Widening the franchise

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Kevin O'Toole/LONDON

When Cityflyer Express first signed up as a British Airways franchisee in the middle of 1993, it was something of an experiment for both carriers. Five years later the formula appears to be working. When BA hosts fifth anniversary celebrations in July, it will do so with nine franchise partners now flying in BA colours in Europe and beyond. Together they carry some 7 million passengers a year.

In fact, the elements of the formula are hardly new. The franchise concept is already used all over the world to sell everything from hotel rooms to hamburgers. Neither are there any surprises in the prospect of a major carrier lending its branding to a regional affiliate. The major US airlines have spent much of the past two decades since deregulation surrounding themselves with a ring of regional codeshare partners and express operations feeding into their major hubs. Carriers in Europe have been slower to respond, but the concept is beginning to take hold.

BA's contribution has been in combining the two concepts, creating a formula flexible enough to be used throughout the world and without the distractions over scope clauses, ownership issues and occasional codeshare disputes that have marred the US experience.

A FLEXIBLE FORMULA

The basics are simple enough. The franchise partner gains access to BA's branding, service standards and, last but not least, its global marketing reach. In return, BA maintains a presence in small or low cost markets where it would have little hope of making the economics stack up with its own direct services.

What the franchise agreement does not cover is how the partner airline is run, what aircraft it flies, what prices it charges or, ultimately, who owns it. That is a large part of the attraction, says Lewis Scard, BA's general manager for franchises and alliances. "It's what a lawyer would understand as a licensing agreement. It's all about intellectual property," he says.

BA's role is to ensure that its brand is used wisely, but it is not obliged to invest in the operators or their aircraft. CityFlyer is fairly typical, as a young, privately-owned regional, operating from London Gatwick, now fast developing as BA's second hub. Similarly British Regional Airlines (BRAL), GB Airways and the Birmingham-based Maersk Air operation are owned by other airline groups.

When BRAL first signed up for a franchise it was still a sister company of BA's arch competitor and sometime critic British Midland, although the two have divided to allow the regional carrier to capitalise on the franchise business. The only partner in which BA now holds equity is its Brymon Airways subsidiary, but that is treated like any other franchise.

The concept also appears to have travelled well, having already been taken overseas to Sun-Air in Denmark and as far afield as South Africa with Comair, which has traded heavily on the BA name. More are promised around the world giving BA access to regional in markets it could not hoped to have tapped.

Much of the franchise operations, however, taking on routes that BA can no longer afford to serve. Virtually all of the Mediterranean tourist routes have already been passed over to partners with the costs to compete with the charter carriers, and British Mediterranean was signed up a year ago to serve the Middle East.

The same arguments apply on core such as Amsterdam, Dublin and Düsseldorf which CityFlyer now serves from the Gatwick hub. At the end of this month it will use its new Aero International (Regional)Avro RJ100s to take over services to Zurich. Increasing environmental penalties at the Swiss airport had tipped the cost balance against BA's 737-200 services. Scard suggests that BA's mainline services have plenty of other calls on their assets.

He sees the only limit as bottom line economics. "If there's a service within the BA portfolio which we're unable to run, that is not a financial success and we don't think that we can turn it around, then we'll allow another carrier to take it over," he says, indicating that the issues of route or aircraft size are largely incidental.

Neither are the franchise partners tied wholly to the BA network. Typically, perhaps only 10-20% of passengers connect on to longer haul BA flights. Scard reckons that across all the partners about 500,000 passengers a year are transfers to BA out of a 7 million total.

THE FRANCHISE FAMILY

Discussing franchising with CityFlyer managing director Brad Burgess and Scard at the regional carrier's Gatwick office, the conversation quickly turns to discussion of the importance of developing relationships rather than fulfilling contractual terms. Neither man can remember an occasion when they had to resort to citing the franchise agreement.

It is a founding principle of BA's grand alliance strategy that the ultimate goal should be to present the customer with a seamless service, regardless of whether BA or one of its partners is running the flight. "It's about becoming a member of the family. Moving traffic throughout the system has to be done as if it were one system," says Scard. That includes the powerful BA sales and marketing machine, selling tickets regardless of the ownership of the airline flying the service. "If we didn't we would never sign another franchise partner," adds Scard.

"There are lots of opportunities which aren't in the franchise agreement, but are opened up because of our relationship," says Burgess. One such option is the ability to work with other franchise partners on joint purchasing or fleet management. CityFlyer itself recently wet leased a 19-seat turboprop to fill a short term capacity gap. Because it came from a fellow BA franchisee, the aircraft and crew slotted in with no problems over cabin layout or service standards.

CityFlyer itself has clearly thrived on the franchise formula. From a standing start, the airline passed the 1 million passenger mark last year and is now second only to its franchisor at Gatwick, with 12%of the airport's slots against around 25% for BA.

Such growth was difficult to imagine when the airline first took to the air with Shorts 360s back in 1991. In fact, Burgess admits that any deal with BA seemed an unlikely event when he and CityFlyer Chairman Richard Wright first set out to get the airline in the air.

Their tale dates back to 14 years earlier and the launch of another regional Gatwick carrier, Connectair. At first, the airline flew for British Caledonian Airways, but when that was absorbed into BA, Burgess says that the management team received "an offer it could not refuse" to defect to the International Leisure Group(ILG).

ILG snapped up the regional to help expand its Air Europe arm at Gatwick and Connectair was duly absorbed into the group as Air Europe Express. When the ill-fated ILG collapsed in 1991, the former Connectair management team was left looking for a new start.

Burgess says that in the depths of a severe airline recession and with cash tight, their ambition was to find a major airline partner rather than go it alone. He adds that the prospect of BA welcoming the airline back after the Air Europe venture seemed remote. Yet a chance discussion with a BA executive revealed that the UK flag carrier was not keen to let the Gatwick operator go astray for a second time.

The new airline was launched early in 1991 with cash from the management team and a group of venture capital investors. BA signed up the fledgling restart - then called Euroworld before a run-in with a similarly named Belgian operator - as a codeshare partner. "BA wanted to see what we made of it before they committed themselves too far," says Burgess.

After proving its mettle, with profits from the second year of operation, CityFlyer signed up a five year franchising agreement with BA in mid-1993. CityFlyer has not looked back. Passenger growth has been averaging 20-30% a year, although now it is beginning to stabilise. In the last financial year to the end of March 1997, the airline posted a pre-tax return of over £4 million ($6.7 million) on sales of over £65 million and growing.

The airline too has begun to outgrow its fleet. The original operation was based around the Shorts 360(quickly phased out)and the AI(R)ATR42, for which CityFlyer was the UK launch customer. There are now six in the fleet alongside five ATR 72s, the ATR 42's larger stablemate, but Burgess believes that the airline is fast outgrowing the turboprop.

A year ago, CityFlyer took the plunge into the regional jet market with the introduction of the AI(R)RJ100 100-seater. Three are already in operation and another two are scheduled to arrive by mid-year. "I rather wish that we had made the decision a year earlier, but we didn't want to take any risks," says Burgess.

GROWTH FOR GATWICK

The basis for the decision and Burgess' regret at not taking it sooner is the speed with which Gatwick has filled up. Peak time slots have become just as rare as at London's more famously congested Heathrow. "To all intents and purposes, the airport's full," Burgess says, with the inevitable conclusion that growth will now have to come from aircraft size rather than from frequency. When CityFlyer takes over BA's services to Zurich at the end of March with its RJ100s, it will have to steal slots from the service to Leeds/Bradford, which it will be forced to end.

"We thought that the last chance of having any serious increase in slots at Gatwick was the 1997 summer and that has been borne out," says Burgess. Services may edge up to 50 rotations a day this coming summer, but he believes that the days of unchecked growth are over.

Within the next two or three years, CityFlyer will have to look at moving above the 100-seat mark, adds Burgess, raising the possibility of an order for the Boeing 737 or Airbus A320 families. Even the 50-seat regional jet has been ruled out as too small.

It is an irony perhaps that the strain on Gatwick is in part a product of a drive by BA, of which CityFlyer is part, to develop the airport as a second key London hub. Over the past three years, BA has almost doubled its annual passenger throughput to 8 million and transfer traffic has mushroomed to 45% last year. Rescheduling work continues to make maximum use of the slots available, says Scard, including turning "ripples" of connecting flights into genuine waves.

CityFlyer, GB Airways and Brymon, together with some feed from BA's German and French subsidiaries, are between them pumping around 1,000 passengers a day into the network.

As BA seeks to develop hubbing opportunities at other airports in the UK such as Manchester ("a very interesting opportunity," says Scard) and possibly Europe, the promise is for a further widening of the franchise.