantas and North East Asia to Cathay Pacific, instead focusing even more disproportionately on the Atlantic as its core business. Alliances and codeshares are all very well but the fact is that seats sold on the partners earn only tiny commissions and in no way equate to sales on any member's own services. BA and other major hub based worldwide airlines probably did better in the world of IATA interline ticketing and fares than in the new more restricted world of alliance member to alliance member connections where 40% or more of their home hub's potential connecting business may be unavailable to them as it is ring fenced by rival alliances. There is little of the former free flow traffic where the operator with the biggest network or highest frequencies disproportionately took most of it. Strategically the major carriers should have avoided alliances and codeshares like the plague but most were seduced by them and as result lost a lot of their fire power. Tim Clark of Emirates in a recent interview by Airline Management says that they have been absolutely clear about the risk of losing their independence and ability to compete in their own right and have been determined to avoid it. With at least 40 new slot pairs to play with, assuming they have to give some away, BA has a one off opportunity here to reassert itself and its own interests. It will need a culture change and some highly competitive, probably new,tough and internationally minded strategy driven people to achieve that. It has to do it or its future is elsewhere.

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