British Airways' much-hyped plans to launch a low-cost point-to-point carrier may herald a larger push into the European leisure market, including a standalone charter operation.

BA has already come under fire for considering its own no-frills carrier to limit the advance in the UK market of low-cost players like EasyJet, Ryanair and Virgin Express. EasyJet alleges the move would be a blatant attempt to push it out of business.

However, BA is more likely to drop the proposal to prevent internal conflict than to avoid regulatory scrutiny and may opt for a move into the continental leisure market instead. A senior BA source pointed to the success of companies like Airtours International in exploiting new crossborder opportunities between Scandinavia and the Mediterranean and suggested this as a possible new direction for the company to follow.

BA executives commissioned UK consultants Howell Henry Caldecott and Lewry in July to examine the European leisure market and the impact of the low-cost entrants. BA has examined a number of options including deals with EasyJet and Ryanair.

Interest has focused on a proposal drawn up by BA's internal strategy department and based on the report's findings for a four-aircraft standalone operation based at London/Stansted and operating to Amsterdam, Paris and Madrid. A further six Boeing 737-300s would be added within a year.

While the plan produced a predictable storm of protest from rivals it also highlighted the difficulties major carriers face in setting up low-cost ventures. 'The problem is avoiding internal conflicts of interest,' says EasyJet managing director Ray Webster, who planned a low-cost venture, Freedom Air, while working for Air New Zealand. While the no-frills operators may expand into markets already successfully exploited by BA franchisees for feed and point-to-point traffic, critics argue that a no-frills operation runs against the grain of BA's global strategy of building feed and claim its primary motivation is predatory.

Financiers also doubt BA will move in this direction. 'It will be difficult for the project to meet BA's own financial criteria,' says Chris Avery, analyst at Paribas Capital Markets. 'There is no strategic logic or requirement to do it [though] the flip side is that if it goes ahead it must have cleared the hurdle.'

BA's share price has been under pressure over the past 10 months, falling 25 per cent since the start of the year, and the carrier will be loath to move too far from its core strategy of building up feed.

BA chief executive Bob Ayling says the carrier still has to find £300 million ($503 million) of the £1 billion target cost savings and a low-cost airline proposal is an obvious means to break any logjam. 'The other reason would be to launch a new brand without disturbing the image of its parent to serve new markets in a new way,' observes Frank Wade at consultants SH&E.

Regulatory clearance for a no-frills venture would hinge on BA's ability to separate the venture and make its costs transparent, but it does risk diluting its own premium image. 'BA could still demand a small [fare] premium because of their reputation,' says Ian Bellhouse at Fitch Consultants, a London-based brand boutique.

However, Webster at EasyJet doubts this assessment and says 'it would accelerate the leakage of value' from the core operation to branch out.

Doug Cameron

Source: Airline Business