At Your Leisure - 22 January 2007
FlyBe: A Regional Specialist?
Are you or your family thinking of beating the winter blues with a trip to a UK or European city? If so, it's likely that you'll be using one of the budget airlines to get there. EasyJet, Ryanair, MyTravellite, BMI Baby - they're all jostling for business as Britons flock to the airports in their droves.
If you're flying to your destination from Leeds Bradford, Liverpool, Edinburgh, Belfast, Manchester, Birmingham, Southampton or Exeter airport, you could well be going with FlyBe.
In this At Your Leisure, we look into the fortunes of FlyBe. How have they taken on the challenge of finding a niche in this crowded marketplace? What is their strategy for future growth? And how do they and other low cost operators offer such low prices?
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History of FlyBe
FlyBe has its roots in the 1979 launch of Jersey European Airways. This company was taken over by the WalkerSteel Group in 1983, as Exeter became its headquarters. In the 1990s the airline grew, adding London Gatwick to its routes from Guernsey. In 1993, it launched its Business Class service.
Franchise partnerships with Air France saw new routes open from Birmingham to Paris and Glasgow. New BAe planes were added to the fleet.
- In 2000, the company changed its name to British European. The re-branding reflected British European's status as the 3rd biggest domestic scheduled airline. Then, the name FlyBe appeared in 2002 as the company realised it must change to meet the challenge of the new low cost air travel environment.
- In 2003, FlyBe was voted the 'Most Recommended UK Low Fares Airline' by Holiday Which? Magazine. More new routes were opened in 2004, as the company launched new sun and ski destinations in France.
- In 2004, record half year profits of £14 million were announced. FlyBe signed a deal for 20 Bombardier aircraft in 2005. It also launched flights from Liverpool John Lennon Airport and Norwich International. Plans were announced for 17 new routes in 2005/06. Up to 26 new Embraer aircraft were ordered. Plus further investment was announced in new routes and hangar facilities at Exeter.
- In 2006, FlyBe launched an online check-in service for both hand and hold luggage, followed by a self-service check-in facility. Later that year it took delivery of Embraer's newest planes. It also announced plans to take over BA Connect, which will make FlyBe the largest regional airline in Europe.
One of Flybe's new Bombardier Q400 planes, deemed to be among the world's most environmentally friendly passenger aircraft. Image copyright: Flybe.
Takeover of BA Connect
In November 2006, FlyBe bought the loss-making regional arm of British Airways, BA Connect. As a result of the takeover, FlyBe will go from an airline employing 1700 staff and carrying 4 million passengers to one carrying 10 million passengers and employing 3500 staff.
The takeover reinforces FlyBe's position in the airline market as a specialist regional operator. It also seems to fit into the wider UK macro-economic strategy. But critics of the airline industry would point to the planned increase in regional air traffic and worry about the environmental damage posed by the takeover.
In terms of the UK's wider economic objectives, it must make sense for us to spread the economic prosperity that is at present concentrated in the south east of Britain. In order to do this, we will need to have thriving regions throughout the UK. Transport links from the regions to other areas of Europe are therefore vital. Airports and airlines are an important part of this strategy.
FlyBe's plans for the BA Connect operation are to keep the majority of the airline's current routes, but get rid of BA Connect's international slots. Stressing the theme of regional prosperity, the most important routes for FlyBe of those previously operated by BA Connect are:
- Domestic trunk routes
- European business centres
What does this mean in the UK and the wider areas of the EU?
Domestic trunk routes operate between the major airports. They are the major or primary airports of the main cities. For FlyBe in the UK this means: Leeds Bradford, Liverpool, Edinburgh, Belfast, Manchester, Birmingham, Southampton and Exeter. FlyBe plan to divest themselves of BA Connect's slots to international services and London Gatwick.
In terms of European business centres, for FlyBe these include: Amsterdam, Avignon, Berne, Bordeaux, Dublin, Dubrovnik, Dusseldorf, Faro, Galway, Geneva, Guernsey, Geneva, Hamburg, Hannover, Jersey, La Rochelle, Limoges, Malaga, Murcia, Nice, Palma, Paris, Perpignan, Rennes, Salzburg, Split And Toulouse.
How will FlyBe make a difference to the services that used to be offered by BA Connect?
Firstly, they plan to make these routes part of a newly-profitable operation. BA Connect's business has been loss-making for some time. As a specialist regional operator, FlyBe will continue most of BA Connect's services, but use the FlyBe brand to make the business successful.
What does this involve? The answer to this question brings us to the heart of what makes a budget airline profitable. Let's outline the main ways in which budget airlines can offer low fares and compete with national carriers such as BA.
Front and back office costs
BA Connect's business was far less reliant on the Internet than is FlyBe's. At the time of writing 85% of FlyBe's passengers book their tickets on the Internet. Only 35% of BA Connect's passengers do so. This means that FlyBe need fewer administrative staff, less office space and less equipment to provide the services that non-Internet bookings require.
'Extras' don't come 'free'
They say there's no such thing as a free lunch. In FlyBe's case, anything from baggage to cups of tea are regarded as extras - in other words, not included in the basic ticket price. Extras also include passengers being able to select a seat, transfer their tickets, be flexible over when they travel and so on.
FlyBe say that if they wrapped up in their ticket prices all the possible options and alternatives that passengers could choose from, then their customers would not be able to benefit from low ticket prices. One reason for BA Connect's failure was that they could not cut these 'extras' from their service, without damaging or diluting the overall BA brand.
A FlyBe assistant at the check-in desk: this service is deemed an 'extra' in order to keep ticket prices down. Image copyright: Flybe.
FlyBe have spent approximately £1.2 bn equipping their fleet with more fuel efficient aircraft. The new Bombardier Q400 and Embraer 195 planes will be fully operational by 2009, giving FlyBe a fleet of 82 aircraft.
These planes are less environmentally damaging than many other airlines' fleets. As they are newer, they are more fuel efficient and create less noise. FlyBe say that the BA Connect fleet, for example, operates at more than 25% higher costs for every seat mile flown. Greater fuel efficiency also means FlyBe can claim to be meeting their environmental policy targets. In comparison with their old fleet, the company's new aircraft will cut fuel consumption by over 50% per seat.
Part of the environmental gain that FlyBe are able to claim comes from their decision to operate a smaller sized fleet for short haul flights within the EU. Where other operators may use a 150-seat plane for a one hour flight, for example, FlyBe will be using a 75-seater aircraft.
The results of the strategy
Environmental targets are all very well, but if the business model isn't successful, then it won't be around long enough to make much of a difference. In FlyBe's case, recent results indicate a strong foundation to the new growth that can be expected following their acquisition of BA Connect.
In the six months to end of September 2006, operating profits rose to more than £20 million, nearly twice the level as the same period a year before. However, the company is taking a exceptional charge of nearly £6.5 million by writing down the asset value of its BAE 146 aircraft this year. This is an essential part of their strategy to operate more efficiently, and in a more environmentally friendly fashion. FlyBe's new fleet will be one of the youngest in the world.
BA have also given the takeover a vote of confidence by taking a 15% stake in the new operation. They have also guaranteed a flow of funding to make the transition a success.
In the battle of the low-cost airlines, FlyBe have decided that an ambitious strategy is the best way that they can prosper. The acquisition of BA Connect accelerates this strategy. FlyBe's rapid growth will enable them to spread their costs over a far greater range of activity and routes than ever before. This should enable them to continue to be able to offer low cost fares.
Will FlyBe's new improved fleet help them increase consumer demand? Copyright: Camilla Reenberg, from stock.xchng.
FlyBe have chosen their battleground carefully, though. It has made sense for them to build on their strengths of being a regional operator. Their expansionist strategy has included picking routes that appeal to UK air travellers' needs, offering an alternative to often highly priced train travel and selecting attractive European destinations, such as sun and ski routes to France.
The airline has also made considerable efforts to renew their fleet, which promises to deliver some important benefits. Lower environmental impacts (noise and CO2 emissions, as well as lower fuel consumption), meet the airline's own targets as well as fitting in with UK government and EU recommendations. The younger fleet also delivers lower costs as new, smaller aircraft make more economic sense, as well as being faster to 'turn around' once landed.
As with all businesses that have experienced a rapid growth phase, though, FlyBe will be keen to avoid the over-burden of excessive debt, which would act as a brake on their success. Analysts will be watching this aspect of the company's future financial performance carefully.
Tasks and Extension Activity:
- Why could BA not operate their Connect airline profitably? Do some research into BA and list the main characteristics of its brand.
- Use this section of FlyBe's Web site to decide for yourself if the airline is right to call itself a regional specialist
- Read this Department for Transport (DfT) Progress Report on the 2003 Air Transport White Paper.
Make notes on how the government plans to ensure that there are:
- Stronger powers to control aviation noise (night flights and aircraft noise)
- Measures to cut air pollution
- Plans to maintain and improve the contribution of air travel to the overall economy
- Opportunities to make greater use of regional airports
- Transport decisions which reduce environmentally damaging emissions and cut travelling time
- Do you agree with the following statement:
"With their ability to cut costs and prices, the low cost airlines seem to have won the battle with the train operators and road users, to transport people throughout the UK."
Use the following resources to find reasons to challenge the argument: