CityFlyer Express
Encyclopedia
CityFlyer Express was an independentindependent from government-owned corporation
s, short-haul regional airline
with its head office in the Iain Stewart Centre adjacent to London Gatwick Airport
in Crawley
, West Sussex
, England
.
In 1993 it became the first British Airways
(BA) franchisee
operating as British Airways Express. CityFlyer's ownership passed to BA in 1999 when that company bought out the original promoters as well as 3i
, the airline's main shareholder at the time. Initially, CityFlyer continued to operate as a separate unit, but it was eventually absorbed into British Airways' mainline short haul operation at Gatwick
in 2001, the result of a change in British Airways' strategy for its Gatwick operation.
Following its absorption into British Airways, the airline's turboprop
s were retired, while the company's fleet of regional short-haul jetliners
and the associated crews were transferred to British Airways' regional operation in Birmingham
and Manchester
. This in turn resulted in British Airways mainline short haul crews based at Gatwick operating most of the erstwhile CityFlyer Express routes using the former's Gatwick-based Boeing 737
fleet.
, at the time the UK's so-called Second Force airline, on 30 May 1984 when it commenced a regional scheduled service between Gatwick and Antwerp with a single, leased Embraer EMB 110 Bandeirante
turboprop. A small number of larger capacity, more efficient Shorts 330
turboprops eventually replaced the Embraer Bandeirante.
There was joint ticketing for both airlines, Connectair flight numbers were prefixed with British Caledonian's BR designator, the two-letter IATA code identifying the airline on whose behalf a flight is operated, and all of the company's aircraft were painted in the British Caledonian Commuter livery
. However, this relationship stopped short of a franchise
agreement.
Following British Airways' takeover of British Caledonian in December 1987, Connectair operated its flights under the UK flag carrier's BA designator without adopting the British Airways livery for an interim period.
. Following ILG's acquisition of Connectair, the airline was re-branded Air Europe Express and adopted a new corporate identity
as of 1 February 1989.
ILG's decision to purchase Connectair was part of Air Europe's corporate strategy
at the time to establish itself as a major short haul scheduled operator at its Gatwick base. Gatwick had become very busy during the late 1980s. This meant that the much-coveted early-morning peak time slots, which Air Europe needed to be able to operate at times that were attractive to business travellers as well as competitive with its rivals' departure and arrival times, were in increasingly short supply. Connectair held a fairly large number of conveniently timed slots at Gatwick, which it had accumulated since its British Caledonian Commuter days. ILG's acquisition of Connectair therefore represented a golden opportunity to substantially increase the number of slots the group's airlines controlled at Gatwick, thereby strengthening Air Europe's competitive position at that airport.
Air Europe Express flew under the same AE airline designator as its bigger sister airline.
Its scheduled services initially linked Gatwick with Antwerp and Rotterdam
.
Larger Shorts 360
s gradually replaced the Shorts 330s.
In addition, ILG purchased Guernsey Airlines in April 1989, another small, independent regional airline, which operated scheduled services between Guernsey
and Gatwick as well as between Guernsey and Manchester at the time. On 29 October 1989 ILG fully integrated Guernsey Airlines into its existing Air Europe Express operation.
These moves provided Air Europe with additional transfer traffic for its developing short haul Europe
an scheduled route network. They also enabled Air Europe to launch new routes where there was insufficient traffic to support its larger Boeing 737 and Fokker 100 jet aircraft
or where these aircraft were too big to provide a frequent schedule during the start-up phase, such as Gatwick—Düsseldorf
and Gatwick—Jersey
for instance.
Following the replacement of the Air Europe Express Shorts 360 turboprops with Air Europe's larger and faster Fokker 100 jets on the Gatwick—Düsseldorf and Gatwick—Jersey routes, Air Europe Express launched a new thrice-daily Gatwick—Birmingham
schedule with its Shorts 360s.
During the year ending August 1990 the Air Europe Express operation carried more than a quarter of a million passengers across its route network for the first time.
Air Europe Express was forced to halt its operations on 8 March 1991 along with its sister airlines in the ILG-controlled Airlines of Europe group as a result of its parent company's decision to put all the group's companies into administrative receivership on that day, even though Air Europe Express itself had remained profitable throughout that period.
1992 also marked CityFlyer's second year of operation, during which it managed to break even
for the first time. (It had recorded a loss of £
0.5mn
in its first year of operation.)
From this point onwards, the airline was to post a consistent profit
.
regional turboprop, acquiring two in 1992.
In the same year Aer Lingus
abandoned the Gatwick to Dublin service, allowing CityFlyer to step in with a daily service.
BA's takeover of Dan-Air also left the Gatwick to Newcastle
route vacant for the airline to assume, offerig a three-times daily service and requiring a third ATR 42.
The addition of Düsseldorf to the network in 1993 and a frequency increase on the Dublin route led to the acquisition of a fourth ATR.
BA proposed a solution to this by offering CityFlyer a franchise agreement, which it accepted. This occasion marked the conclusion of the first-ever franchise agreement between British Airways and another airline. It also marked the conclusion of the first franchise agreement in the UK airline industry.
Under this arrangement the CityFlyer aircraft would be painted in full BA livery with interiors and cabin layout conforming to BA's contemporary, standard two-class European product. Staff would wear BA uniforms and all flights would operate under BA flight numbers. British Airways itself would take over CityFlyer's marketing and handle all reservations on its behalf. To all intents and purposes, CityFlyer Express would present itself and trade as British Airways.
The deal came into effect in June 1993.
) and worldwide sales force.
The airline was again UK launch customer for the larger, 66-seat ATR 72
, the first of which was delivered in October 1994.
By the end of the 1995 financial year, CityFlyer served ten destinations.
. A second Avro RJ100 was acquired in May of that year. Three more were added in 1998 and a further two joined the fleet in 1999. (At the time, the airline also operated six ATR 42s, one of which was returned to its lessor in 1999, as well as five larger ATR 72s. Three additional ATR 72s were delivered in 1999. Eventually, these replaced the remaining ATR 42s.)
By the turn of the millennium the company's jet fleet had expanded to 16 RJ100s.
of £89.4mn. The airline’s shareholders took the opportunity to realise their investment
and put the airline up for sale. HSBC
was appointed to handle the process, and approached a number of carriers about the sale. Of the airlines approached, both British Airways and Virgin Atlantic
stated their interest to acquire the airline.
At the time Virgin chairman Richard Branson
attacked British Airways' intention to bid for CityFlyer Express by claiming publicly that it already had a "total monopoly
" at Heathrow
and now wanted a "total monopoly" at Gatwick as well, thereby undermining its rivals' ability to compete with it on a level playing field
.
Disregarding a publicly stated offer from Virgin Atlantic to purchase the company for £100mn, HSBC announced the sale of CityFlyer Express to Virgin's archrival British Airways for £75mn in November 1998. This immediately caused controversy, with Richard Branson stating that HSBC never responded to Virgin’s offer despite numerous requests from Virgin. CityFlyer's management defended its decision to sell to British Airways by stating that it had never received Virgin's bid
in the first place.
This resulted in the already agreed takeover of CityFlyer Express by British Airways being referred to the Competition Commission
.
The Competition Commission eventually cleared the sale of CityFlyer Express to British Airways for £75mn in 1999. However, it also imposed a ceiling on the maximum number of slots British Airways and its newly acquired subsidiary CityFlyer Express were allowed to hold at Gatwick.
According to this ruling, British Airways and CityFlyer could control a combined maximum of 41% of all Gatwick slots on an annual basis as well as no more than 70% of the airport's slots on an hourly basis and up to 65% of these slots within a two-hour time span. These limits were designed to enable other airlines to offer competitive schedules on short haul routes where British Airways or CityFlyer was the sole or dominant carrier, without resorting to compulsory slot transfers that would have impeded British Airways' ability to run an effective hub-and-spoke operation at Gatwick.
services that would help it turn around its loss-making operation at the airport by improving long haul load factors. It was hoped that this would shore up the profitability of the UK flag carrier's long haul routes from Gatwick, thereby enabling it to return the entire Gatwick operation to profitability in the long term.
CityFlyer and its predecessor Connectair had a proven track record of operating a network of regional domestic and European scheduled services from Gatwick profitably. This was in stark contrast to BA's mainline short haul operation at Gatwick, which had racked up huge losses ever since BA had established a major presence at Gatwick as a result of the British Caledonian and Dan-Air takeovers. The losses BA's mainline short haul services generated at Gatwick were at the heart of the unsatisfactory financial performance of the entire Gatwick operation. After the failed attempt to use the acquisition of Dan-Air, which was on the verge of bankruptcy at the end of October 1992, to form a new low-cost, short haul unit within BA's mainline short haul operation at Gatwick, franchising seemed to offer the best solution for providing the level of feeder services BA needed to protect its long-haul loads and profits at Gatwick, without re-creating the complex organisation and fleet mix, and without duplicating the costly overheads of the BA mainline short haul operation at Heathrow, which did not suit the revenue
environment at Gatwick. Apart from the additional transfer traffic this generated for BA's long haul services at Gatwick, the main benefit of this arrangement for BA was that CityFlyer was to remain completely independent of the BA mainline operation. The feeder services CityFlyer provided for BA at Gatwick under the franchise agreement did not impact the direct operating cost
s of BA's mainline operation. CityFlyer also had very low costs as a result of a flat organisational structure and a simple fleet. This suited Gatwick's revenue environment and was the main reason BA decided to make the franchise agreement with CityFlyer Express a central plank of its strategy to achieve sustained, overall profitability at Gatwick.
The prime causes for BA's inability to operate profitably at Gatwick are:
The route structure with which BA was left following its takeover of British Caledonian in December 1987 was notable for the unplanned and unsystematic manner in which it had grown since the early 1960s.
At the time the late Sir Freddie Laker had begun building up British United Airways
' scheduled route network in his capacity as that airline's managing director. In those days only very limited opportunities existed for wholly privately owned, independent airlines to provide fully fledged scheduled air services on major domestic and international trunk routes. This resulted in a poor fit of many routes in British United's network of scheduled services, thereby making it difficult to offer sensible connections that could be marketed to the travelling public. It also represented the best network structure the late Sir Freddie was able to put in place under the then prevailing regulatory regime.
British Caledonian, which BA acquired at the end of 1987 in what was widely acknowledged to be a rescue deal to prevent that airline from going under and its assets to pass into the hands of foreign-owned or -controlled competitors, had inherited British United's scheduled route structure at the time of its creation in late November 1970 when that carrier was taken over by Caledonian Airways
.
The most fitting description for the resulting network of domestic, European and intercontinental long haul scheduled services from Gatwick was a motley collection of routes resembling a rag bag. This made it difficult to develop profitable streams of transfer traffic using Gatwick as a hub
. For this reason it was always going to be a challenge to persuade people to fly to Gatwick from relatively minor places like Genoa
or Jersey in order to make an onward connection at the airport to what many people would consider secondary places in Africa
or South America
, and an even greater challenge to do this profitably.
At the height of its commercial success in the late 1970s and early 1980s, British Caledonian managed to turn the dilemma the structure of its route network presented to its advantage by focusing on those routes that carried a very high proportion of potentially very profitable, oil-related, premium business traffic. It even managed to become the preferred carrier of many high-ranking oil industry executives based in Texas
, the centre of the global oil industry, by providing convenient, hassle-free connections between Houston/Dallas, Lagos
and Tripoli
via the airline's Gatwick base. However, the downside of this initially successful strategy was that it made the company dependent on a small number of markets whose fortunes were tied to the commodity price cycle, in often unstable parts of the world, for most of its profits.
Although this worked in British Caledonian's favour when the price of a barrel of crude oil was sky-high during the late '70s/early '80s, it started working against it when the oil price collapsed in the mid-'80s. It also further compounded the firm's growing financial problems at the time, culminating in the financial crisis that led to its takeover by archrival BA.
In July 1987 BA publicly announced its intention to take over its ailing, home-grown rival British Caledonian. This led to a counter bid from ILG who sought to take over British Caledonian themselves and merge it with Air Europe.
Although Air Europe eventually failed to merge with British Caledonian, its management succeeded in having the rival BA bid referred to the Monopolies and Mergers Commission (MMC), a forerunner of today's Competition Commission, by claiming that this deal would destroy the UK's entire independent airline sector if approved without requiring BA to make any concessions to redress the resulting competitive imbalance.
The decision by the MMC to require BA to give up 5,000 annual slots at Gatwick to competitors and to re-apply for some of British Caledonian's most important short haul feeder routes, as well as the subsequent decision by the CAA to award all of these routes to rival, independent airlines left BA's Gatwick operation with only ten short haul routes. This reduction in the number of short haul routes the airline continued to serve from Gatwick was accompanied by a corresponding reduction in the company's Gatwick-based short haul fleet from 14 to ten Boeing 737-200 Advanced aircraft.
The routes the CAA had awarded BA's independent rivals included the most profitable former British Caledonian short haul routes that had generated a substantial amount of transfer traffic for that airline's Gatwick-based scheduled operation, such as London Gatwick — Paris
Charles de Gaulle
and Gatwick—Brussels
. It also included a number of British Caledonian's loss-making domestic routes, such as Gatwick—Glasgow
, Gatwick—Edinburgh
and Gatwick—Manchester
, which were important feeder services for that airline's profitable long haul routes.
The loss of these vital routes to rival airlines and the consequent reduction in the number of passengers making connections between BA's short and long haul flights at Gatwick threatened the company's ability to continue operating profitably on the long haul routes it had inherited at Gatwick from British Caledonian.
BA's acquisition of the bulk of Dan-Air's scheduled activities at the end of October 1992 was intended to create the basis for a new in-house, low-cost unit that would enable the airline to reverse the heavy losses its own mainline operation's Gatwick-based short haul services incurred by transferring its entire short haul operation at the airport to the new unit.
To attain this goal, BA's management unilaterally imposed the pay scales and terms of the old Dan-Air employment contracts on the entire workforce of its Gatwick-based short haul operation at the beginning of 1993. This effectively cut average pay for everyone by 20%.
Management hoped this decision would help bring its short haul operation's costs in line with what Gatwick's revenue environment could sustain to enable it to return to profitability.
However, BA's unilateral decision to force everyone working for its short haul operation at Gatwick to take a pay cut caused bitter feelings towards the company, among both former Dan-Air staff as well as BA's existing employees at Gatwick who were already working for its short haul operation there prior to Dan-Air's acquisition. The former, who were now officially members of the BA family, were upset that they did not enjoy the same pay and terms of employment as the other family members who were working for its long haul operation at the same airport as well as those who were based at Heathrow. The latter were equally upset at having their pay and terms of employment downgraded to what they considered the inferior standards of a charter airline, which their employer had saved from bankruptcy at the eleventh hour.
The resulting unrest among BA's Gatwick-based short haul staff culminated in an unofficial, one-day strike during the first quarter of 1993. As a result of this unofficial industrial action, BA was forced to reverse its earlier decision to cut its Gatwick-based short haul workers' pay unilaterally. These events had clearly demonstrated the power of BA's unionised workforce. The power of the unions representing the affected workers as well as the entrenched attitudes of the middle management within BA's complex, hierarchical organisation also meant that the airline was unable to win any concessions that would have helped it offset the additional costs it was going to face in its short haul operation at Gatwick against increased labour productivity, in return for not cutting those workers' pay.
Therefore, BA's attempt to extend the lower pay scales and less generous terms of employment that prevailed at Dan-Air to align the costs of its short haul operation at Gatwick with the airport's revenue environment eventually turned out to be a costly failure.
BA's failure to simplify its complex, hierarchical organisation to enable it to reduce its overheads has been the main reason that has until now prevented the airline from achieving a cost structure that would make its Gatwick operation profitable. This situation has been further compounded by the fact that the company enjoys fewer economies of scale
at Gatwick compared with Heathrow because the firm's operation at the former airport is smaller than the one at the latter.
As a general rule, on average, a full-service scheduled operation at Gatwick with a fare structure that is identical to a similar operation at Heathrow produces a 10% lower load factor. It also generates a 20% lower revenue and results in an up to 25% lower yield.
Although the growing presence of aggressive low-cost, "no frills
" airlines on an ever increasing number of UK domestic and European routes since the late 1990s has rendered this rule largely invalid for short to medium haul operations, it is still valid for most long haul operations where the competition from low-cost airlines is still in its infancy.
Heathrow's and Gatwick's respective geographic location as well as the number of people living within each airport's catchment area accounts for this difference in load factors, revenues and yields.
The former has a bigger catchment area than the latter because more people live north of the Thames than south of it. Heathrow's catchment area includes about three-quarters of London
's population and roughly two-thirds of the population in the whole of Southeast England. London is where most of the demand for air travel in the Southeast originates. This means that 5.6mn people in London live in Heathrow's catchment area as opposed to 1.9mn in Gatwick's catchment area (out of an estimated total Greater London
population of 7.5mn). The comparable figures for the Southeast are: 6.7mn people in Heathrow's catchment area as opposed to 3.3mn in Gatwick's catchment area (out of an estimated total population of 10mn).
This is of particular significance for the premium travel market as Heathrow's larger catchment area means that it is able to offer more frequent flights to a greater number of destinations with more conveniently timed connections. This, in turn, helps attract a greater number of business travellers who generally tend to be the airlines' most profitable customers. It also means that there are four to five business travellers in Heathrow's catchment area for every business traveller in Gatwick's catchment area.
On the other hand, the differing sizes of Heathrow's and Gatwick's catchment areas are far less significant for non-premium travel as many people are prepared to travel to an airport outside their catchment area to take advantage of a cheaper flight.
However, the growing presence of aggressive low-cost, "no frills" airlines at Luton
and Stansted
respectively in recent years has somewhat diminished Heathrow's advantage in terms of its catchment area, as far as short to medium haul flights are concerned. Like Heathrow, these airports are located north of the Thames where most of the people in London and the Southeast live and their catchment areas, particularly Luton's, overlap with it.
During the summer of 1996 BA announced that it was planning to enter into a new code- and revenue- as well as profit-sharing alliance with American Airlines
.
The planned alliance was the most ambitious and far-reaching commercial airline alliance attempted at the time. It was also dependent on being granted anti-trust immunity by the British Government and the United States Department of Justice
as well as the European Commission
's Competition Directorate. This mega alliance was meant to replace the much more limited code-share agreement BA had with US Airways
since the beginning of 1993, which was not dependent on anti-trust immunity.
The new alliance envisaged merging the transatlantic
operations of both airlines by combining all their commercial activities into a joint company, thus making it a "virtual" merger. One of the new alliance's most outstanding features was a plan for an hourly shuttle service between London Heathrow
and New York JFK
, the world's busiest and most profitable intercontinental air route.
This meant that BA, which at the time only controlled about 38% of all take-off and landing slots at Heathrow, needed to secure additional prime time slots at Heathrow in order to be able to launch the hourly JFK shuttle. In those days the grey market for buying and selling take-off and landing slots at the world's busiest international airport was still in its infancy and there was uncertainty concerning the legality of this activity.
In anticipation of gaining all necessary approvals for the proposed alliance — including anti-trust immunity, BA decided to reserve the required slots at Heathrow by moving all long-haul services to East
, Central
and Southern Africa
(other than those to South Africa
itself) as well as to Latin America
to Gatwick over the 1996 summer timetable period as well as the 1996/7 winter timetable period. BA chose to transfer these routes to Gatwick because they generated lower traffic volumes and were therefore less profitable than its routes to North America
, the Middle East
, the Indian sub-continent as well as the Far East
. They also carried relatively few transfer passengers. This meant that the risk of losing these passengers to a competitor because of Gatwick's smaller number of connections compared with Heathrow was fairly low.
BA furthermore decided to transfer a number of barely profitable or wholly loss-making, short haul routes to secondary destinations in the UK
and Eastern Europe
to Gatwick because BA could use these slots far more profitably to operate additional transatlantic services from Heathrow under this alliance.
With the benefit of hindsight, BA had underestimated the strength of the gathering opposition to its planned "virtual" merger with American Airlines. It had also underestimated its opponents' political clout with the regulatory authorities in the UK and the US
as well as the European Union
.
At the time Sir Richard Branson publicly referred to this mega alliance as the "alliance from hell". He feared that it was part of a new BA strategy to drive Virgin Atlantic, BA's main UK-based transatlantic competitor, out of business. He therefore wanted to have it stopped at any cost.
BA's US-based transatlantic rivals, especially those that were denied access to Heathrow under the stringent Bermuda II
regulatory regime, wanted approval of this alliance to be made dependent upon the successful negotiation of a new UK-US "Open Skies
" air services agreement that would supersede Bermuda II and remove all access restrictions to Heathrow.
Eventually, the alliance was effectively killed off when regulators on both sides of the Atlantic demanded that BA should hand over hundreds of slots at Heathrow and that anti-trust immunity should be withheld for the Heathrow—JFK "flagship" route.
At the same time, BA's senior management had become so preoccupied with this alliance that it did not pay any attention to the fundamental changes that were beginning to re-shape the airline industry at the time. These changes were going to have a profound effect on the commercial environment in which BA was operating. They included the inexorable rise of the low-cost, "no frills" airlines, first and foremost EasyJet
and Ryanair
, in BA's own backyard as well as the growing competitive threat posed by the government-assisted recovery of Lufthansa
and Air France
, BA's main European full-service, network airline rivals, both of which had been in no position to challenge BA commercially in the early to mid-1990s as they were effectively bankrupt at that time.
For all these reasons the grandiose BA-AA alliance ultimately turned out to be a very costly distraction for BA's management and was the main contributing factor that led to Robert Ayling
's downfall who happened to be the BA chief executive during that period.
Project "Jupiter" was BA's internal working title for the strategy it had devised to turn the struggling Gatwick operation into a fully fledged hub.
The airline reckoned that this would enable it to turn around the poor overall financial performance of its operation at the airport after years of heavy losses.
BA decided to give its operation there the economies of scale as well as the scope
, in terms of flight connections, it considered necessary to attract enough travellers who were prepared to pay fares that were sufficiently high-yield to achieve sustained profitability.
The aim was to make Gatwick the second biggest hub-and-spoke operation on BA's network as well as on of the biggest outside the US.
Within three years from the launch of Project "Jupiter", the BA mainline operation more than doubled the number of long haul aircraft at Gatwick and increased the number of short haul aircraft at the airport by more than half. In addition, the airline's franchisees, notably CityFlyer Express and GB Airways
, increased their Gatwick-based fleets as well. During that period the number of BA passengers passing through Gatwick also doubled.
The role BA had assigned its franchisees generally and CityFlyer in particular to make Project "Jupiter" work was to provide feeder services that were expected to be profitable in their own right and enable transfer passengers to connect at ease with BA's long haul services at Gatwick, thereby improving those services' load factors and increasing their profitability. Unlike some of the North America
n commuter carriers that operate under franchise agreements on the same routes as their mainline partners using smaller aircraft at less busy times, BA's franchisees only operated on routes the company's mainline short haul operation could not serve profitably from Gatwick itself due to its higher cost base.
By the turn of the millennium, BA, the firm's franchisees as well as its subsidiaries and partners in the Oneworld
global airline alliance together controlled about 40% of all take-off and landing slots at Gatwick and used a fleet of more than 100 aircraft to serve around 120 destinations worldwide from the airport, more than any other airline from any airport in the UK. Together they carried 8m passengers through Gatwick annually. This accounted for almost 30% of the total number of passengers passing through the airport each year during that period. 45% of the passengers travelling with BA and its affiliated carriers through Gatwick were changing flights there. At the time, CityFlyer Express and the other BA franchisees as well as its subsidiaries and partner airlines at Gatwick accounted for 1,000 of these passengers each day.
Ultimately, BA's attempt to make its Gatwick operation profitable by building it up into a full-scale hub-and-spoke operation failed.
When Sir Rod Eddington
took over as BA's chief executive in 2000, he initiated a root-and-branch review of the airline's worldwide operation with the aim of improving profitability after it had incurred its first net loss since privatisation during the 1999/2000 financial year.
This included a review of the loss-making Gatwick operation.
At the time Rod Eddington stated that BA's Gatwick operation alone had incurred a loss of £40mn before allocating overheads, in spite of having £4.5bn
of assets at the airport, and that it was destroying shareholder value. (Industry sources estimated that during the aforesaid period the total loss for the airline's entire Gatwick operation was £200mn after allocating all overheads.)
Eddington attributed this loss to Gatwick's failure to attract sufficient high-yield traffic. He furthermore stated that Gatwick's loss was entirely accounted for by its mainline short haul operation whose schedules were primarily designed to feed BA's long haul services at the airport. Eddington was of the opinion that this was the wrong way around because there were not enough early morning departures and late-evening arrivals that could have attracted a greater number of locally based business and leisure passengers requiring same-day-return facilities. Also, the long haul route network BA operated from Gatwick at the time strangely resembled the long haul route structure British Caledonian had inherited from British United at the time of its inception three decades earlier. Moreover, in his opinion, the physical constraints imposed on BA's Gatwick operation by the airport's single runway and two terminals meant that the airline could not offer truly competitive schedules, in terms of frequencies and conveniently timed connections. In addition, Eddington also felt that Gatwick's operation was far too fragmented, in terms of what he called the airport's "bewildering array" of operators and their equipment, which substantially increased costs. At the time, in addition to BA's mainline operation, which accounted for the bulk of the airline's scheduled services at Gatwick, all of its UK-based franchisees (with the exception of British Mediterranean and Loganair
) as well as the company's subsidiaries and partners provided scheduled services at the airport as well, in some cases with a single aircraft on one route only, operating all aircraft types in their combined inventory except Concorde
and some of the smaller commuter planes.
Independent analysts were also of the opinion that the long haul routes BA chose to transfer from Heathrow to Gatwick mainly served what many people considered secondary destinations in Africa and Latin America. These were generally not the type of destinations to which business people, including those living in Gatwick's catchment area, were travelling. On the other hand, popular destinations for business and leisure travel, such as New York, Los Angeles
, Chicago
, Hong Kong
or Singapore
were either under-served or not served at all. For instance, at the time BA operated Gatwick's only daily service to New York JFK and there were no direct services from the airport to any of the other aforementioned destinations.
These analysts furthermore pointed to the extent and speed of BA's growth in employment at the airport during that time as a major cause of the huge loss incurred by that operation. Within a relatively short time span of only three years, the airline had increased its headcount at Gatwick alone to 8,500. This was more than the entire 7,700-strong worldwide workforce of British Caledonian at its peak during the early part of the summer in 1986. BA had effectively created a miniature version of its Heathrow-based organisational hierarchy at Gatwick, thereby multiplying its overheads and increasing its cost base at the latter airport.
In October 2000 BA publicly announced its decision to de-hub Gatwick and to turn it into a regional Southeast airport primarily serving leisure-orientated point-to-point routes where most of the demand originated in the Gatwick catchment area.
This was part of a new strategy designed to provide services from Gatwick only if there was sufficient demand in the local catchment area and to do it at a cost the local revenue environment could support.
It was also part of a strategy to deny the low-cost airlines generally and EasyJet in particular the physical space, in terms of airport slots, to continue expanding unabated in the Southeast. The aim of this secondary strategy was to prevent these carriers from posing an ever greater threat to BA's high-cost, mainline short haul operation at Heathrow, which suffered annual losses to the tune of several hundred million pounds during that period.
BA therefore decided to move all predominantly business-orientated long haul routes (other than those that had to stay at Gatwick due to bilateral constraints, such as its non-stop services to Atlanta, Dallas and Houston) back to Heathrow. The airline also decided to withdraw all loss-making services from the airport and to simplify its Gatwick-based fleet by reducing the number of aircraft stationed there and operating only two different aircraft types from the airport. Henceforth, all short to medium haul services from Gatwick were to be exclusively operated with Boeing 737s, while Boeing 777
s were to be the only aircraft to ply the long haul routes from the airport.
This was accompanied by a reduction in BA's headcount at Gatwick to 3,000 as well as the introduction of a common cabin crew pool for both its short and long haul operations at the airport and a number of other cost cutting measures.
However, following BA's decision to abandon its hub-and-spoke strategy at Gatwick in October 2000, CityFlyer was subsumed into British Airways' mainline operation at Gatwick in 2001, thereby ceasing to exist as a separate entity.
There were two reasons for fully integrating CityFlyer into BA's mainline short haul operation at Gatwick.
The first of these was operational. Although CityFlyer remained a profitable business in its own right following its acquisition by BA and industry analysts familiar with the company expected it to generate a profit of at least £7mn during BA's 2000/1 financial year, BA found that franchising overall had not been the financial success it had hoped. There were too many franchisees whose administrative and sales support actually cost the airline more than the additional revenue resulting from franchise fees and the connecting traffic its franchise partners generated. Therefore, as far as the bigger picture was concerned, BA's senior management felt that the franchise agreements with its various franchisees, all of which were profitable in their own right, had benefited the franchisees more than itself.
The second reason was related to maintaining good industrial relations between management and the workforce, especially those working for the mainline short haul operation at Gatwick. These workers had always regarded the concept of franchising generally and CityFlyer Express in particular as a Trojan horse
. They feared that BA's long-term strategy was to hand over its entire, heavily loss-making, mainline short haul operation to profitable franchisees such as CityFlyer, thereby threatening many jobs and the terms of employment of the remaining mainline employees. They also feared that BA would eventually resemble a "virtual" airline.
Therefore, BA's senior management decided that it was prudent to reduce the number of franchise agreements and to make use of franchisees only if it gave BA a presence in markets it did not already serve itself and where there was no prospect of providing such a service profitably through its mainline operation.
Following the integration of CityFlyer Express into BA's mainline short haul operation at Gatwick, all former CityFlyer employees other than flight crew and engineers working on the jet fleet were made redundant. The ex-CityFlyer flight crew and engineers whom BA continued to employ were transferred along with their equipment to BA's regional bases in Birmingham and Manchester.
BA's subsequent decision to retire the former CityFlyer turboprop fleet, resulted in the withdrawal of the airline's services from Gatwick to Antwerp, Guernsey and Rotterdam.
In addition, the fact that the integration of low-cost CityFlyer Express into the high-cost BA mainline short haul operation at Gatwick inevitably meant that formerly profitable CityFlyer routes were now burdened with the expensive BA mainline overheads, necessitated the withdrawal of additional BA short haul services from Gatwick over the course of a few years, including CityFlyer’s routes to Cologne
and Düsseldorf.
At the same time, British Regional Airlines
, another British Airways franchise operator based on the Isle of Man
, was acquired by British Airways as well and in 2002 was merged with British Airways' wholly owned regional subsidiary Brymon Airways
to form British Airways Citiexpress
, which would assume the operation of domestic and European services from UK regional airports.
On 1 February 2006, British Airways Citiexpress was renamed BA Connect
.
Government-owned corporation
A government-owned corporation, state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, or parastatal is a legal entity created by a government to undertake commercial activities on behalf of an owner government...
s, short-haul regional airline
Regional airline
Regional airlines are airlines that operate regional aircraft to provide passenger air service to communities without sufficient demand to attract mainline service...
with its head office in the Iain Stewart Centre adjacent to London Gatwick Airport
London Gatwick Airport
Gatwick Airport is located 3.1 miles north of the centre of Crawley, West Sussex, and south of Central London. Previously known as London Gatwick,In 2010, the name changed from London Gatwick Airport to Gatwick Airport...
in Crawley
Crawley
Crawley is a town and local government district with Borough status in West Sussex, England. It is south of Charing Cross, north of Brighton and Hove, and northeast of the county town of Chichester, covers an area of and had a population of 99,744 at the time of the 2001 Census.The area has...
, West Sussex
West Sussex
West Sussex is a county in the south of England, bordering onto East Sussex , Hampshire and Surrey. The county of Sussex has been divided into East and West since the 12th century, and obtained separate county councils in 1888, but it remained a single ceremonial county until 1974 and the coming...
, England
England
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...
.
In 1993 it became the first British Airways
British Airways
British Airways is the flag carrier airline of the United Kingdom, based in Waterside, near its main hub at London Heathrow Airport. British Airways is the largest airline in the UK based on fleet size, international flights and international destinations...
(BA) franchisee
Franchising
Franchising is the practice of using another firm's successful business model. The word 'franchise' is of anglo-French derivation - from franc- meaning free, and is used both as a noun and as a verb....
operating as British Airways Express. CityFlyer's ownership passed to BA in 1999 when that company bought out the original promoters as well as 3i
3i
3i Group plc is a multinational private equity and venture capital company headquartered in London, United Kingdom. It has offices in 13 countries across Asia, Europe and the Americas and had total assets under management of £12.7 billion as at 31 March 2011...
, the airline's main shareholder at the time. Initially, CityFlyer continued to operate as a separate unit, but it was eventually absorbed into British Airways' mainline short haul operation at Gatwick
London Gatwick Airport
Gatwick Airport is located 3.1 miles north of the centre of Crawley, West Sussex, and south of Central London. Previously known as London Gatwick,In 2010, the name changed from London Gatwick Airport to Gatwick Airport...
in 2001, the result of a change in British Airways' strategy for its Gatwick operation.
Following its absorption into British Airways, the airline's turboprop
Turboprop
A turboprop engine is a type of turbine engine which drives an aircraft propeller using a reduction gear.The gas turbine is designed specifically for this application, with almost all of its output being used to drive the propeller...
s were retired, while the company's fleet of regional short-haul jetliners
Jet airliner
A jet airliner is an airliner that is powered by jet engines. This term is sometimes contracted to jetliner or jet.In contrast to today's relatively fuel-efficient, turbofan-powered air travel, first generation jet airliner travel was noisy and fuel inefficient...
and the associated crews were transferred to British Airways' regional operation in Birmingham
Birmingham
Birmingham is a city and metropolitan borough in the West Midlands of England. It is the most populous British city outside the capital London, with a population of 1,036,900 , and lies at the heart of the West Midlands conurbation, the second most populous urban area in the United Kingdom with a...
and Manchester
Manchester
Manchester is a city and metropolitan borough in Greater Manchester, England. According to the Office for National Statistics, the 2010 mid-year population estimate for Manchester was 498,800. Manchester lies within one of the UK's largest metropolitan areas, the metropolitan county of Greater...
. This in turn resulted in British Airways mainline short haul crews based at Gatwick operating most of the erstwhile CityFlyer Express routes using the former's Gatwick-based Boeing 737
Boeing 737
The Boeing 737 is a short- to medium-range, twin-engine narrow-body jet airliner. Originally developed as a shorter, lower-cost twin-engine airliner derived from Boeing's 707 and 727, the 737 has developed into a family of nine passenger models with a capacity of 85 to 215 passengers...
fleet.
History
CityFlyer's origins
CityFlyer Express can be traced back to the formation of Connectair in 1983. Connectair became a feeder airline for British CaledonianBritish Caledonian
British Caledonian was a private, British independentindependent from government-owned corporations airline, operating out of Gatwick Airport in the 1970s and 1980s...
, at the time the UK's so-called Second Force airline, on 30 May 1984 when it commenced a regional scheduled service between Gatwick and Antwerp with a single, leased Embraer EMB 110 Bandeirante
Embraer EMB 110 Bandeirante
The Embraer EMB 110 Bandeirante is a general purpose 15-21 passenger twin-turboprop light transport aircraft suitable for military and civil duties...
turboprop. A small number of larger capacity, more efficient Shorts 330
Shorts 330
|-See also:-Bibliography:* Barnes C.H. and James Derek N. Shorts Aircraft since 1900. London: Putnam, 1989. ISBN 0-85177-819-4.* Donald, David, ed. The Encyclopedia of Civil Aircraft. London: Aurum, 1999. ISBN 1-85410-642-2....
turboprops eventually replaced the Embraer Bandeirante.
There was joint ticketing for both airlines, Connectair flight numbers were prefixed with British Caledonian's BR designator, the two-letter IATA code identifying the airline on whose behalf a flight is operated, and all of the company's aircraft were painted in the British Caledonian Commuter livery
Aircraft livery
Aircraft livery is a paint scheme applied to an aircraft, generally to fuselage, wings, empennage , or jet engines. Most airlines have a standard paint scheme for their aircraft fleet, usually prominently displaying the airline logo or name. From time to time special liveries are introduced, for...
. However, this relationship stopped short of a franchise
Franchising
Franchising is the practice of using another firm's successful business model. The word 'franchise' is of anglo-French derivation - from franc- meaning free, and is used both as a noun and as a verb....
agreement.
Following British Airways' takeover of British Caledonian in December 1987, Connectair operated its flights under the UK flag carrier's BA designator without adopting the British Airways livery for an interim period.
The ILG era
In June 1988 the firm was acquired by the International Leisure Group (ILG), the parent company of Air EuropeAir Europe
Air Europe was a wholly privately owned, independentindependent from government-owned corporations British airline, established in 1978 under the working title Inter European Airways. It adopted the Air Europe name the following year...
. Following ILG's acquisition of Connectair, the airline was re-branded Air Europe Express and adopted a new corporate identity
Corporate identity
In Corporate Communications, a corporate identity is the "persona" of a corporation which is designed to accord with and facilitate the attainment of business objectives...
as of 1 February 1989.
ILG's decision to purchase Connectair was part of Air Europe's corporate strategy
Strategic management
Strategic management is a field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments...
at the time to establish itself as a major short haul scheduled operator at its Gatwick base. Gatwick had become very busy during the late 1980s. This meant that the much-coveted early-morning peak time slots, which Air Europe needed to be able to operate at times that were attractive to business travellers as well as competitive with its rivals' departure and arrival times, were in increasingly short supply. Connectair held a fairly large number of conveniently timed slots at Gatwick, which it had accumulated since its British Caledonian Commuter days. ILG's acquisition of Connectair therefore represented a golden opportunity to substantially increase the number of slots the group's airlines controlled at Gatwick, thereby strengthening Air Europe's competitive position at that airport.
Air Europe Express flew under the same AE airline designator as its bigger sister airline.
Its scheduled services initially linked Gatwick with Antwerp and Rotterdam
Rotterdam
Rotterdam is the second-largest city in the Netherlands and one of the largest ports in the world. Starting as a dam on the Rotte river, Rotterdam has grown into a major international commercial centre...
.
Larger Shorts 360
Shorts 360
The Short 360 is a commuter aircraft built by Short Brothers. The Short 360 seats up to 36-39 passengers and was introduced into service in 1981. It is a larger version of the Short 330.-Development:...
s gradually replaced the Shorts 330s.
In addition, ILG purchased Guernsey Airlines in April 1989, another small, independent regional airline, which operated scheduled services between Guernsey
Guernsey
Guernsey, officially the Bailiwick of Guernsey is a British Crown dependency in the English Channel off the coast of Normandy.The Bailiwick, as a governing entity, embraces not only all 10 parishes on the Island of Guernsey, but also the islands of Herm, Jethou, Burhou, and Lihou and their islet...
and Gatwick as well as between Guernsey and Manchester at the time. On 29 October 1989 ILG fully integrated Guernsey Airlines into its existing Air Europe Express operation.
These moves provided Air Europe with additional transfer traffic for its developing short haul Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
an scheduled route network. They also enabled Air Europe to launch new routes where there was insufficient traffic to support its larger Boeing 737 and Fokker 100 jet aircraft
Jet aircraft
A jet aircraft is an aircraft propelled by jet engines. Jet aircraft generally fly much faster than propeller-powered aircraft and at higher altitudes – as high as . At these altitudes, jet engines achieve maximum efficiency over long distances. The engines in propeller-powered aircraft...
or where these aircraft were too big to provide a frequent schedule during the start-up phase, such as Gatwick—Düsseldorf
Düsseldorf
Düsseldorf is the capital city of the German state of North Rhine-Westphalia and centre of the Rhine-Ruhr metropolitan region.Düsseldorf is an important international business and financial centre and renowned for its fashion and trade fairs. Located centrally within the European Megalopolis, the...
and Gatwick—Jersey
Jersey
Jersey, officially the Bailiwick of Jersey is a British Crown Dependency off the coast of Normandy, France. As well as the island of Jersey itself, the bailiwick includes two groups of small islands that are no longer permanently inhabited, the Minquiers and Écréhous, and the Pierres de Lecq and...
for instance.
Following the replacement of the Air Europe Express Shorts 360 turboprops with Air Europe's larger and faster Fokker 100 jets on the Gatwick—Düsseldorf and Gatwick—Jersey routes, Air Europe Express launched a new thrice-daily Gatwick—Birmingham
Birmingham
Birmingham is a city and metropolitan borough in the West Midlands of England. It is the most populous British city outside the capital London, with a population of 1,036,900 , and lies at the heart of the West Midlands conurbation, the second most populous urban area in the United Kingdom with a...
schedule with its Shorts 360s.
During the year ending August 1990 the Air Europe Express operation carried more than a quarter of a million passengers across its route network for the first time.
Air Europe Express was forced to halt its operations on 8 March 1991 along with its sister airlines in the ILG-controlled Airlines of Europe group as a result of its parent company's decision to put all the group's companies into administrative receivership on that day, even though Air Europe Express itself had remained profitable throughout that period.
A new beginning
The management of Air Europe Express quickly started a new airline, Euroworld Airways, and began operations in May 1991 using two Shorts 360 aircraft and staff from the old Air Europe Express. The new carrier also carried on night freight and mail contracts from the defunct airline. The airline soon began flights from Gatwick to Guernsey, Antwerp and Rotterdam, for which two additional Shorts 360s were purchased. At this time, the airline approached several large carriers with a view to establishing a link, but in the event only British Airways was to show any interest, and a code share agreement was struck between the two.Choosing a new corporate identity
The airline rebranded as CityFlyer Express in 1992.1992 also marked CityFlyer's second year of operation, during which it managed to break even
Break Even
Break Even are an Australian hardcore band from Perth, Western Australia.-History:Forming in the suburbs of Perth in 2005, Break Even have released two successful releases and toured with the biggest names in local and international hardcore....
for the first time. (It had recorded a loss of £
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
0.5mn
Million
One million or one thousand thousand, is the natural number following 999,999 and preceding 1,000,001. The word is derived from the early Italian millione , from mille, "thousand", plus the augmentative suffix -one.In scientific notation, it is written as or just 106...
in its first year of operation.)
From this point onwards, the airline was to post a consistent profit
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
.
Launching a new generation of turboprop planes in the UK
CityFlyer Express was the UK launch customer for the ATR 42ATR 42
-Civil operators:The largest operators of the ATR-42 are FedEx Express, Airlinair, TRIP Linhas Aéreas,and Mexico City-based Aeromar respectively. Number of aircraft as of 2010:Some 70 other airlines operate smaller numbers of the type....
regional turboprop, acquiring two in 1992.
In the same year Aer Lingus
Aer Lingus
Aer Lingus Group Plc is the flag carrier of Ireland. It operates a fleet of Airbus aircraft serving Europe and North America. It is Ireland's oldest extant airline, and its second largest after low-cost rival Ryanair...
abandoned the Gatwick to Dublin service, allowing CityFlyer to step in with a daily service.
BA's takeover of Dan-Air also left the Gatwick to Newcastle
Newcastle Airport
Newcastle International Airport is located in Woolsington in the City of Newcastle upon Tyne, England, north-west of the city centre. In 2010 it was the 11th busiest airport in the United Kingdom....
route vacant for the airline to assume, offerig a three-times daily service and requiring a third ATR 42.
The addition of Düsseldorf to the network in 1993 and a frequency increase on the Dublin route led to the acquisition of a fourth ATR.
Formalisation of code-share relationship with British Airways
Meanwhile, the code share agreement had resulted in several complaints being lodged with British Airways by customers expecting a BA flight and the BA product.BA proposed a solution to this by offering CityFlyer a franchise agreement, which it accepted. This occasion marked the conclusion of the first-ever franchise agreement between British Airways and another airline. It also marked the conclusion of the first franchise agreement in the UK airline industry.
Under this arrangement the CityFlyer aircraft would be painted in full BA livery with interiors and cabin layout conforming to BA's contemporary, standard two-class European product. Staff would wear BA uniforms and all flights would operate under BA flight numbers. British Airways itself would take over CityFlyer's marketing and handle all reservations on its behalf. To all intents and purposes, CityFlyer Express would present itself and trade as British Airways.
The deal came into effect in June 1993.
Further expansion
The franchise agreement allowed CityFlyer Express to take advantage of the UK flag carrier's marketing clout, pricing power as well as its global distribution system (GDSGDS
-Medicine:* Geriatric Depression Scale, a simple, self-administered assessment of depression among the elderly.* Global Deterioration Scale, a standardized system of evaluating the progression of dementia, specifically in Alzheimer's Disease.-Schools:...
) and worldwide sales force.
The airline was again UK launch customer for the larger, 66-seat ATR 72
ATR 72
The ATR 72 is a twin-engine turboprop short-haul regional airliner built by the French-Italian aircraft manufacturer ATR. ATR and Airbus are both built in Toulouse, and share resources and technology...
, the first of which was delivered in October 1994.
By the end of the 1995 financial year, CityFlyer served ten destinations.
Ushering in the jet age
CityFlyer Express acquired its first jet aircraft in March 1997 when it became the first UK-based airline to introduce the Avro RJ100BAe 146
The British Aerospace 146 is a medium-sized commercial airliner formerly manufactured in the United Kingdom by British Aerospace, later part of BAE Systems. Production ran from 1983 until 2002. Manufacture of an improved version known as the Avro RJ began in 1992...
. A second Avro RJ100 was acquired in May of that year. Three more were added in 1998 and a further two joined the fleet in 1999. (At the time, the airline also operated six ATR 42s, one of which was returned to its lessor in 1999, as well as five larger ATR 72s. Three additional ATR 72s were delivered in 1999. Eventually, these replaced the remaining ATR 42s.)
By the turn of the millennium the company's jet fleet had expanded to 16 RJ100s.
Selling out to British Airways
With the franchise agreement due to end in 1999, CityFlyer Express was the second largest slot holder at Gatwick Airport (behind British Airways). It held 96 daily slots at Gatwick, employed 677 people and returned a pre-tax profit of £6.4mn on salesSales
A sale is the act of selling a product or service in return for money or other compensation. It is an act of completion of a commercial activity....
of £89.4mn. The airline’s shareholders took the opportunity to realise their investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
and put the airline up for sale. HSBC
HSBC
HSBC Holdings plc is a global banking and financial services company headquartered in Canary Wharf, London, United Kingdom. it is the world's second-largest banking and financial services group and second-largest public company according to a composite measure by Forbes magazine...
was appointed to handle the process, and approached a number of carriers about the sale. Of the airlines approached, both British Airways and Virgin Atlantic
Virgin Atlantic Airways
Virgin Atlantic Airways Limited is a British airline owned by Sir Richard Branson's Virgin Group and Singapore Airlines...
stated their interest to acquire the airline.
At the time Virgin chairman Richard Branson
Richard Branson
Sir Richard Charles Nicholas Branson is an English business magnate, best known for his Virgin Group of more than 400 companies....
attacked British Airways' intention to bid for CityFlyer Express by claiming publicly that it already had a "total monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
" at Heathrow
London Heathrow Airport
London Heathrow Airport or Heathrow , in the London Borough of Hillingdon, is the busiest airport in the United Kingdom and the third busiest airport in the world in terms of total passenger traffic, handling more international passengers than any other airport around the globe...
and now wanted a "total monopoly" at Gatwick as well, thereby undermining its rivals' ability to compete with it on a level playing field
Level playing field
A level playing field is a concept about fairness, not that each player has an equal chance to succeed, but that they all play by the same set of rules. A metaphorical playing field is said to be level if no external interference affects the ability of the players to compete fairly...
.
Disregarding a publicly stated offer from Virgin Atlantic to purchase the company for £100mn, HSBC announced the sale of CityFlyer Express to Virgin's archrival British Airways for £75mn in November 1998. This immediately caused controversy, with Richard Branson stating that HSBC never responded to Virgin’s offer despite numerous requests from Virgin. CityFlyer's management defended its decision to sell to British Airways by stating that it had never received Virgin's bid
BID
Bid may refer to:*Bidding, making a price offer in an auction, stock exchange, or card games*Bid , a British home shopping channel...
in the first place.
This resulted in the already agreed takeover of CityFlyer Express by British Airways being referred to the Competition Commission
Competition Commission
The Competition Commission is a non-departmental public body responsible for investigating mergers, markets and other enquiries related to regulated industries under competition law in the United Kingdom...
.
The Competition Commission eventually cleared the sale of CityFlyer Express to British Airways for £75mn in 1999. However, it also imposed a ceiling on the maximum number of slots British Airways and its newly acquired subsidiary CityFlyer Express were allowed to hold at Gatwick.
According to this ruling, British Airways and CityFlyer could control a combined maximum of 41% of all Gatwick slots on an annual basis as well as no more than 70% of the airport's slots on an hourly basis and up to 65% of these slots within a two-hour time span. These limits were designed to enable other airlines to offer competitive schedules on short haul routes where British Airways or CityFlyer was the sole or dominant carrier, without resorting to compulsory slot transfers that would have impeded British Airways' ability to run an effective hub-and-spoke operation at Gatwick.
Background to British Airways' acquisition of CityFlyer Express
The main reason for British Airways' acquisition of CityFlyer Express was the fact that CityFlyer held about 13% of Gatwick slots at the time. BA did not want these to fall into any competitor's hands. BA also needed CityFlyer's slots to expand its Gatwick operation so that it could offer enough feederFeeder
-Technology:* Feeder , any of several devices used in apiculture to supplement or replace natural food sources* Feeder , another name for a riser, a reservoir built into a metal casting mold to prevent cavities due to shrinkage...
services that would help it turn around its loss-making operation at the airport by improving long haul load factors. It was hoped that this would shore up the profitability of the UK flag carrier's long haul routes from Gatwick, thereby enabling it to return the entire Gatwick operation to profitability in the long term.
CityFlyer and its predecessor Connectair had a proven track record of operating a network of regional domestic and European scheduled services from Gatwick profitably. This was in stark contrast to BA's mainline short haul operation at Gatwick, which had racked up huge losses ever since BA had established a major presence at Gatwick as a result of the British Caledonian and Dan-Air takeovers. The losses BA's mainline short haul services generated at Gatwick were at the heart of the unsatisfactory financial performance of the entire Gatwick operation. After the failed attempt to use the acquisition of Dan-Air, which was on the verge of bankruptcy at the end of October 1992, to form a new low-cost, short haul unit within BA's mainline short haul operation at Gatwick, franchising seemed to offer the best solution for providing the level of feeder services BA needed to protect its long-haul loads and profits at Gatwick, without re-creating the complex organisation and fleet mix, and without duplicating the costly overheads of the BA mainline short haul operation at Heathrow, which did not suit the revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
environment at Gatwick. Apart from the additional transfer traffic this generated for BA's long haul services at Gatwick, the main benefit of this arrangement for BA was that CityFlyer was to remain completely independent of the BA mainline operation. The feeder services CityFlyer provided for BA at Gatwick under the franchise agreement did not impact the direct operating cost
Cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
s of BA's mainline operation. CityFlyer also had very low costs as a result of a flat organisational structure and a simple fleet. This suited Gatwick's revenue environment and was the main reason BA decided to make the franchise agreement with CityFlyer Express a central plank of its strategy to achieve sustained, overall profitability at Gatwick.
BA's inability to operate profitably at Gatwick following the acquisition of British Caledonian and Dan-Air
The prime causes for BA's inability to operate profitably at Gatwick are:
- The unwieldy route structure it inherited from British Caledonian.
- The Monopolies and Mergers Commission's decision to require BA to give up 5,000 annual slots at Gatwick to its competitors and to re-apply for some of British Caledonian's short haul feeder routes, as well as the subsequent decision of the Civil Aviation Authority (CAA) to award these routes to rival airlines.
- Its failure to transform the short haul operation inherited from Dan-Air into a low-cost unit within the Gatwick mainline short haul operation.
- The fact that on identical routes with the same fare structure its costs at Gatwick are only marginally lower than at Heathrow, whereas load factors, revenues and yieldYield managementRevenue management is the process of understanding, anticipating and influencing consumer behavior in order to maximize yield or profits from a fixed, perishable resource...
s — the profit per passenger — are significantly lower at Gatwick than at Heathrow.
- Gatwick's location and its smaller catchment area compared with Heathrow.
The route structure with which BA was left following its takeover of British Caledonian in December 1987 was notable for the unplanned and unsystematic manner in which it had grown since the early 1960s.
At the time the late Sir Freddie Laker had begun building up British United Airways
British United Airways
British United Airways was a private, independentindependent from government-owned corporations British airline formed as a result of the merger of Airwork Services and Hunting-Clan Air Transport in July 1960, making it the largest wholly private airline based in the United Kingdom at the time...
' scheduled route network in his capacity as that airline's managing director. In those days only very limited opportunities existed for wholly privately owned, independent airlines to provide fully fledged scheduled air services on major domestic and international trunk routes. This resulted in a poor fit of many routes in British United's network of scheduled services, thereby making it difficult to offer sensible connections that could be marketed to the travelling public. It also represented the best network structure the late Sir Freddie was able to put in place under the then prevailing regulatory regime.
British Caledonian, which BA acquired at the end of 1987 in what was widely acknowledged to be a rescue deal to prevent that airline from going under and its assets to pass into the hands of foreign-owned or -controlled competitors, had inherited British United's scheduled route structure at the time of its creation in late November 1970 when that carrier was taken over by Caledonian Airways
Caledonian Airways
Caledonian Airways was a wholly private, independentindependent from government-owned corporations Scottish charter airline formed in April 1961. It began with a single Douglas DC-7C leased from Sabena. Caledonian grew rapidly over the coming years to become the leading transatlantic "affinity...
.
The most fitting description for the resulting network of domestic, European and intercontinental long haul scheduled services from Gatwick was a motley collection of routes resembling a rag bag. This made it difficult to develop profitable streams of transfer traffic using Gatwick as a hub
Airline hub
An airline hub is an airport that an airline uses as a transfer point to get passengers to their intended destination. It is part of a hub and spoke model, where travelers moving between airports not served by direct flights change planes en route to their destinations...
. For this reason it was always going to be a challenge to persuade people to fly to Gatwick from relatively minor places like Genoa
Genoa
Genoa |Ligurian]] Zena ; Latin and, archaically, English Genua) is a city and an important seaport in northern Italy, the capital of the Province of Genoa and of the region of Liguria....
or Jersey in order to make an onward connection at the airport to what many people would consider secondary places in Africa
Africa
Africa is the world's second largest and second most populous continent, after Asia. At about 30.2 million km² including adjacent islands, it covers 6% of the Earth's total surface area and 20.4% of the total land area...
or South America
South America
South America is a continent situated in the Western Hemisphere, mostly in the Southern Hemisphere, with a relatively small portion in the Northern Hemisphere. The continent is also considered a subcontinent of the Americas. It is bordered on the west by the Pacific Ocean and on the north and east...
, and an even greater challenge to do this profitably.
At the height of its commercial success in the late 1970s and early 1980s, British Caledonian managed to turn the dilemma the structure of its route network presented to its advantage by focusing on those routes that carried a very high proportion of potentially very profitable, oil-related, premium business traffic. It even managed to become the preferred carrier of many high-ranking oil industry executives based in Texas
Texas
Texas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...
, the centre of the global oil industry, by providing convenient, hassle-free connections between Houston/Dallas, Lagos
Lagos
Lagos is a port and the most populous conurbation in Nigeria. With a population of 7,937,932, it is currently the third most populous city in Africa after Cairo and Kinshasa, and currently estimated to be the second fastest growing city in Africa...
and Tripoli
Tripoli
Tripoli is the capital and largest city in Libya. It is also known as Western Tripoli , to distinguish it from Tripoli, Lebanon. It is affectionately called The Mermaid of the Mediterranean , describing its turquoise waters and its whitewashed buildings. Tripoli is a Greek name that means "Three...
via the airline's Gatwick base. However, the downside of this initially successful strategy was that it made the company dependent on a small number of markets whose fortunes were tied to the commodity price cycle, in often unstable parts of the world, for most of its profits.
Although this worked in British Caledonian's favour when the price of a barrel of crude oil was sky-high during the late '70s/early '80s, it started working against it when the oil price collapsed in the mid-'80s. It also further compounded the firm's growing financial problems at the time, culminating in the financial crisis that led to its takeover by archrival BA.
In July 1987 BA publicly announced its intention to take over its ailing, home-grown rival British Caledonian. This led to a counter bid from ILG who sought to take over British Caledonian themselves and merge it with Air Europe.
Although Air Europe eventually failed to merge with British Caledonian, its management succeeded in having the rival BA bid referred to the Monopolies and Mergers Commission (MMC), a forerunner of today's Competition Commission, by claiming that this deal would destroy the UK's entire independent airline sector if approved without requiring BA to make any concessions to redress the resulting competitive imbalance.
The decision by the MMC to require BA to give up 5,000 annual slots at Gatwick to competitors and to re-apply for some of British Caledonian's most important short haul feeder routes, as well as the subsequent decision by the CAA to award all of these routes to rival, independent airlines left BA's Gatwick operation with only ten short haul routes. This reduction in the number of short haul routes the airline continued to serve from Gatwick was accompanied by a corresponding reduction in the company's Gatwick-based short haul fleet from 14 to ten Boeing 737-200 Advanced aircraft.
The routes the CAA had awarded BA's independent rivals included the most profitable former British Caledonian short haul routes that had generated a substantial amount of transfer traffic for that airline's Gatwick-based scheduled operation, such as London Gatwick — Paris
Paris
Paris is the capital and largest city in France, situated on the river Seine, in northern France, at the heart of the Île-de-France region...
Charles de Gaulle
Charles de Gaulle
Charles André Joseph Marie de Gaulle was a French general and statesman who led the Free French Forces during World War II. He later founded the French Fifth Republic in 1958 and served as its first President from 1959 to 1969....
and Gatwick—Brussels
Brussels
Brussels , officially the Brussels Region or Brussels-Capital Region , is the capital of Belgium and the de facto capital of the European Union...
. It also included a number of British Caledonian's loss-making domestic routes, such as Gatwick—Glasgow
Glasgow
Glasgow is the largest city in Scotland and third most populous in the United Kingdom. The city is situated on the River Clyde in the country's west central lowlands...
, Gatwick—Edinburgh
Edinburgh
Edinburgh is the capital city of Scotland, the second largest city in Scotland, and the eighth most populous in the United Kingdom. The City of Edinburgh Council governs one of Scotland's 32 local government council areas. The council area includes urban Edinburgh and a rural area...
and Gatwick—Manchester
Manchester
Manchester is a city and metropolitan borough in Greater Manchester, England. According to the Office for National Statistics, the 2010 mid-year population estimate for Manchester was 498,800. Manchester lies within one of the UK's largest metropolitan areas, the metropolitan county of Greater...
, which were important feeder services for that airline's profitable long haul routes.
The loss of these vital routes to rival airlines and the consequent reduction in the number of passengers making connections between BA's short and long haul flights at Gatwick threatened the company's ability to continue operating profitably on the long haul routes it had inherited at Gatwick from British Caledonian.
BA's acquisition of the bulk of Dan-Air's scheduled activities at the end of October 1992 was intended to create the basis for a new in-house, low-cost unit that would enable the airline to reverse the heavy losses its own mainline operation's Gatwick-based short haul services incurred by transferring its entire short haul operation at the airport to the new unit.
To attain this goal, BA's management unilaterally imposed the pay scales and terms of the old Dan-Air employment contracts on the entire workforce of its Gatwick-based short haul operation at the beginning of 1993. This effectively cut average pay for everyone by 20%.
Management hoped this decision would help bring its short haul operation's costs in line with what Gatwick's revenue environment could sustain to enable it to return to profitability.
However, BA's unilateral decision to force everyone working for its short haul operation at Gatwick to take a pay cut caused bitter feelings towards the company, among both former Dan-Air staff as well as BA's existing employees at Gatwick who were already working for its short haul operation there prior to Dan-Air's acquisition. The former, who were now officially members of the BA family, were upset that they did not enjoy the same pay and terms of employment as the other family members who were working for its long haul operation at the same airport as well as those who were based at Heathrow. The latter were equally upset at having their pay and terms of employment downgraded to what they considered the inferior standards of a charter airline, which their employer had saved from bankruptcy at the eleventh hour.
The resulting unrest among BA's Gatwick-based short haul staff culminated in an unofficial, one-day strike during the first quarter of 1993. As a result of this unofficial industrial action, BA was forced to reverse its earlier decision to cut its Gatwick-based short haul workers' pay unilaterally. These events had clearly demonstrated the power of BA's unionised workforce. The power of the unions representing the affected workers as well as the entrenched attitudes of the middle management within BA's complex, hierarchical organisation also meant that the airline was unable to win any concessions that would have helped it offset the additional costs it was going to face in its short haul operation at Gatwick against increased labour productivity, in return for not cutting those workers' pay.
Therefore, BA's attempt to extend the lower pay scales and less generous terms of employment that prevailed at Dan-Air to align the costs of its short haul operation at Gatwick with the airport's revenue environment eventually turned out to be a costly failure.
BA's failure to simplify its complex, hierarchical organisation to enable it to reduce its overheads has been the main reason that has until now prevented the airline from achieving a cost structure that would make its Gatwick operation profitable. This situation has been further compounded by the fact that the company enjoys fewer economies of scale
Economies of scale
Economies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
at Gatwick compared with Heathrow because the firm's operation at the former airport is smaller than the one at the latter.
As a general rule, on average, a full-service scheduled operation at Gatwick with a fare structure that is identical to a similar operation at Heathrow produces a 10% lower load factor. It also generates a 20% lower revenue and results in an up to 25% lower yield.
Although the growing presence of aggressive low-cost, "no frills
No frills
No-frills or no frills is a term used to describe any service or product for which the non-essential features have been removed to keep the price low. The use of the term "frills" refers to a style of fabric decoration...
" airlines on an ever increasing number of UK domestic and European routes since the late 1990s has rendered this rule largely invalid for short to medium haul operations, it is still valid for most long haul operations where the competition from low-cost airlines is still in its infancy.
Heathrow's and Gatwick's respective geographic location as well as the number of people living within each airport's catchment area accounts for this difference in load factors, revenues and yields.
The former has a bigger catchment area than the latter because more people live north of the Thames than south of it. Heathrow's catchment area includes about three-quarters of London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
's population and roughly two-thirds of the population in the whole of Southeast England. London is where most of the demand for air travel in the Southeast originates. This means that 5.6mn people in London live in Heathrow's catchment area as opposed to 1.9mn in Gatwick's catchment area (out of an estimated total Greater London
Greater London
Greater London is the top-level administrative division of England covering London. It was created in 1965 and spans the City of London, including Middle Temple and Inner Temple, and the 32 London boroughs. This territory is coterminate with the London Government Office Region and the London...
population of 7.5mn). The comparable figures for the Southeast are: 6.7mn people in Heathrow's catchment area as opposed to 3.3mn in Gatwick's catchment area (out of an estimated total population of 10mn).
This is of particular significance for the premium travel market as Heathrow's larger catchment area means that it is able to offer more frequent flights to a greater number of destinations with more conveniently timed connections. This, in turn, helps attract a greater number of business travellers who generally tend to be the airlines' most profitable customers. It also means that there are four to five business travellers in Heathrow's catchment area for every business traveller in Gatwick's catchment area.
On the other hand, the differing sizes of Heathrow's and Gatwick's catchment areas are far less significant for non-premium travel as many people are prepared to travel to an airport outside their catchment area to take advantage of a cheaper flight.
However, the growing presence of aggressive low-cost, "no frills" airlines at Luton
London Luton Airport
London Luton Airport is an international airport located east of the town centre in the Borough of Luton in Bedfordshire, England and is north of Central London. The airport is from Junction 10a of the M1 motorway...
and Stansted
London Stansted Airport
-Cargo:-Statistics:-Infrastructure:-Terminal and satellite buildings:Stansted is the newest passenger airport of all the main London airports. The terminal is an oblong glass building, and is separated in to three areas: Check-in concourse, arrivals and departures...
respectively in recent years has somewhat diminished Heathrow's advantage in terms of its catchment area, as far as short to medium haul flights are concerned. Like Heathrow, these airports are located north of the Thames where most of the people in London and the Southeast live and their catchment areas, particularly Luton's, overlap with it.
BA's failed attempt at a "virtual" merger with American Airlines
During the summer of 1996 BA announced that it was planning to enter into a new code- and revenue- as well as profit-sharing alliance with American Airlines
American Airlines
American Airlines, Inc. is the world's fourth-largest airline in passenger miles transported and operating revenues. American Airlines is a subsidiary of the AMR Corporation and is headquartered in Fort Worth, Texas adjacent to its largest hub at Dallas/Fort Worth International Airport...
.
The planned alliance was the most ambitious and far-reaching commercial airline alliance attempted at the time. It was also dependent on being granted anti-trust immunity by the British Government and the United States Department of Justice
United States Department of Justice
The United States Department of Justice , is the United States federal executive department responsible for the enforcement of the law and administration of justice, equivalent to the justice or interior ministries of other countries.The Department is led by the Attorney General, who is nominated...
as well as the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
's Competition Directorate. This mega alliance was meant to replace the much more limited code-share agreement BA had with US Airways
US Airways
US Airways, Inc. is a major airline based in the U.S. city of Tempe, Arizona. The airline is an operating unit of US Airways Group and is the sixth largest airline by traffic and eighth largest by market value in the country....
since the beginning of 1993, which was not dependent on anti-trust immunity.
The new alliance envisaged merging the transatlantic
Transatlantic flight
Transatlantic flight is the flight of an aircraft across the Atlantic Ocean. A transatlantic flight may proceed east-to-west, originating in Europe or Africa and terminating in North America or South America, or it may go in the reverse direction, west-to-east...
operations of both airlines by combining all their commercial activities into a joint company, thus making it a "virtual" merger. One of the new alliance's most outstanding features was a plan for an hourly shuttle service between London Heathrow
London Heathrow Airport
London Heathrow Airport or Heathrow , in the London Borough of Hillingdon, is the busiest airport in the United Kingdom and the third busiest airport in the world in terms of total passenger traffic, handling more international passengers than any other airport around the globe...
and New York JFK
John F. Kennedy International Airport
John F. Kennedy International Airport is an international airport located in the borough of Queens in New York City, about southeast of Lower Manhattan. It is the busiest international air passenger gateway to the United States, handling more international traffic than any other airport in North...
, the world's busiest and most profitable intercontinental air route.
This meant that BA, which at the time only controlled about 38% of all take-off and landing slots at Heathrow, needed to secure additional prime time slots at Heathrow in order to be able to launch the hourly JFK shuttle. In those days the grey market for buying and selling take-off and landing slots at the world's busiest international airport was still in its infancy and there was uncertainty concerning the legality of this activity.
In anticipation of gaining all necessary approvals for the proposed alliance — including anti-trust immunity, BA decided to reserve the required slots at Heathrow by moving all long-haul services to East
East Africa
East Africa or Eastern Africa is the easterly region of the African continent, variably defined by geography or geopolitics. In the UN scheme of geographic regions, 19 territories constitute Eastern Africa:...
, Central
Central Africa
Central Africa is a core region of the African continent which includes Burundi, the Central African Republic, Chad, the Democratic Republic of the Congo, and Rwanda....
and Southern Africa
Southern Africa
Southern Africa is the southernmost region of the African continent, variably defined by geography or geopolitics. Within the region are numerous territories, including the Republic of South Africa ; nowadays, the simpler term South Africa is generally reserved for the country in English.-UN...
(other than those to South Africa
South Africa
The Republic of South Africa is a country in southern Africa. Located at the southern tip of Africa, it is divided into nine provinces, with of coastline on the Atlantic and Indian oceans...
itself) as well as to Latin America
Latin America
Latin America is a region of the Americas where Romance languages – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
to Gatwick over the 1996 summer timetable period as well as the 1996/7 winter timetable period. BA chose to transfer these routes to Gatwick because they generated lower traffic volumes and were therefore less profitable than its routes to North America
North America
North America is a continent wholly within the Northern Hemisphere and almost wholly within the Western Hemisphere. It is also considered a northern subcontinent of the Americas...
, the Middle East
Middle East
The Middle East is a region that encompasses Western Asia and Northern Africa. It is often used as a synonym for Near East, in opposition to Far East...
, the Indian sub-continent as well as the Far East
Far East
The Far East is an English term mostly describing East Asia and Southeast Asia, with South Asia sometimes also included for economic and cultural reasons.The term came into use in European geopolitical discourse in the 19th century,...
. They also carried relatively few transfer passengers. This meant that the risk of losing these passengers to a competitor because of Gatwick's smaller number of connections compared with Heathrow was fairly low.
BA furthermore decided to transfer a number of barely profitable or wholly loss-making, short haul routes to secondary destinations in the UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
and Eastern Europe
Eastern Europe
Eastern Europe is the eastern part of Europe. The term has widely disparate geopolitical, geographical, cultural and socioeconomic readings, which makes it highly context-dependent and even volatile, and there are "almost as many definitions of Eastern Europe as there are scholars of the region"...
to Gatwick because BA could use these slots far more profitably to operate additional transatlantic services from Heathrow under this alliance.
With the benefit of hindsight, BA had underestimated the strength of the gathering opposition to its planned "virtual" merger with American Airlines. It had also underestimated its opponents' political clout with the regulatory authorities in the UK and the US
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
as well as the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
.
At the time Sir Richard Branson publicly referred to this mega alliance as the "alliance from hell". He feared that it was part of a new BA strategy to drive Virgin Atlantic, BA's main UK-based transatlantic competitor, out of business. He therefore wanted to have it stopped at any cost.
BA's US-based transatlantic rivals, especially those that were denied access to Heathrow under the stringent Bermuda II
Bermuda II
Bermuda II was a bilateral air transport agreement between the governments of the United Kingdom and the United States signed on 23 July 1977 as a renegotiation of the original 1946 Bermuda air services agreement...
regulatory regime, wanted approval of this alliance to be made dependent upon the successful negotiation of a new UK-US "Open Skies
Open skies
Open skies is an international policy concept which calls for the liberalization of rules and regulations on international aviation industry most specially commercial aviation - opening a free market for the airline industry...
" air services agreement that would supersede Bermuda II and remove all access restrictions to Heathrow.
Eventually, the alliance was effectively killed off when regulators on both sides of the Atlantic demanded that BA should hand over hundreds of slots at Heathrow and that anti-trust immunity should be withheld for the Heathrow—JFK "flagship" route.
At the same time, BA's senior management had become so preoccupied with this alliance that it did not pay any attention to the fundamental changes that were beginning to re-shape the airline industry at the time. These changes were going to have a profound effect on the commercial environment in which BA was operating. They included the inexorable rise of the low-cost, "no frills" airlines, first and foremost EasyJet
EasyJet
EasyJet Airline Company Limited is a British airline headquartered at London Luton Airport. It carries more passengers than any other United Kingdom-based airline, operating domestic and international scheduled services on 500 routes between 118 European, North African, and West Asian airports...
and Ryanair
Ryanair
Ryanair is an Irish low-cost airline. Its head office is at Dublin Airport and its primary operational bases at Dublin Airport and London Stansted Airport....
, in BA's own backyard as well as the growing competitive threat posed by the government-assisted recovery of Lufthansa
Lufthansa
Deutsche Lufthansa AG is the flag carrier of Germany and the largest airline in Europe in terms of overall passengers carried. The name of the company is derived from Luft , and Hansa .The airline is the world's fourth-largest airline in terms of overall passengers carried, operating...
and Air France
Air France
Air France , stylised as AIRFRANCE, is the French flag carrier headquartered in Tremblay-en-France, , and is one of the world's largest airlines. It is a subsidiary of the Air France-KLM Group and a founding member of the SkyTeam global airline alliance...
, BA's main European full-service, network airline rivals, both of which had been in no position to challenge BA commercially in the early to mid-1990s as they were effectively bankrupt at that time.
For all these reasons the grandiose BA-AA alliance ultimately turned out to be a very costly distraction for BA's management and was the main contributing factor that led to Robert Ayling
Robert Ayling
Robert John Ayling is a British businessman who has been involved in many high profile companies and organisations. Perhaps most notably, he was chief executive of British Airways from 1996 to 2000.-Career:...
's downfall who happened to be the BA chief executive during that period.
Project Jupiter
Project "Jupiter" was BA's internal working title for the strategy it had devised to turn the struggling Gatwick operation into a fully fledged hub.
The airline reckoned that this would enable it to turn around the poor overall financial performance of its operation at the airport after years of heavy losses.
BA decided to give its operation there the economies of scale as well as the scope
Economies of scope
Economies of scope are conceptually similar to economies of scale. Whereas 'economies of scale' for a firm primarily refers to reductions in average cost associated with increasing the scale of production for a single product type, 'economies of scope' refers to lowering average cost for a firm in...
, in terms of flight connections, it considered necessary to attract enough travellers who were prepared to pay fares that were sufficiently high-yield to achieve sustained profitability.
The aim was to make Gatwick the second biggest hub-and-spoke operation on BA's network as well as on of the biggest outside the US.
Within three years from the launch of Project "Jupiter", the BA mainline operation more than doubled the number of long haul aircraft at Gatwick and increased the number of short haul aircraft at the airport by more than half. In addition, the airline's franchisees, notably CityFlyer Express and GB Airways
GB Airways
GB Airways was a UK airline; prior to its dissolution it was headquartered in "The Beehive," a former terminal building, at City Place Gatwick, London Gatwick Airport in Crawley, West Sussex, England. It operated scheduled services as a British Airways franchise to 30 destinations in Europe and...
, increased their Gatwick-based fleets as well. During that period the number of BA passengers passing through Gatwick also doubled.
The role BA had assigned its franchisees generally and CityFlyer in particular to make Project "Jupiter" work was to provide feeder services that were expected to be profitable in their own right and enable transfer passengers to connect at ease with BA's long haul services at Gatwick, thereby improving those services' load factors and increasing their profitability. Unlike some of the North America
North America
North America is a continent wholly within the Northern Hemisphere and almost wholly within the Western Hemisphere. It is also considered a northern subcontinent of the Americas...
n commuter carriers that operate under franchise agreements on the same routes as their mainline partners using smaller aircraft at less busy times, BA's franchisees only operated on routes the company's mainline short haul operation could not serve profitably from Gatwick itself due to its higher cost base.
By the turn of the millennium, BA, the firm's franchisees as well as its subsidiaries and partners in the Oneworld
Oneworld
Oneworld , branded as oneworld, is one of the world's three largest global airline alliances with its central management team, oneworld Management Company, based in New York City, New York, USA. Oneworld was founded in 1999 by American Airlines, British Airways, Canadian Airlines, Cathay Pacific...
global airline alliance together controlled about 40% of all take-off and landing slots at Gatwick and used a fleet of more than 100 aircraft to serve around 120 destinations worldwide from the airport, more than any other airline from any airport in the UK. Together they carried 8m passengers through Gatwick annually. This accounted for almost 30% of the total number of passengers passing through the airport each year during that period. 45% of the passengers travelling with BA and its affiliated carriers through Gatwick were changing flights there. At the time, CityFlyer Express and the other BA franchisees as well as its subsidiaries and partner airlines at Gatwick accounted for 1,000 of these passengers each day.
Ultimately, BA's attempt to make its Gatwick operation profitable by building it up into a full-scale hub-and-spoke operation failed.
When Sir Rod Eddington
Rod Eddington
Sir Roderick Ian Eddington is an Australian businessman. He is currently chair of the government body Infrastructure Australia, a director of News Corporation, continuing his long association with that company, and has served in other senior positions including as former CEO of British...
took over as BA's chief executive in 2000, he initiated a root-and-branch review of the airline's worldwide operation with the aim of improving profitability after it had incurred its first net loss since privatisation during the 1999/2000 financial year.
This included a review of the loss-making Gatwick operation.
At the time Rod Eddington stated that BA's Gatwick operation alone had incurred a loss of £40mn before allocating overheads, in spite of having £4.5bn
1000000000 (number)
1,000,000,000 is the natural number following 999,999,999 and preceding 1,000,000,001.In scientific notation, it is written as 109....
of assets at the airport, and that it was destroying shareholder value. (Industry sources estimated that during the aforesaid period the total loss for the airline's entire Gatwick operation was £200mn after allocating all overheads.)
Eddington attributed this loss to Gatwick's failure to attract sufficient high-yield traffic. He furthermore stated that Gatwick's loss was entirely accounted for by its mainline short haul operation whose schedules were primarily designed to feed BA's long haul services at the airport. Eddington was of the opinion that this was the wrong way around because there were not enough early morning departures and late-evening arrivals that could have attracted a greater number of locally based business and leisure passengers requiring same-day-return facilities. Also, the long haul route network BA operated from Gatwick at the time strangely resembled the long haul route structure British Caledonian had inherited from British United at the time of its inception three decades earlier. Moreover, in his opinion, the physical constraints imposed on BA's Gatwick operation by the airport's single runway and two terminals meant that the airline could not offer truly competitive schedules, in terms of frequencies and conveniently timed connections. In addition, Eddington also felt that Gatwick's operation was far too fragmented, in terms of what he called the airport's "bewildering array" of operators and their equipment, which substantially increased costs. At the time, in addition to BA's mainline operation, which accounted for the bulk of the airline's scheduled services at Gatwick, all of its UK-based franchisees (with the exception of British Mediterranean and Loganair
Loganair
Loganair is a Scottish airline with its registered office on the grounds of Glasgow International Airport and in Paisley, Renfrewshire, Scotland. Loganair operates scheduled services under a Flybe franchise in mainland Scotland and to Orkney, Shetland and the Western Isles. In addition it operates...
) as well as the company's subsidiaries and partners provided scheduled services at the airport as well, in some cases with a single aircraft on one route only, operating all aircraft types in their combined inventory except Concorde
Concorde
Aérospatiale-BAC Concorde was a turbojet-powered supersonic passenger airliner, a supersonic transport . It was a product of an Anglo-French government treaty, combining the manufacturing efforts of Aérospatiale and the British Aircraft Corporation...
and some of the smaller commuter planes.
Independent analysts were also of the opinion that the long haul routes BA chose to transfer from Heathrow to Gatwick mainly served what many people considered secondary destinations in Africa and Latin America. These were generally not the type of destinations to which business people, including those living in Gatwick's catchment area, were travelling. On the other hand, popular destinations for business and leisure travel, such as New York, Los Angeles
Los Ángeles
Los Ángeles is the capital of the province of Biobío, in the commune of the same name, in Region VIII , in the center-south of Chile. It is located between the Laja and Biobío rivers. The population is 123,445 inhabitants...
, Chicago
Chicago
Chicago is the largest city in the US state of Illinois. With nearly 2.7 million residents, it is the most populous city in the Midwestern United States and the third most populous in the US, after New York City and Los Angeles...
, Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
or Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
were either under-served or not served at all. For instance, at the time BA operated Gatwick's only daily service to New York JFK and there were no direct services from the airport to any of the other aforementioned destinations.
These analysts furthermore pointed to the extent and speed of BA's growth in employment at the airport during that time as a major cause of the huge loss incurred by that operation. Within a relatively short time span of only three years, the airline had increased its headcount at Gatwick alone to 8,500. This was more than the entire 7,700-strong worldwide workforce of British Caledonian at its peak during the early part of the summer in 1986. BA had effectively created a miniature version of its Heathrow-based organisational hierarchy at Gatwick, thereby multiplying its overheads and increasing its cost base at the latter airport.
In October 2000 BA publicly announced its decision to de-hub Gatwick and to turn it into a regional Southeast airport primarily serving leisure-orientated point-to-point routes where most of the demand originated in the Gatwick catchment area.
This was part of a new strategy designed to provide services from Gatwick only if there was sufficient demand in the local catchment area and to do it at a cost the local revenue environment could support.
It was also part of a strategy to deny the low-cost airlines generally and EasyJet in particular the physical space, in terms of airport slots, to continue expanding unabated in the Southeast. The aim of this secondary strategy was to prevent these carriers from posing an ever greater threat to BA's high-cost, mainline short haul operation at Heathrow, which suffered annual losses to the tune of several hundred million pounds during that period.
BA therefore decided to move all predominantly business-orientated long haul routes (other than those that had to stay at Gatwick due to bilateral constraints, such as its non-stop services to Atlanta, Dallas and Houston) back to Heathrow. The airline also decided to withdraw all loss-making services from the airport and to simplify its Gatwick-based fleet by reducing the number of aircraft stationed there and operating only two different aircraft types from the airport. Henceforth, all short to medium haul services from Gatwick were to be exclusively operated with Boeing 737s, while Boeing 777
Boeing 777
The Boeing 777 is a long-range, wide-body twin-engine jet airliner manufactured by Boeing Commercial Airplanes. It is the world's largest twinjet and is commonly referred to as the "Triple Seven". The aircraft has seating for over 300 passengers and has a range from , depending on model...
s were to be the only aircraft to ply the long haul routes from the airport.
This was accompanied by a reduction in BA's headcount at Gatwick to 3,000 as well as the introduction of a common cabin crew pool for both its short and long haul operations at the airport and a number of other cost cutting measures.
British Airways' short haul reorganisation
Under the franchise agreement it had concluded with BA before being taken over in 1999, CityFlyer Express initially operated as an independent business unit within British Airways serving a number of short haul European and UK regional routes from Gatwick that were completely separate from the services BA's mainline operation provided from the airport.However, following BA's decision to abandon its hub-and-spoke strategy at Gatwick in October 2000, CityFlyer was subsumed into British Airways' mainline operation at Gatwick in 2001, thereby ceasing to exist as a separate entity.
There were two reasons for fully integrating CityFlyer into BA's mainline short haul operation at Gatwick.
The first of these was operational. Although CityFlyer remained a profitable business in its own right following its acquisition by BA and industry analysts familiar with the company expected it to generate a profit of at least £7mn during BA's 2000/1 financial year, BA found that franchising overall had not been the financial success it had hoped. There were too many franchisees whose administrative and sales support actually cost the airline more than the additional revenue resulting from franchise fees and the connecting traffic its franchise partners generated. Therefore, as far as the bigger picture was concerned, BA's senior management felt that the franchise agreements with its various franchisees, all of which were profitable in their own right, had benefited the franchisees more than itself.
The second reason was related to maintaining good industrial relations between management and the workforce, especially those working for the mainline short haul operation at Gatwick. These workers had always regarded the concept of franchising generally and CityFlyer Express in particular as a Trojan horse
Trojan Horse
The Trojan Horse is a tale from the Trojan War about the stratagem that allowed the Greeks finally to enter the city of Troy and end the conflict. In the canonical version, after a fruitless 10-year siege, the Greeks constructed a huge wooden horse, and hid a select force of men inside...
. They feared that BA's long-term strategy was to hand over its entire, heavily loss-making, mainline short haul operation to profitable franchisees such as CityFlyer, thereby threatening many jobs and the terms of employment of the remaining mainline employees. They also feared that BA would eventually resemble a "virtual" airline.
Therefore, BA's senior management decided that it was prudent to reduce the number of franchise agreements and to make use of franchisees only if it gave BA a presence in markets it did not already serve itself and where there was no prospect of providing such a service profitably through its mainline operation.
Following the integration of CityFlyer Express into BA's mainline short haul operation at Gatwick, all former CityFlyer employees other than flight crew and engineers working on the jet fleet were made redundant. The ex-CityFlyer flight crew and engineers whom BA continued to employ were transferred along with their equipment to BA's regional bases in Birmingham and Manchester.
BA's subsequent decision to retire the former CityFlyer turboprop fleet, resulted in the withdrawal of the airline's services from Gatwick to Antwerp, Guernsey and Rotterdam.
In addition, the fact that the integration of low-cost CityFlyer Express into the high-cost BA mainline short haul operation at Gatwick inevitably meant that formerly profitable CityFlyer routes were now burdened with the expensive BA mainline overheads, necessitated the withdrawal of additional BA short haul services from Gatwick over the course of a few years, including CityFlyer’s routes to Cologne
Cologne
Cologne is Germany's fourth-largest city , and is the largest city both in the Germany Federal State of North Rhine-Westphalia and within the Rhine-Ruhr Metropolitan Area, one of the major European metropolitan areas with more than ten million inhabitants.Cologne is located on both sides of the...
and Düsseldorf.
At the same time, British Regional Airlines
British Regional Airlines
British Regional Airlines was a franchise partner of British Airways based in Manchester. They operated a large network of domestic and european services from many UK regional airports....
, another British Airways franchise operator based on the Isle of Man
Isle of Man
The Isle of Man , otherwise known simply as Mann , is a self-governing British Crown Dependency, located in the Irish Sea between the islands of Great Britain and Ireland, within the British Isles. The head of state is Queen Elizabeth II, who holds the title of Lord of Mann. The Lord of Mann is...
, was acquired by British Airways as well and in 2002 was merged with British Airways' wholly owned regional subsidiary Brymon Airways
Brymon Airways
Brymon Airways is a former British airline with its head office in the Brymon House on the property of Plymouth City Airport in Plymouth, Devon...
to form British Airways Citiexpress
BA Connect
BA Connect was a fully owned subsidiary airline of British Airways. Headquartered in Didsbury, Manchester, England, it operated a network of domestic and European services from a number of airports in the United Kingdom on behalf of British Airways...
, which would assume the operation of domestic and European services from UK regional airports.
On 1 February 2006, British Airways Citiexpress was renamed BA Connect
BA Connect
BA Connect was a fully owned subsidiary airline of British Airways. Headquartered in Didsbury, Manchester, England, it operated a network of domestic and European services from a number of airports in the United Kingdom on behalf of British Airways...
.
Facts of interest
- Brad Burgess was instrumental in setting up Connectair. He was managing director of both Air Europe Express and CityFlyer Express. He is now chairman of AstraeusAstraeus (airline)Astraeus Limited, trading as Astraeus Airlines, was a British airline based at Astraeus House in Crawley, West Sussex, England. In May 2008, Astraeus changed its business model and ceased full time charter and scheduled service flying to concentrate on sublease activities...
.
- Flight numbers in the 7000 and 8000 range used to be allocated to CityFlyer Express-operated British Airways franchise flights. Following CityFlyer's integration into the British Airways mainline operation at Gatwick, the latter's scheduled services from the airport to AmsterdamAmsterdamAmsterdam is the largest city and the capital of the Netherlands. The current position of Amsterdam as capital city of the Kingdom of the Netherlands is governed by the constitution of August 24, 1815 and its successors. Amsterdam has a population of 783,364 within city limits, an urban population...
Schiphol, BordeauxBordeauxBordeaux is a port city on the Garonne River in the Gironde department in southwestern France.The Bordeaux-Arcachon-Libourne metropolitan area, has a population of 1,010,000 and constitutes the sixth-largest urban area in France. It is the capital of the Aquitaine region, as well as the prefecture...
, Dublin, Jersey, LuxembourgLuxembourgLuxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
, NiceNiceNice is the fifth most populous city in France, after Paris, Marseille, Lyon and Toulouse, with a population of 348,721 within its administrative limits on a land area of . The urban area of Nice extends beyond the administrative city limits with a population of more than 955,000 on an area of...
and ToulouseToulouseToulouse is a city in the Haute-Garonne department in southwestern FranceIt lies on the banks of the River Garonne, 590 km away from Paris and half-way between the Atlantic Ocean and the Mediterranean Sea...
still used flight numbers in these ranges, thus identifying them as former CityFlyer Express routes.