“This is an airline that really has to bite the bullet on short-haul, looking long and hard at what it’s costing and whether they can ever get a decent margin out of it,” said Howard Wheeldon, senior strategist at BGC Partners LP in London. “Some U.K. and European routes have a very limited future.”
Fares between European countries have declined as discount carriers Ryanair Holdings Plc and EasyJet Plc grab market share. Trips such as London to Paris, the route where British Airways pioneered the first international air service in 1919, may be among the first to go because of the shrinking profit margins and the impact of the competing Eurostar high-speed rail service, Wheeldon said.
British Airways is already the biggest carrier between Europe and the U.S. The business-class-only experiment from London City airport will help Chief Executive Officer Willie Walsh determine whether the company can fill planes with people flying to and from the U.K. capital alone, or if it still needs a substantial European network to feed passengers from around the region onto long-haul flights.
Premium Reliance
The carrier, Europe’s third-largest, has historically made almost all of its profit from first- and business-class travel and last year derived 45 percent of revenue from premium tickets that accounted for only 13 percent of seat sales. BA’s revenue fell 12 percent in the three months through June as it had a 106 million-pound ($169 million) net loss, the carrier said July 31.
The recession has led to a 12-month decline in bookings that has left premium seats sparsely populated as people avoid flying or trade down to economy class. Premium traffic at the carrier fell 12 percent last month, compared with a 1.3 percent gain in coach, and Walsh told shareholders on July 14 that demand may never fully recover.
The declines have prompted London-based British Airways to review its model for short-haul services and the Club Europe business-class brand, Peter Simpson, managing director of the CityFlyer regional unit, said in a Sept. 21 interview. His division is responsible for European and domestic routes already served from London City.
Market Will Decide
“We have looked at Club Europe within the current environment and our customers are telling us that ‘yes,’ there is a demand,” he said. “The market will dictate whether it’s still around in five year’s time.”
British Airways was little changed at 212.9 pence as of 12:30 p.m. today after falling for six consecutive days in London trading, while the Bloomberg EMEA Airlines Index declined 0.8 percent. BA shares have surged 71 percent in the past three months, amid optimism that the slump in premium travel may be bottoming out. Deutsche Lufthansa AG has gained 33 percent in that period and Air France-KLM Group has advanced 34 percent.
Richard Tams, BA’s U.K. and Ireland sales chief, said in an interview that the carrier still needs European feeder traffic to help sustain longer routes and that, for business travelers, offering daily flights is a minimum requirement.
The London-New York service beginning tomorrow will provide evidence of the carrier’s ability to lure bankers, lawyers and other professionals with a premium-only product costing 1,900 pounds for a roundtrip ticket. Financial institutions accounted for 13 of the airline’s top 50 clients last year.
Canary Wharf, City
The service from London City is targeted at frequent travelers based in the nearby Canary Wharf complex and the main City financial district five miles (8 kilometers) away. The twice-daily service will be given the flight number BA001, which was used for the Concorde, and will operate two Airbus SAS A318 planes that must refuel in Ireland on outbound trips because the airport’s short runway limits takeoff weights.
British Airways will seek to make a virtue of the stopover by processing passengers through U.S. immigration while on the ground at Shannon airport, reducing queuing times in New York. The route will be the carrier’s first business-only service from the U.K. since it ceased flights with Concorde in 2003.
If it could start again, British Airways would probably become some sort of an all-premium long-haul carrier and not offer short-haul trips, said Gert Zonneveld, a London-based analyst at Panmure Gordon who rates the stock “hold.”
‘Unviable’ to Compete
“It’s a very, very difficult strategy to adopt but it’s necessary,” BGC’s Wheeldon said. “It might not happen this year or next, but at some point it will need to occur. The EasyJets and Ryanairs aren’t going to go away and at some point it becomes unviable for BA to compete.”
British Airways on Sept. 25 was advertising roundtrip flights from London to Frankfurt during the German city’s book fair in October for 108 pounds. Ryanair ticket prices during that period include a roundtrip for 29.10 pounds.
BA has dozens of short-haul routes from London, including flights to Amsterdam, Geneva and Toulouse, France. The carrier has already cut flights to destinations such as Dublin and Zurich this year as it trims capacity to match falling demand.
Not everyone agrees British Airways should cut back. HSBC Securities analyst Robin Byde said British Airways will be wary about shrinking its European network much further after already falling behind Air France-KLM and Lufthansa following a series of acquisitions by the pair.
Network Needs
“BA to a degree lacks scale and diversity,” London-based Byde said. “It’s a smaller airline by some measures than Air France and Lufthansa, and additional network and scale is going to be needed if they want to keep competing.”
U.K. rival Virgin Atlantic Airways Ltd. and Dubai-based Emirates are among carriers that have established business models based around point-to-point, intercontinental routes with minimal short-haul connections.
“If they can make it work it’s a bit of a holy-grail product,” said Nick Cunningham, an analyst at Evolution Securities in London who has an “add” rating on British Airways stock. “Short-haul premium may be nearly dead, but when M&A picks up there’ll still be bankers flying all over the place, so the guys from Goldman and JPMorgan will still be on the plane.”