RICHARD PINKHAM IN LONDON AND BAKU
Five years into its franchise relationship with British Airways, BMed is enjoying rapid growth and unprecedented profitability.
Now a British Airways franchise, British Mediterranean Airways (BMed) began its life not only as an independent airline, but one that had a less than amicable relationship with its current franchisor. Eight years later, it is prospering under its tie-up with BA, carrying 250,000 passengers a year to 12 destinations in a fleet of five Airbus aircraft. Indeed, BMed cannot imagine a return to life on its own.
The carrier was set up by a group of private investors to fly one Airbus A320 between London and Beirut, a route on which it initiated service in October 1994. It was, says chief executive Des Hetherington, a lean time for BMed, made leaner by BA launching its own London-Beirut service five months later.
The company, however, was undaunted. Although it was losing money, and still only had one aircraft, it added Damascus and Amman in spring 1995, tagging twice-weekly flights to each destination on to its Beirut service.
Around this time, BA, whose flights to the Levant were even more unprofitable, approached BMed about the possibility of becoming a franchise partner. The initial call came no doubt as a surprise, as relations between the two corporate entities were not only fiercely competitive, but also adversarial. Several times they appeared before the UK Civil Aviation Authority to resolve contentious capacity limit arguments.
However, Hetherington explains that personal relations between the two executive corps remained cordial, and even friendly. These good relations, as well as substantial shared history between the team members, he says, were critical in the consummation of the agreement in April 1997. Since then, BMed has used the sales and distribution reach of BA with great success, even as it has expanded beyond the Mediterranean.
In 1997, the carrier - which does all its own strategic planning - recognised that potentially profitable routes to the former Soviet republics of Central Asia were lying fallow. So, one month after becoming a BA franchise, it launched flights to Tbilisi, Georgia, and followed that up eight months later with twice-weekly service to Yerevan, Armenia. Now, half of BMed's 12 destinations are in the region.
This has had positive implications for the airline, the greatest being that business passengers now represent its biggest traffic component. "The Levant," Hetherington says, "is extremely peaky: we will fly twice as many passengers in August as in November. The cost of production, however, is pretty well the same all year round. Business traffic does not vary much at all, so this is obviously a positive development."
Central Asian growth
BMed's emergence in the region also aided BA, which was losing money flying there, but wanted to keep the cities on its route map. In early 2000, BA discontinued service to Baku, Azerbaijan. A day later, BMed applied for permission to serve the route and began flying there three-times weekly.
Baku has become one of the carrier's most successful routes. BMed now flies there daily and is increasing its seat capacity through an equipment up-gauge. What is more, Baku is the launch point for two of its three weekly flights to Bishkek - for which it holds local traffic rights - and all its flights to Almaty, Kazakhstan. Now BMed is developing relationships with regional carriers to offer connecting services between Baku and the Kazakh oil field cities of Aktau, Atyrau and Uralsk.
Similarly, BMed filled a breach left in Tehran after BA discontinued its loss-making Boeing 777 service to the Iranian capital. BMed initially flew to Tehran three-times-weekly via Baku, but the route's performance has led it to increase its service level to four non-stop weekly flights. Indeed, the ability to do so was a consideration in the purchase of its first extended-range Airbus A321.
Hetherington attributes BMed's success to its knowledge of its markets and its ability to focus its attention on the costs and revenues generated by its 12 markets. And while the 11 September-exacerbated collapse of air travel obviously hurt the carrier, it also gave rise to a "radical review of costs", which has continued to pay dividends, even as BMed's traffic and yields have recovered.
In addition to minor work rule alterations that enhanced staff flexibility and utilisation, BMed was able to renegotiate contracts with most of its key suppliers. This enabled it to bring its unit costs down by over 20% to a super slim 3.89 pence (6.03¢) per available seat kilometre. Although its costs will rise (the renegotiated contracts are for a finite period), Hetherington expects to maintain a cost advantage versus the rest of the industry.
Looking to the future, the carrier plans to search out new markets and opportunities within its geographic areas of focus, with the initiation of service to Tashkent, Uzbekistan, planned for the New Year. Otherwise, Hetherington says BMed's main strategy is to "maximise the value of the franchise."
And, while he cannot imagine why the relationship with BA, which he describes as "robust from both ends of the pipe", should be terminated, if it were, he would immediately set out to find another franchise partner. "Having had experience as both an individual and partner airline," he says, "we definitely prefer the latter."
Source: Airline Business
