Just six months into a bid to turn around its regional airline business British Airways has forged a deal to sell virtually the entire operation to fast-growing flybe. BA Connect has not made a profit in the last five years, says BA chief executive Willie Walsh, who gave the carrier two years to break even at the beginning of the year.
Despite a rebranding and cost-cutting exercise this summer, BA Connect was not hitting its targets. "The numbers were clearly not on track," says BA's newly appointed commercial director Robert Boyle. Flybe's approach gave BA a better option than the "reality of a closure alternative", he says.
Over the past two years flybe has considered bidding for BA Connect, but the timing for BA had not been right, says Mike Rutter chief commercial officer at flybe. This time the approach "came at the right time", says Boyle.
"We are trying to be a bigger, better flybe, not a regional easyJet or Ryanair
Unlike the regional operations of Air France or Lufthansa, BA Connect provides virtually no hub feed to its parent. "It is not strategic to BA," says Walsh.
The deal, which Walsh hopes will be completed by year-end, sees flybe acquiring all of BA Connect's operations except for its network out of London City airport and a Boeing 767 service between Manchester and New York. Flybe will become the single biggest operator at Manchester and consolidate its leading position at Birmingham and Southampton airports, says Rutter. The aim is for the BA Connect brand to be replaced by flybe's by the start of the summer schedule in late March.
Rutter says the deal will make it the largest regional airline in Europe in passenger terms with traveller numbers doubling from 5 million to 10 million. The new carrier will have annual revenues of over £600 million ($1.1 billion). Flybe had revenues of £255 million ($471 million) in 2005 and made a net profit of £15.7 million. It will operate 159 routes up from the 101 it currently flies after absorbing BA Connect.
Although Walsh will not reveal how much the deal is costing BA, he says: "When I say we sold BA Connect it's a very liberal use of the word sold." BA took a one-off write down of £106 million of its investment in BA Connect in its fiscal second quarter results to the end of September.
Flybe says it paid a "nominal price" for BA Connect and that BA will support the enlarged company. In particular it will underwrite flybe's disposal of the BA Connect fleet. BA Connect operates Avro RJs, BAe 146s, Bombardier Q300s and Embraer ERJ-145s. The new flybe will focus on Q400s and Embraer 195s. Flybe operates 24 Q400s and recently took delivery of the first of 14 195s. It has options on a further 21 Q400s and 12 195s which it now plans to exercise.
As part of the deal BA obtains a 15% stake in flybe, which it will sell when flybe floats. The BA Connect acquisition means flybe's float, initially planned for next year by the airline's private shareholders, will now be postponed until 2008 or 2009 to allow the airline to digest BA Connect, says Rutter.
Acquiring BA Connect will not divert flybe from the "very clear business model we know: serving domestic and European city pairs from the regions", says Rutter. "We are trying to be a bigger, better flybe, not a regional easyJet or Ryanair. We work hard at being a regional business."
Neither carrier wanted the deal to include BA Connect's London City operations. Flybe pulled out of the airport in late 2004. BA's Boyle says the high level of premium business at London City is a close fit with its core customer groups. The carrier will expand its operations there with a two-class product using 10 Avro RJs that will be run as a separate business.