British Caledonian in The 1980s - A New Airline For Europe

A New Airline For Europe

The collapse of the oil price during the mid-1980s had serious repercussions for BCal's revenue and profit projections as this impacted the oil-related business routes on which the airline had depended for most of its profits since the late 1970s. All of these routes carried fewer premium business travellers than anticipated. This in turn led to a sharp decline of those routes' profitability and, hence, their contribution to the airline's overall profitability. In the case of the newly acquired Saudi Arabian routes this meant that they delivered less than half the projected profits.

The limited route transfer had allowed BCal to grow its scheduled capacity to about 18% of all UK scheduled airline capacity, while BA only suffered an insignificant reduction in its share of total scheduled capacity.

BCal's 18% share was still far less than the minimum size BCal needed to acquire the economies of scale to compete with BA and the giant US carriers on a level playing field. This was also less than what had been envisaged in the Edwards report prior to BCal's formation.

This situation was unsatisfactory for the airline and unrewarding for its shareholders.

Therefore, under pressure from its controlling shareholder 3i, the search for a new, long-term strategy began.

As a consequence of its main shareholder's dissatisfaction, the British Caledonian Group's board of directors established contact with ILG's board in November 1985. The purpose of this meeting was to begin exploring ways of combining BCal's and Air Europe's separate short-haul operations in a new joint venture that would have enabled both airlines to acquire the economies of scale to compete with a privatised BA on a level playing field. Another objective of this exercise was to smooth out each other's peaks and troughs, for BCal's peaks occurred during week days while Air Europe's occurred on week-ends. This meant that both airlines could offer their spare capacities to each other to achieve an overall higher level of equipment utilisation and higher load factors throughout the week. ILG's dominant position in the inclusive tour market would also have helped BCal to significantly increase its generally low short-haul loads by filling seats that would otherwise remain empty with ILG's clients, especially on week-ends. A series of meetings ensued. The result was a 150-page study entitled An Airline for Europe. It envisaged the commencement of joint scheduled operations from Gatwick to Hamburg, Munich, Düsseldorf, Milan Linate and Nice in 1987. The next stage of development was to occur during the 1988/89 winter timetable period when further routes linking Gatwick with Copenhagen, Stockholm, Vienna, Rome and Athens were to be added. The study also envisaged adding services from Gatwick to Zürich, Dublin, Madrid and Lisbon at a later stage to enable the joint venture to acquire sufficient economies of scale to become a viable entity in the long term. However, it recognised that it might be difficult to implement the last stage of the envisaged expansion as the relevant routes had already been licensed to Dan-Air.

The study also made profit projections for each stage of the envisaged joint venture's development.

These were:

• £3.7 million for 1987/88.
• £5.5 million for 1988/89.
• £25.2 million for 1989/90.

The latter represented a return on total equity employed plus previously retained earnings of 18.2%. This was substantially better than BCal's short-haul operation could have hoped to achieve on its own.

Despite several rounds of talks being held that lasted well into the first half of 1986, both sides eventually decided not to proceed further with their joint venture study and to go their separate ways.