A stubborn competitor

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Joining the Star Alliance and plans to launch on the transatlantic may open a new chapter for British Midland, but chairman Sir Michael Bishop is determined that the airline he has led for over two decades will lose none of its old competitive instincts.

Report by Kevin O'Toole in Castle Donington

To all outward appearances, Sir Michael Bishop is the very image of the reserved English gentleman. The impression is only emphasised by the setting of his office in the British Midland headquarters at Donington Hall - an 18th century manor house complete with flags and turrets set in its own ample grounds in the the airline's ancestral homeland in the middle of the English shires.

But behind the polite, softly spoken exterior there is, perhaps, a little of the British bulldog determination too. Over more than 20 years as chairman and part-owner of British Midland, Bishop has proved a stubborn and independently minded competitor. During that time the airline has slowly but steadily become so too. It is now just shy of being a $1 billion operation, and, with the second largest tranche of slots at London Heathrow after British Airways, has been at the forefront of opening up the cosy duopolies once held by Europe's flag carriers.

Now Bishop has a couple more long-term projects to complete, though they may now possibly be his last before handing over the reins at British Midland. The first is to create alliance competition at Heathrow. After years of studious independence, the airline has signed to the Star Alliance and Bishop has made clear his intent to give BA and its rival oneworld alliance some global competition on its own doorstep. "Our driving strategy is to create the only competing hub in Europe," says Bishop.

The second, perhaps related project, is to take British Midland onto the transatlantic. After years of patient but determined lobbying, Bishop is convinced that a new US/UK bilateral is not far off which will give British Midland US rights out of Heathrow. Long-haul aircraft were ordered earlier this year ready to fly next the summer. They could even be used to launch a new name and livery. Bishop confirms that there is indeed a change of name safely locked away in Donington Hall, but, with a hint of a smile, suggests that it is not absolutely certain yet whether it will be used.

Future plans

So why this apparently brusque overhaul of strategy? Characteristically, it is part of some careful long-term planning. It stems, says Bishop, from a decision taken three years ago when he sat down to map out the next five or so years for his own and his company's business plan. In fact, the two are inextricably linked.

Back in 1978, the year in which Bishop became airline chairman, the investment company which then owned British Midland decided it was time to sell out of the racy airline industry. Bishop and two fellow directors put together a management buy-out. Their investment vehicle, Airlines of Britain Holdings (ABH) still owns 60% of the airline group with the rest held for some time by SAS, although Lufthansa took over half of that as part of the dealing that went on behind British Midland's accession to Star. Given that Bishop has a majority in ABH he also effectively retains control of the airline.

His two investment partners have since retired and Bishop, looking through to 2005 or so, also needed to make plans for retirement. That may not happen for a while yet, but Bishop has said that he will not stay on beyond the normal retirement age of 65 which comes around in another seven years. The company has already been busy assembling a new generation of management from both within and without the company. Bishop points to the chief financial officer who has only just turned 40. It should be remembered that Bishop effectively found himself left running the airline before he had turned 30.

Succession issues, he says, are important for a business which have been "dominated by a series of personalities" including his own. "You have to ensure that the business maintains momentum," he adds.

Crossroads

At the same time, some radical shifts were taking place in the European market. Not least, a new breed of low-cost competition was starting to fan out from the UK. That, says Bishop, left the business standing at the "crossroads", with a fundamental decision to take over whether to join the fledgling low-cost movement or remain the full-service airline that it had always been. Bishop has rarely taken uncalculated risks and, in the end, decided that the surest bet was to stay full-service.

The option of going low-cost was seriously considered, but to do it properly would have entailed swingeing cutback and expensive upheaval. While Bishop believes that it would have been "survivable" it hardly represented best value. Not least throwing away two decades of careful work building up a business presence at Heathrow. "Why would we want to surrender a strategic position there for a business that we didn't really know?" he says. "Whatever we would have done would have become a hybrid. A low cost airline at a high cost airport."

Instead British Midland opened the bidding from the emerging global alliances. The airline already had helped pioneer codesharing, at its height having 18 agreements in place to leverage its position at Heathrow. "The moment in time came when we had to decide to be committed rather than promiscuous."

Other loose strands of British Midland's holdings had already been tied up. Early in 1997, the group's regional arm was floated off as British Regional Airlines (BRAL), with Bishop still as chairman and part-owner. With typical foresight, Bishop had been early to identify the growth potential of the regional business and quick to see BRAL sign up as a BA franchise partner.

In the global alliance stakes, British Midland could clearly not contemplate joining BA-led oneworld. KLM/Northwest quickly dropped out of the running, leaving Star or the emerging Air France/Delta grouping, since officially named SkyTeam. Bishop says that both had potential and that the contest was closer than many imagined. The fact that Star founder partner held a stake was not even a factor, although it may have caused SAS some anxious moments. A chief attraction of Air France was the presence of its new president Jean-Cyril Spinetta, for whom Bishop has candid praise. "He has done a fantastic job and changed the shape of the business," he says.

Ultimately though it was Lufthansa and Star that made the grade and British Midland officially joined at the start of July. But Bishop is insistent that he will not abandon the crusade to raise competition in Europe. "I'm not actually prepared to give up the principle of competition just because we've joined an alliance," he says. "It's the same old British Midland underneath, wanting to make sure that the consumer gets best value." All that has changed is that the focus has shifted to ensuring that alliances compete.

He points to the model of Chicago O'Hare, where US rivals American and United both hold around 40% of the slots and have long been pitched in head-on competition. At Heathrow, the balance will rather be less even. BA and its partners can muster well over 40%, while Star would be on 27% once British Midland's 14% is added into the equation. But Bishop is undeterred. "Our mission is to see that global alliances are competing," he says, although adding that not all of the Star members necessarily share that goal, at least not those with their own fortress hubs to defend.

He admits that the Star membership has meant a massive upheaval of the route network, with 25-30%moved at a stroke. Such change is clearly against Bishop's naturally cautious instincts. British Midland has rarely launched more than a single route a year, aiming to get it right before moving on. "I've seen a lot of people come low in this business over the last 30 years, by pulling out all the stops too soon, so perhaps one has a natural caution," he says.

Accession to Star was accompanied in May by new flights to Madrid, Milan and Rome four times a day and the closure of routes to Prague and Warsaw. This withdrawal from Eastern Europe was primarily due to the market protectionism that still hampers effective competitive, although Bishop concedes that joining Star did help to "concentrate the mind".

Atlantic crossing

The transatlantic plans were also launched two years ago as part of the long-term game-plan to secure the airline a profitable future. Such services could certainly help cushion British Midland's exposure to an increasingly competitive European market. "The Atlantic can be cruel but it has remained profitable for a lot of airlines when other parts of their business have been losing money," says Bishop, highlighting the fact that however much BA has suffered on the Atlantic its heavy losses have came from Europe.

British Midland already has the necessary infrastructure in place, including handling and line maintenance. Six years ago it also set up a Boeing 747 maintenance hangar - again part of Bishop's famously long-term planning.

Bishop is too shrewd to give too much away about the precise shape of his transatlantic plans. But, it will follow "the pedigree of the airline", suggesting a focus on high-yield business travellers. From the start, the "big question" was over aircraft size: whether to join Virgin with high seating capacities (it has even mooted buying the Airbus A3XX), or learn from BA, which is rapidly slimming down to the Boeing 777 big twin to concentrate on high-yield point-to-point markets.

Having done its homework, British Midland has gone for small, placing orders for up to four 211-seat Airbus A330s. "It is big aircraft churning out a lot of cheap seats that creates the strain [on yields]," warns Bishop. He suggests that Star partner United will "complement" the business, while British Midland itself has healthy feed - not least from the UK domestic market which still accounts for 40-45% of its Heathrow flights.

The aircraft arrive in April and the plan is to start flying shortly after that. That, of course, assumes that the US and UK negotiators can emerge at the end of this year with a new bilateral which would, as a minimum, allow a new entrant at Heathrow on either side. History has not favoured optimism, but Bishop expresses almost absolute certainty that the deal will be ready by the end of the year, even if it goes to the wire.

Such certainty has added significance coming from Bishop, a man not given to making rash promises and whose plans are never less than meticulous and whose UK political connections are legend. Although he has shunned the sort of limelight hogged by Virgin, Bishop is an old hand at effective lobbying with 30 years of hard experience in fighting for market access.

While he concedes that the latest set of bilateral talks in Washington have not been conclusive, he argues that they have gone well. "The whole atmosphere has changed. I think that there's an understanding between both governments," he says, noting that both transport secretaries have publicly committed themselves to a deal by year-end. Both have their political reasons for wanting to be able to show progress on this nagging trade issue between the two countries. Bishop also drops some tantalising hints that there have been indications that they mean to get it. There is also a possibility that BA's strategic alliance plans, now fluid, will have taken firmer shape by then, giving bilateral negotiators on both sides more to work with.

The immediate prospect is for a phased deal, gradually stepping opening up Heathrow beyond the two incumbents on each side. At present, the proposal is for British Midland to start the ball rolling by taking four daily frequencies in return for two new US carriers coming in with two daily flights each. The question of slot surrender is apparently not on the agenda. Bishop argues that the new US entrants would have opportunities to buy slots on the grey market and could look to their European alliance partners to help.

No regrets

Bishop says that looking back, he has "no regrets" about the decision to join an alliance rather than turn British Midland into a low-cost carrier.

Along the way he also resisted the temptation to create an independent merger with Virgin Atlantic. Sir Richard Branson was a persistent suitor and even even offered Bishop the chairman's role. On paper that would have brought together BA's two homegrown competitors into a group with reach in Europe and beyond. Yet it is hard to imagine a greater contrast in personal style between Branson's brazen publicity seeking and Bishop, who politely but firmly turns down even the most modest of photo opportunities. Ultimately the Virgin offer "never got as far as the numbers" foundering on Bishop's insistence that any merged company would have to be publicly floated.

The start-up for which Bishop reserves his most unqualified admiration is for Ryanair and the pure low-cost vision it has pursued under the leadership of its chief architect and chief executive Mike O'Leary. "He's quite the most talented person to come into the industry over the last 20 years," says Bishop, adding that other low-cost pretenders have failed to come "within a shade" of his vision.

There is perhaps just a hint that Bishop himself would have relished the same opportunity to reinvent a carrier without the expensive trappings that have shackled the established airlines. He expresses "genuine horror" and some sympathy at the fact that a flag carrier such as BA, with the strength of its route network, can still lose money. Yet Bishop was not about to take commercial risks with British Midland, whatever the excitement it might have generated. He still bears in mind a warning handed down by his own first chairman "not to confuse movement for action". It is advice that he has taken to heart.

A long-serving knight

Sir Michael Bishop is executive chairman of British Midland, the airline group he has led for the best part of three decades and in which he holds a controlling stake, together with two investment partners via Airlines of Britain Holdings(ABH).

He is also chairman of British Regional Air Lines (BRAL), the British Airways franchise carrier that was floated off from British Midland, and a non-executive deputy chairman of Airtours, the UK leisure company.

• Born in 1942 in Bowdon, Cheshire, and educated at the private Mill Hill School, he then joined the family business in commercial vehicles.

• Keen to make a career in aviation, he left in 1963 to set up a handling operation for Mercury Airlines, a small local carrier at Manchester Airport. A year later, British Midland took over the airline and its young station manager.

• By 1969 he had become general manager of British Midland and three years later rose to managing director, becoming chairman in 1978.

• The investment group that then owned British Midland decided to sell out and Bishop, together with two other directors, led a management buy-out.Their group still holds 60%of the airline.

• British Midland launched its first international flights from London Heathrow in June 1986.

• Following a keen interest in music, Bishop became chairman of the D'Oyly Carte Opera Trust, the famous Gilbert & Sullivan opera company that was revived in 1988.

• Bishop was knighted in 1991 and in the same year joined the board of the UK's new terrestrial television station Channel 4, serving as chairman from 1993 to 1997.

• BRAL was split out from the British Midland group in 1996 and publicly floated, although ABH retains a controlling stake.

• In July 2000 British Midland officially joined the Star Alliance. As a preamble to the deal, Lufthansa took over half of the 40%stake held by partner SAS since the mid-1990s.