A SELECTION OF DEVELOPMENTS REPORTED IN SEPTEMBER 1999

In September 1999 the Millennium was but a few months away. There were still concerns about the possibility of ‘bugs’ in legacy IT systems and war in the Balkans provided a sombre backdrop to European affairs.

Within the airline industry SAir was still flexing its muscles and State owned Air France was only just beginning to enter the global alliance game. Within the EC a change of commissioner promised both a new start and confirmation of environmental and customer driven agendas that are still in progress.

In most airlines a period of cost cutting continued, with capacity and therefore staff cuts: a pursuit of higher yield fares, and a growing concern that the low cost airlines were continuing to capture market share.

In this context airlines were changing their top management with some frequency and increasingly, as in the case of British Airways, it was perceived commercial acumen that was the determining factor.

A personal snapshot of selected events in this period is as follows:

• The new Transport Commissioner for the EC, Loyola de Palacio, was questioned by Members of the European Parliament. In her written submission and in the consequent discussion Ms. Palacio identified five key objectives for transport in the EU. These were:

  • Better functioning of the internal market in the interests of the efficiency of the system

  • Increased investment in infrastructure including intelligent transport systems

  • Improving the integration of transport in all regions and inter-modally

  • Reducing the adverse impact of transport on society, particularly in the fields of safety and the environment

  • Making the EU more effective in defending its interests in bilateral and multilateral relations.

• Several key points that emerged in this discussion were:

  • Senora Palacio confirmed that she supported plans to base infrastructure costs on marginal social costs. This confirmed that the EC intended to include environmental costs within any pricing structure.

  • The commitment of the EC to reducing air traffic delays through reform of air traffic control, including the proposal to effectively transfer sovereignty for ATC to Eurocontrol

  • The new Commissioner’s determination to pursue the proposals formulated by her predecessor (Neil Kinnock and first mooted by his predecessor Karl van Miert) to develop an effective European negotiating mandate for international air service agreements

  • Her determination to protect passenger rights by Europe wide regulation

  • The priority the EC were giving to proposals on the air transport and the environment in advance of the EC Environment ministers meeting in Helsinki: these to include the recognition of all costs, reduced emissions, and the promotion of environmentally-friendly modes of transport.

• Meanwhile the summer of 1999 had seen worsening air traffic control delays, where creaking infrastructure and staff shortages were compounded by restrictions on flights over the war zones in the Balkans.

• The major airlines all reported a significant deterioration in operating profits over the late summer. These were explained as due to:

  • Significant capacity increases on most routes, especially the North Atlantic

  • Evidence of premium passengers trading down by cabin and by fare type

  • A continued increase in passengers carried on Ryanair and easyJet on low fares

• In addition the summer had seen

  • A reluctance by airlines to enter markets vacated by majors despite EC decisions on alliances making slots available on supposedly attractive routes

  • The demise of AB Airlines and concerns over the financial strength of Debonair and Air One

  • EC approval for the takeover of AOM of France by SAir.

• The EC finally approved the alliance between KLM and Alitalia

  • In order to secure agreement the two airlines agreed to make up to 224 weekly slots available to new entrants on the Amsterdam-Rome and Amsterdam-Milan routes and to then reduce their own capacity to ensure other airlines could gain 60% of the route capacity

  • Encouraging the two airlines to predict that they expected to merge within three years – subject to resolving nationality clauses in current bilaterals, and the Alitalia persuading the EC to remove financial restrictions placed on Alitalia as conditions for its receipt of state aid.

  • Leading to a new marketing position of “one ticket to the world” to compete with the Star, Oneworld and Qualiflyer alliances.

• The EC reported that further Spanish state aid for Iberia, in addition to previous aid paid in 1996, was acceptable as the act of “a rational investor” and this aid would now place Iberia in a position comparable to its competitors and able to prepare for full privatisation. This decision was interpreted as clearing the way for similar state investments to be made to Air France to prepare it for privatisation.

• The EC blocked Airtours proposed acquisition of First Choice Holidays (previously known as Air 2000) on the grounds that this would leave only three vertically integrated companies (Airtours, Thomson and Thomas Cook) dominating the market.

• The UK and the USA failed to make any progress on a proposed new bilateral to replace the Bermuda 2 agreement – which restricted access to London Heathrow to two US airlines.

  • Little further progress was then expected until after the forthcoming US Presidential election

  • Part of the context for these talks was the decision by the EC to refuse approval of an anti-trust agreement between British Airways and American Airlines unless the two airlines surrendered slots on key routes; which they refused to do.

• The Oneworld Alliance continued to expand with Iberia and Finnair formally starting operations within the alliance, but key member Canadian Airlines was seen to be struggling.

• British Airways reacted to lower profits and a declining share price by:

  • Reducing planned capacity growth

  • Continuing its “Business Efficiency Programme” of cost cutting

  • Forcing up yields by reducing seats available for economy fare transfers

  • Strengthening hub operations and investing in new cabin products

  • Maintaining investments in other markets through dba and Air Liberte and competition in the low fare sector through Go

  • Continuing to attack ‘unfair subsidies’ paid to Alitalia, Air France and Lufthansa

• Air France was also taking action to grow an international alliance. It was looking to build on its partnership with Delta Airlines by talking with Aeromexico, British Midland, South African Airways, Tunisair and Meridiana.

  • But Air France was ‘disappointed’ that Austrian elected to join the Star Alliance

• British Midland confirmed that it was discussing the sale of a significant equity stake, with the Star Alliance airlines reportedly the most interested because a stake would give them greater access to London Heathrow airport.

• Despite a downturn in reported profits the SAir group was also interested in investing in British Midland, although it was also in discussions about investing in Malev and LOT.

  • SAir was therefore continuing to pursue a multiple investment strategy with investments in airlines over the previous two years including in: Air Portugulia, Air Europe, Air Littoral, AOM, Air Volare, Cargolux, Crossair, Panalpina, Sabena and TAP.

  • In addition the group had taken stakes in Dobbs (airline catering), LTU/LTT (tour operator and charter airline), and BA Catering.

  • The SAir Group was at this time probably the most diversified airline group in the world and in addition to the airline has three other divisions;

    • SAirServices – ground handling

    • SAir Logistics – freight forwarding and cargo

    • SAirRelations – in-flight catering, sales and hotels

    • In addition the charter and regional airlines expertise was grouped in the European Leisure Group.

© The Management coach-house Ltd. 2009