View Full Version : Lessons For Flag Carriers From Down Under?

30th Oct 2002, 20:51
Dow Jones
Wednesday October 30, 2:45 PM

THE SKEPTIC: Lessons For Flag Carriers From Down Under?
(This story was originally published Tuesday)
By Howard Wheeldon

LONDON (Dow Jones)--Oh no, another new low-cost airline took off this week.

But don't worry, this one is hardly going to affect those that fly this already-lucrative market in Europe - though European flag carriers may do well to heed the strategic lessons this new airline seeks to demonstrate.

So what's the name of this mysterious new airline?

Australian Airlines. That's right, a new and wholly-owned offshoot of flag carrier Qantas (A.QAN), which will take over some routes where its parent consistently failed to make money.

But this is a low-cost airline with a difference. For a start, it's one that has no plans to offer cheap flights. Instead of lowering ticket prices, Australian's idea is to make profits by securing and operating on a low-cost base.

Like its parent, Australian will offer a standard economy cabin configuration, initially using four Boeing (BA) 767s, and is aimed at the lucrative Australian tourist business.

And with a low cost base, the idea is this new airline, operating at first on routes that don't conflict with Qantas, should be profitable with 75% of its seats filled.

These days, the big flag carriers need near 90% of seats filled to make any decent contribution to the bottom line.

Qantas' new way of thinking makes sense - and British Airways (BAB), which currently owns around 18% of Qantas shares, would do well to watch Australian Airlines' flight plan.

Remember, it wasn't so very long ago that British Airways formed an offshoot called Go with the aim of competing in the high-growth, low-frills market.

Trouble was, BA wasn't committed to this segment and couldn't get away from fears Go would compete with its normal services. And when the going got tough, British Airways sold off Go.

True, unlike Go, Australian Airlines won't face much in the way of competition, whereas when BA started Go both Ryanair (RYAAY) and Easyjet (U.EZJ) were already well-established.

The point is that in creating Australian, Qantas seems to be ensuring its new child will be properly brought up. And if the idea works, it seems likely Qantas would look to float shares of the new operator.

True, starting a new airline without cutting ticket prices looks a bit risky, especially in a travel market battered by the terror attacks of the past 14 months. The bomb attacks in Bali in early October, in particular, are likely to keep Australian travelers feeling jittery.

But in taking such a chance it looks like Qantas is showing British Airways what it should have done - and what it might still have to consider - to fix its troublesome European route network.

Perhaps British Airways would do well to divorce these routes from the rest of the company and let them operate as a separate entity, leaving the parent to do what it's best at - long haul travel.

And if that idea appeals to British Airway's management, could we perhaps suggest a name: British European Airways? After all, that was the name of the short-haul flyer merged into BOAC to form British Airways in the first place. -By Howard Wheeldon, Dow Jones Newswires; (44 207) 842 9251; [email protected]