chipsbrand
18th Apr 2012, 07:26
Dear Sir Richard,
Please let me tell you why any appeal against the EU’s decision in respect of bmi is a waste of time and money.
The time to challenge the future of bmi was at the time that Sir Michael Bishop chose to sell the company to LH. That was when he did a deal with them which included a put option for them to acquire the business when he mandated it. The date of that deal was around 12 years ago. The EU looked at that deal when Sir Michael forced LH to acquire the company and they nodded it through. That was when Virgin should have started a major campaign against the whole deal. It was at that stage that the pass was lost.
Then bmi already was an effective competitor to BA at LHR on many routes and its network was still building. That bmi had a network at all goes back to 1984 when there was something called the Civil Aviation Review. That review was ordered by the government to assess the almost universal view of the private aviation sector that the privatisation of BA would damage the private sector. There was a united front in favour of safeguards for the rest of the industry until bmi broke ranks. It was widely believed at the time that bmi broke ranks because of a deal between Michael Bishop and Lord King, then Chairman of BA under which BA would not object to bmi competition at LHR. The prize for BA was to neutralise BCAL which was then its only likely long haul competitor. At that time BCAL was prevented from operating at LHR and wished to do so. Whatever the truth around the suspicions about that deal the net effect was that BCAL was prevented from operating at LHR and bmi was free to expand there. BCAL died 4 years later and was bought by BA.
bmi did expand and started to put together a credible network of largely reasonable frequency routes on both domestic and international routes. It competed head-on with BA on many of those routes and gained an excellent reputation with its Diamond Service. Although the product had changed the network was largely intact when LH acquired the company.
At the time of the Civil Aviation Review the debate was largely about British competition for BA. This was all several years before the liberalising legislation of the EU. Their first directive about liberalisation came about in December 1987.
The network that bmi built up at LHR was indeed British completion for BA. bmi’s assets at LHR, namely slots, were indeed British assets used to provide competition. But all this changed when the company was sold to LH. They became non-British assets and were free to be used in any way that LH wanted. So, perhaps inevitable, LH went about reducing the bmi network and transferring the slots to themselves, Austrian, Swiss and SN. In this process LH substantially increased competition between their group and BA by increasing frequencies between LHR and numerous cities in the homelands of those airlines but they decreased completion between British airlines. It is this transfer of sovereign rights that Virgin should have contested. Probably the only way to have done that would have been to buy bmi at any price. Aviation experts like me believe that Virgin did not have the money to do that at any time, possibly because of a hostile view by SQ as the very large minority shareholder. But the battle was lost then.
What is left of bmi is just a tiny part of its former self. The competitive routes are all included in the concessions extracted by the EU. Basically they are EDI, ABZ, CAI, MOW and RUH. Currently they are all loss making. I do not have access to bmi’s accounts but it would not surprise me if these routes together did not lose at least £50 million per year. bmi has no competitive advantage on any of them. BA flies roughly twice as many daily flights on EDI and ABZ as bmi did. This alone means that effective competition on anything other than price is impossible. Aviation experts believe that around 60% 0f BA traffic on EDI is self-interlining. So that traffic is not open to competition. ABZ is probably 40% self-interlining. A large part of bmi’s traffic on both routes was interlining with other airlines at LHR was thus very low yielding.
MOW and CAI will be loss making for any conventional airline. Just look at the CAA’s traffic figures and work out the load factors.
So, Sir Richard, if you get all the slots my guess is that you will have to pay £50 million plus for them. You will then fine annual losses of around £50 million for the three years that you must operate all those routes and you will have one-off reorganisation costs of perhaps £100 million. How anyone can meet the criteria of the EU’s requirements which include an independently evaluated business plan currently escape me.
Good luck. Have SQ agreed to share these losses?
One other thing, since Virgin have started several other airlines have done a fine job in creating a real success in competition. All in strong contrast to Virgin. Ryanair is one. It is now the largest international passenger carrying airline in the world. It has the largest market capitalisation of any airline in the EU, it has the best on-time record of any European airline, it is the biggest passenger carrying airline in the EU, it has more than 300 aircraft, it is the biggest intra-Spain airline, it totally dominates Irish Sea routes (except LHR). It never whinges about lack of competitive opportunities. Neither does EZY which started more than 10 years after Virgin. Wizz is bigger than Virgin, and so is Norwegian. Neither of them whinges about competition either.
The real problem, Sir Richard is that you only want to expand at LHR. The problem there is that it is not big enough for anyone. So what you ought to be doing is campaign for its expansion.
Please let me tell you why any appeal against the EU’s decision in respect of bmi is a waste of time and money.
The time to challenge the future of bmi was at the time that Sir Michael Bishop chose to sell the company to LH. That was when he did a deal with them which included a put option for them to acquire the business when he mandated it. The date of that deal was around 12 years ago. The EU looked at that deal when Sir Michael forced LH to acquire the company and they nodded it through. That was when Virgin should have started a major campaign against the whole deal. It was at that stage that the pass was lost.
Then bmi already was an effective competitor to BA at LHR on many routes and its network was still building. That bmi had a network at all goes back to 1984 when there was something called the Civil Aviation Review. That review was ordered by the government to assess the almost universal view of the private aviation sector that the privatisation of BA would damage the private sector. There was a united front in favour of safeguards for the rest of the industry until bmi broke ranks. It was widely believed at the time that bmi broke ranks because of a deal between Michael Bishop and Lord King, then Chairman of BA under which BA would not object to bmi competition at LHR. The prize for BA was to neutralise BCAL which was then its only likely long haul competitor. At that time BCAL was prevented from operating at LHR and wished to do so. Whatever the truth around the suspicions about that deal the net effect was that BCAL was prevented from operating at LHR and bmi was free to expand there. BCAL died 4 years later and was bought by BA.
bmi did expand and started to put together a credible network of largely reasonable frequency routes on both domestic and international routes. It competed head-on with BA on many of those routes and gained an excellent reputation with its Diamond Service. Although the product had changed the network was largely intact when LH acquired the company.
At the time of the Civil Aviation Review the debate was largely about British competition for BA. This was all several years before the liberalising legislation of the EU. Their first directive about liberalisation came about in December 1987.
The network that bmi built up at LHR was indeed British completion for BA. bmi’s assets at LHR, namely slots, were indeed British assets used to provide competition. But all this changed when the company was sold to LH. They became non-British assets and were free to be used in any way that LH wanted. So, perhaps inevitable, LH went about reducing the bmi network and transferring the slots to themselves, Austrian, Swiss and SN. In this process LH substantially increased competition between their group and BA by increasing frequencies between LHR and numerous cities in the homelands of those airlines but they decreased completion between British airlines. It is this transfer of sovereign rights that Virgin should have contested. Probably the only way to have done that would have been to buy bmi at any price. Aviation experts like me believe that Virgin did not have the money to do that at any time, possibly because of a hostile view by SQ as the very large minority shareholder. But the battle was lost then.
What is left of bmi is just a tiny part of its former self. The competitive routes are all included in the concessions extracted by the EU. Basically they are EDI, ABZ, CAI, MOW and RUH. Currently they are all loss making. I do not have access to bmi’s accounts but it would not surprise me if these routes together did not lose at least £50 million per year. bmi has no competitive advantage on any of them. BA flies roughly twice as many daily flights on EDI and ABZ as bmi did. This alone means that effective competition on anything other than price is impossible. Aviation experts believe that around 60% 0f BA traffic on EDI is self-interlining. So that traffic is not open to competition. ABZ is probably 40% self-interlining. A large part of bmi’s traffic on both routes was interlining with other airlines at LHR was thus very low yielding.
MOW and CAI will be loss making for any conventional airline. Just look at the CAA’s traffic figures and work out the load factors.
So, Sir Richard, if you get all the slots my guess is that you will have to pay £50 million plus for them. You will then fine annual losses of around £50 million for the three years that you must operate all those routes and you will have one-off reorganisation costs of perhaps £100 million. How anyone can meet the criteria of the EU’s requirements which include an independently evaluated business plan currently escape me.
Good luck. Have SQ agreed to share these losses?
One other thing, since Virgin have started several other airlines have done a fine job in creating a real success in competition. All in strong contrast to Virgin. Ryanair is one. It is now the largest international passenger carrying airline in the world. It has the largest market capitalisation of any airline in the EU, it has the best on-time record of any European airline, it is the biggest passenger carrying airline in the EU, it has more than 300 aircraft, it is the biggest intra-Spain airline, it totally dominates Irish Sea routes (except LHR). It never whinges about lack of competitive opportunities. Neither does EZY which started more than 10 years after Virgin. Wizz is bigger than Virgin, and so is Norwegian. Neither of them whinges about competition either.
The real problem, Sir Richard is that you only want to expand at LHR. The problem there is that it is not big enough for anyone. So what you ought to be doing is campaign for its expansion.