The announcement that Exeter-based regional airline Flybe has acquired the BA Connect operation from British Airways makes sound business sense on both sides.
BA finally gets to off-load a regional operation that has become something of a bottomless money pit in recent years and concentrate on what, arguably, it does best by cementing a place as one of the world’s leading long-haul airlines.
As far as the ambitious Flybe (http://www.flybe.com) is concerned, the deal provides it with a larger base operation ahead of next year’s much-anticipated float on the stock exchange. After floatation Flybe, previously owned by the late steel magnate and Blackburn Rovers benefactor Sir Jack Walker and now controlled by The Walker Trust, could become a prime take-over target.
Ryanair would be an obvious suitor, although Flybe’s gradual expansion and now acquisition of BA Connect would also make it an attractive proposition for larger airlines and private equity groups.
However, the Flybe board insists it has no intention of agreeing to any future take-over bid. Indeed, the airline’s chairman and chief executive Jim French, has issued a very bullish statement outlining how the BA deal will make Flybe the largest regional operator in Europe and forms part of further expansion plans.
The floatation is designed to fund the £800m expansion of Flybe’s fleet, while the Connect deal means it will carry 10 million passengers per year to 159 routes, generating revenues of around £600m.
“It will allow Flybe to offer even more opportunities to travel on our existing network and to many new destinations,” he explained. “Acquiring the BA Connect route network means we will provide an even wider selection of services into key European cities such as Paris, Frankfurt, Dusseldorf and Milan.
“The Flybe business model concentrates on domestic and European city markets and has been incredibly successful over the last 4 years. This acquisition will allow us to bring our growth plans forward by two years.”
Flybe will certainly be taking on the BA Connect brand from a position of strength. Between the beginning of April and end of September, Flybe reported an operating profit of £20.5m, against £12.4m in the same period last year.
It has also managed to achieve such results with a far leaner and more efficient operation – Flybe has been carrying nearly twice as many passengers with 100 less staff than BA Connect, which employs 1,900 people.
Yet the airline is taking a sizable risk with this deal. BA has singularly failed to make the regional operation a success despite the obvious boom in the European city-break and long weekend market.
Although the Connect brand was relaunched within the last 12 months in a major marketing push, BA continued to lose out to operators like Flybe, BMI Baby, Ryanair and Easyjet. It also struggled to match the short-haul operations of the likes of Lufthansa.
As a result, services like the BA hub at Birmingham International Airport have taken something of a battering with job losses and a re-focusing of resources elsewhere.
Of course, given the global nature of BA’s services and the pressures of maintaining a place among the major players, the Connect operation has suffered as a result of distractions that Flybe simply does not have at the moment. But if an established operator like BA can struggle, then Flybe will be well aware of the hard work and investment required to ensure the deal works out favourably in the long run.
It is not simply a case of expanding the route network. Flybe needs to make sure the approach it has adopted so successfully five years ago, when the brand first took off, transfers quickly and as effortlessly as possible and that it can develop regional hubs like Birmingham.
It is fair to say that although BA and other established global carriers have learned many valuable lessons from the budget airlines in the last decade, the no frills approach to regional services does not always translate smoothly to the long haul market.
Flybe insists the deal is a calculated risk. It certainly has the credentials and recent track record to suggest it can make the merged operations work.
But BA has needed to accept a painful lesson in recent years that biggest does not always mean best and it is something Flybe is likely to face in the coming years.