Strategic Meetings Summit London, 26 September,
September 29 2022, Kimpton Fitzroy London
Friday 30 September 2022, JW Marriott Grosvenor
A brief British Airways (BA) press release arrived at the ABTN offices last week. Now a BA positive media story is a rare thing in itself, as the airline has a reputation for hiding most of its good news, although this one suggested more questions than answers.
”British Airways has joined with TPG Capital, Vista Capital, Inversiones Ibersuizas and Quercus Equity to investigate a possible consortium offer for Iberia,” the statement read. ”There is no guarantee that a formal bid will be made. The airline has previously ruled out further capital investment as part of any consortium offer and will not make an independent bid for the airline.”
The first question is why? Why does BA want to get involved with Iberia (IB)? The history of airline investment in other carriers is poor.
Go back into history and you can uncover real disasters, with recent examples including: Singapore and Air New Zealand; Swissair with Sabena; BA themselves with Qantas and both French and German operations that have disappeared. Lufthansa (LH) has taken over bankrupt Swiss and Air France (AF) KLM. However, these are still early days with the jury out.
Passenger reports regarding Iberia are not very encouraging. Yes, the European business class is as good as you will get but even with the latest flat bed seats, IB is not setting very high standards with its long haul operations, which are mainly to South America. Find an alternative carrier seems to be the general thinking.
Why invest in Iberia? Is it a business move by a cash rich enterprise looking for expansion and prepared to gamble? No. Iberia grew revenues by 10% to EURO3.7bn ($7.3bn) during 2006, but profits from operating activities fell 64%.
Is it a defensive measure against competitors? If that were the case would competitors be interested in the product? The answer here seems to be no too, as BA”s two main rivals, LH & AF, have enough on their plate.
Is it a way of integrating two businesses, the sum total of which will give a more remunerative proposition? Now this might be the answer, but joining together BA and IB is a rather more daunting task than the AF/KLM partnership.
BA has virtually abandoned the very busy South American market. The airline wants to steer its customers over Madrid, but with direct flights only to Sao Paulo, passengers have a choice of Amsterdam, Paris and Frankfurt, as well as the Spanish hub to make a connection. There is little doubt that what the clients want is non-stop flights from London to Rio, Buenos Aires and Santiago.
ABTN believes that BA needs to look very carefully at the commercial scenario regarding South America, as it is no good being clever with the City and attempting some glorious take-over which will turn sour at a later date. Just like the lawyers, fund managers are not around to be nice, but to make money and just watch them abandon any enterprise that comes slightly off the rails. Many of the so-called analysts are very clever at number crunching but know little of the inner workings of an airline.
Sadly, the one takeover that might have made sense never happened. KLM and Amsterdam (AMS) might have made a perfect partnership for BA - don't forget the ”London's third airport” campaign - as diverting regional connecting traffic into AMS would have relieved Heathrow and perhaps opened up slots for South America.
Very senior people at KLM were keen and certainly not happy with any AF relationship - after all the British and the Dutch have got on pretty well in terms of leisure and business over the years. The problem was that Rod Eddington, BA CEO at the time, had other things to worry about and clearly did not give it much attention.
All is not lost, however, as under the new bilateral and EU rules BA could move into AMS (or Paris for that matter) and begin to make it a hub. In fact it is a far cheaper scenario than the KLM take-over, although BA has a history of being slow off the mark. Brymon, which BA controlled, was the first airline into London City Airport, but with no backing from its major shareholder it did not have the finance to develop the operation (which AF took over and continues with). BA returned and the operation is now profitable.
ABTN says don”t just look at the bottom line Mr Walsh - consider the wider (commercial) considerations. Does Britain's national airline really want to get involved in Latin wars? There has been no payout for investors this year. Get BA right and then look around.