A detailed strategic review of the future of UK-based carrier GB Airways eventually led to the carrier being sold to easyJet. What lay behind the deal?
The roots of GB Airways date back to the 1930s and span seven decades of operations under the shadow of the Rock of Gibraltar
In came the strippers and stuffers, or SAS. That was the tongue-in-cheek name easyJet gave the teams tasked with turning 15 former GB Airways aircraft orange, as the final stage of bringing this airline into the easyJet operation went into full swing.
Engineers reconfigured the aircraft from a two-class cabin to an all-economy layout and staff placed orange headrest covers on seats, along with scores of other modifications, on the night of 29/30 March to complete the integration of GB into easyJet. The work was done at GB's main base at London Gatwick as well as at Manchester airport. This low-key operation went virtually unnoticed and without fanfare, in sharp contrast to the chaos surrounding the transfer of British Airways to Terminal 5, which was taking place at the same time just an hour's drive away at Heathrow.
The dawn of Sunday 30 March was the cue for little-known GB to quietly take its place in airline history books. Two months earlier the sale of the carrier to easyJet for £103.5 million ($212 million) was formally completed after UK competition authorities cleared the deal.
To the outside world, the announcement six months earlier in October that easyJet was to buy GB, which operated mainly out of Gatwick under a franchise deal with BA, came out of the blue. It was, however, the culmination of a two-year strategic evaluation of the future of the company, explains Richard Davey, chief executive of London-based Nyras Capital. His firm of aviation finance and business advisors was brought in by GB's owners, the privately owned Bland Group, in May 2006 to work with the airline's senior management to develop a range of strategic options for the carrier.
"It was one of those deals that was a win-win for all parties"
Chief executive - Nyras Capital
At the same time, former BA executive and Britannia Airways managing director Kevin Hatton was brought in to run GB. Hatton and Davey had worked together before, on change management projects at BA when Hatton was with BA and Davey headed up the global aviation practice at PricewaterhouseCoopers.
"The mission was to look at strategic options for GB and what actions should be taken," says Davey. "The group realised they were operating a BA product in an intensely competitive leisure market up against opposition from low-cost carriers and tour operators. It was important to understand the impact of this for the future."
GB was a niche carrier operating 44 routes from the UK to destinations in southern Europe, the wider Mediterranean and North Africa using nine Airbus A320s and six A321s. The airline had historically been very profitable but a combination of the changing competitive environment and the constraints of the franchise agreement pushed the airline into the red in 2006. Its finances recovered to a pre-tax profit of £2.6 million on revenues of £250 million in the year to March 2007.
Under Hatton, GB had been successful in driving down its underlying cost base, without this impacting on its operational performance. "Our first priority was to get our own house in order as regards both the cost and the revenue lines," says Hatton. "However, having tackled both of these, frustrations still existed in both areas as to how far we could improve further. Firstly, with regard to costs, being a small, 15-aircraft business clearly inhibited our ability to exert any more negotiating pressure on our suppliers. Scale certainly does matter in this industry. On the revenue front, the franchise agreement with BA, while being a positive factor in the earlier years, was increasingly thought to be unfit for purpose as the constraints outweighed the benefits."
GB was finding to its cost that passenger yields were declining in real terms as a result of a competitive market and overcapacity. And with the market only getting tougher, the owners knew they needed to act.
Under the BA franchise, with all the aircraft painted in BA colours, GB Airways was required to conform to the BA style of services. Although the smaller carrier was responsible for its own network planning, sales and marketing, it did not have the commercial freedom which Hatton felt was desirable to raise the short-term profitability to an acceptable level. "BA had right of veto on any new routes which GB wanted to operate and the ancillary revenue all went to BA so GB had to focus very much on seat revenue," he says. "It didn't have freedom of movement, but it had its own aircraft, route rights, airport slots, Airline Operating Certificate and workforce - that gives options," explains Davey.
The time was right for the Bland Group to look at its options as the BA franchise agreement was due to end in 2010, says Davey. There was a need to look at alternatives should the agreement not be renewed.
By July the GB and Nyras team had developed five options:
For the Bland Group the preferred option was to start discussions with its friends at BA and maintain a good partnership. Bland and GB's relationship with BA dated back to the 1947 while the franchise was created in 1995. Project BOLD was as ambitious as its name suggests. It saw GB taking over all of BA's short-haul activities at Gatwick. As defined, the business plan had the potential to take a loss-making part of BA's operation and make it viable. The new carrier would feed BA's long-haul services at the airport.
"It would have been a two-class product away from the BA brand with a no-frills, buy-on-board economy product and an enhanced business product," says Davey. "We also believed it was fundamental to have critical mass at Gatwick with 30- to 40 aircraft. GB with 15 aircraft was subscale."
There was a long series of discussions with BA over Project BOLD in early 2007, but in the end BA decided not to proceed. Neither GB nor Nyras will speculate on BA's decision, only to state they viewed it as the most desirable option. From BA's point of view, although the option could have given it a way to make its short-haul Gatwick operation profitable it seemed to have other more pressing issues taking up the time of its management team, including the preparations for Terminal 5, service issues at Heathrow and the issue of transatlantic Open Skies. There would have also been some serious labour relations issues related to any wholesale transfer of BA staff.
© Gibraltar Government
With this ruled out, of the other options, only an outright sale and a relationship with another carrier were seriously considered, says Davey. A continuation of the franchise with BA was ruled out with the network giant looking to exit its franchise agreements. Moreover, a franchise deal with another carrier was rejected. "Our thoughts were that if GB went for another airline would it simply swap one franchise strait jacket for another? Our question was how sustainable would it be?" Going it alone was discounted early on as it produced unacceptable financial returns and was too much of a risk.
With yields forecast to fall and the downturn approaching, the Bland Group saw little option than to sell the business. It made the move reluctantly, but market uncertainty and the possibility of GB falling back into loss was a real prospect it told staff when announcing the sale. With its growing operation at Gatwick, easyJet was a natural potential buyer for GB. "EasyJet was at the top of the list as it made strategic sense for them," says Davey. "The number two slot holder would become number one by acquiring the number three slot holder." As it turned out, the Bland Group did not have to approach easyJet about a potential sale following a chance meeting between Hatton and easyJet chief executive Andrew Harrison at an industry dinner early in 2007. A general chat about industry prospects was followed up by Harrison several weeks later and the sale discussions began.
"My feeling was that Andy Harrison and I hit it off on our first encounter," says Hatton. "I think this was helpful with the inevitable ups and downs during the negotiation and transaction periods. Certainly, I think our relationship had a clearly positive influence on the transition process and the eventual integration of GB into easyJet. Make no mistake, this was a complex and challenging project - but the fact that it went off with hardly a hitch is testament to the professional attitude and commitment on both sides."
As the negotiations began, the role of Nyras was expanded to handle the disposal of GB on behalf of the Bland Group, says Davey. In fact there were three transactions: the sale to easyJet the negotiation of a transition arrangement with BA to exit the franchise and the sale of four valuable slot pairs that GB held at Heathrow. Nyras was advising on all three deals simultaneously, working together with Hatton and the Bland Group.
In trade sales of this kind the most common route is to appoint an investment bank rather than strategic advisors to handle the deal. The Bland Group decided this was not necessary as they had built up a close working relationship with Nyras and wanted to avoid unnecessary duplication of effort that would have arisen. "Nyras understood GB's business, the options it had and what value it had to easyJet. and because it is authorized by the UK's financial regulator, the Financial Services Authority, it could advise on the deals and handle the due diligence process" says Davey.
EasyJet made a formal offer for GB in August 2007 and entered into exclusive talks. At this stage the Bland Group advised BA of a potential change in control of GB. Under the terms of their agreement BA still had the option to buy GB but chose not to exercise it.
The only part of GB not included in the deal was the Heathrow slots, as easyJet did not want to operate from this London hub. Nyras began to market the slots on behalf of Bland initially without revealing the seller.
These had to be traded prior to the IATA slot conference in November so they could be used for the summer 2008 schedule. With several US carriers clamouring for Heathrow slots to support new routes made possible by US-Europe Open Skies it was a fortuitous time to transfer them. Bland will not reveal the consideration it received for the slots, nor who acquired them, as the transactions are subject to confidentially arrangements.
Weeks of hard negotiations culminated in October with easyJet agreeing to buy GB. The deal will accelerate the airline's route development and give it 24% of Gatwick's slots. This year it will carry some eight million passengers across 62 routes from the airport.
A peculiarity of the deal was that for a period of two months, from when the sale was completed on 31 January until 29 March, an easyJet owned company operated as a BA franchise partner as it saw out the end of the franchise period. This saw some BA liveried aircraft gradually becoming white tails under the transition arrangements.
For Davey, two years work had virtually come to an end. "In many ways it was sad to see a good organisation like GB Airways having to disappear," he says. "It was one of those deals that was a win-win for all parties, and strangely so for BA too in some ways because it had clarity in the short term about its Gatwick operation. "Our role was a question of bringing together a lot of dimensions in the industry that have hitherto operated separately. We developed a solution that was thought through from all different angles, rather than one developed from other people's functional viewpoint. This gave a consistency and continuity that provided stability as we went through the process."
But was the GB deal just another individual transaction unlikely to be repeated. "I don't think it's a one-off because we're already working on two others," says Davey.
The GB story
Formed in 1931 in Gibraltar by shipping company MH Bland, the forerunner of GB Airways started flying between this British enclave on the tip of Spain and Tangier in Morocco using a Saunders-Roe A21 Windhover flying boat. During the Second World War, Gibraltar Airways, as it was known, represented Imperial Airways and after the war began its relationship with British European Airways.
In 1947 BEA took a 49% stake in Gibraltar Airways and that joint ownership continued with BA until 1995 when the Bland Group bought back BA's shareholding. This arrangement was succeeded by the franchise partnership. In 1989 the company moved to the UK basing itself at Gatwick Airport and became GB Airways.
The Bland Group continues its other travel and transport interests. It is also retaining the GB Airways headquarters at Gatwick known as the Beehive.