British Caledonian in The 1980s - Merger Discussions

Merger Discussions

By July 1987, BCal had already exhausted most of the proceeds from the asset disposal programme.

The proceeds from the sale of two DC-10s to Continental Airlines was all that was left to keep the airline in business. Senior management realised that the company was unlikely to survive on its own and that it needed to act fast if it wanted to avoid BCal's collapse.

Therefore, the search for a financially strong partner acquired a renewed sense of urgency.

Several rounds of talks that were aimed at achieving a full-scale merger ensued with various airlines in the UK, the US, Canada and Europe.

BCal's future prospects as a stand-alone, medium-sized airline operating a variety of short-, medium- and long-haul scheduled services were rapidly diminishing against a background of looming consolidation in the airline industry. This was driven by the giant US carriers that had begun channeling their traffic flows into powerful hub-and-spoke operations, rather than feeding these into the networks of BCal and other international partner airlines, in the wake of US deregulation. In addition, BA's impending privatisation and the Government's refusal to fully implement the recommendations contained in the CAA's airline competition White Paper meant that BCal was unable to acquire the economies of scale it needed to compete with these airlines on a level playing field. This prevented BCal from achieving higher volumes over which to spread its fixed costs. It also deprived the airline of the capacity to generate the funds to continue investing in fleet renewal, further network expansion and new information technology systems.

BCal's basic dilemma at the time can be summed up as follows:

It had become a mid-sized airline that was too big to be a specialist, niche operator. Yet it was too small to effectively compete with BA and the US giants in terms of economies of scale and scope. At the same time, it was unable to match the significantly lower costs of emerging, aggressively expanding Far East competitors, such as Cathay Pacific.

BCal's precarious financial position made it obvious for most of its rivals and seasoned industry observers that the ailing airline lacked the financial strength to survive on its own for much longer.

BCal had valuable traffic rights to operate scheduled services on a number of lucrative, long-haul routes to parts of the world that were not served by any other British airline at that time. It therefore became a desirable takeover target and a bidding war ensued between several potential suitors.

The chief protagonists in this takeover battle were BCal's archrival BA as well as ILG/Air Europe and SAS.