Reasons for the failure of British Caledonian
Encyclopedia
In December 1987, following substantial losses, the private, British
independentindependent of government-owned corporation
s airline British Caledonian
(BCal) was taken over by newly privatise
d British Airways
(BA).
The prime causes for the failure of the "Second Force" concept and BCal's demise were:
The route structure BCal had inherited from BUA at the time of its inception was notable for the unplanned and unsystematic manner in which it had grown since the early 1960s.
At the time, Sir Freddie Laker had begun building up BUA's scheduled route network in his capacity as that airline's managing director. In those days very limited opportunities existed for wholly privately owned, independent airlines to provide fully fledged scheduled air services on major domestic and international trunk routes. This resulted in a poor fit of many routes in BUA's network of scheduled services, thereby making it difficult to offer sensible connections that could be marketed to the travelling public. It also represented the best network structure Sir Freddie was able to put in place under the then prevailing regulatory regime.
The resulting network of domestic, European and intercontinental long-haul scheduled services from Gatwick was a motley collection of routes resembling a rag bag. This made it difficult to develop profitable
streams of transfer traffic using Gatwick as a hub
. Therefore, it was a challenge to persuade people to fly to Gatwick from relatively minor places like Genoa
or Jersey
in order to make an onward connection at the airport
to secondary places in Africa
or South America
, and an even greater challenge to do this profitably.
At the height of its commercial success in the late 1970s and early 1980s, BCal managed to turn the dilemma the structure of its route network presented to its advantage by focusing on those routes that carried a very high proportion of profitable, oil-related, premium business traffic. It even managed to become the preferred carrier
of high-ranking oil industry executive
s based in Texas
, by providing convenient, hassle-free connections between Houston/Dallas, Lagos
and Tripoli
via the airline's Gatwick base. However, the downside of this initially successful strategy was that it made the company dependent on a small number of markets whose fortunes were tied to the commodity price cycle, in unstable parts of the world, for most of its profits.
Although this worked in BCal's favour when the price of a barrel of crude oil was high during the late 1970s/early 1980s, it worked against it when the oil price collapsed in the mid-1980s. It also further compounded the firm's growing financial problems at the time, culminating in the financial crisis
that led to its takeover
by BA.
Despite BCal being awarded several licences to commence scheduled services on a number of high-profile long-haul routes with a good mix of business and leisure traffic, the Government made little or no attempt to assist the airline in obtaining reciprocal traffic rights from overseas governments that would have enabled it to use all of these licences.
For instance, the Civil Aviation Authority (CAA) had awarded BCal licences to launch fully fledged scheduled services from London Gatwick to New York
's John F. Kennedy Airport
(JFK), Los Angeles
, Boston
, Houston, Atlanta, Toronto
and Singapore
during the 1972 "Cannonball" hearings. However, it took the UK
Government four years to negotiate a new air services agreement with the US government
that actually enabled BCal to make use of its Houston and Atlanta licences. Renegotiation of the then very restrictive UK—Canadian
air treaty that could have permitted BCal to operate a scheduled service to Toronto took even longer. British Overseas Airways Corporation
's resistance to opening the lucrative Far East
ern route to Singapore to home-grown competition by another British scheduled airline was so strong that BCal eventually only managed to obtain a renewable, three-months exempt charter permit, which entitled the airline to operate a small number of seat-only charter flights between Gatwick, Bahrain
and Singaporethese flights were exempt from the affinitiy group rules and not subject to bilateral capacity restrictions.
In addition, the UK Government itself began to undermine the "Second Force" concept from the moment it decided to re-allocate BCal's unused Gatwick—JFK and Gatwick—Los Angeles International
licences to rival independent airline Laker Airways
, following Sir Freddie's high-profile, public campaign to get his proposed Skytrain off the ground. The "Second Force" concept was furthermore undermined when the Government overturned the CAA's refusal to grant British Midland
a licence to begin domestic scheduled services on the two main trunk routes between London
and Scotland
from Heathrow, without giving BCal reciprocal access to that airport. The "Second Force" policy was finally killed off when the Government decided to go ahead with BA's privatisation
. Moreover, the CAA undermined the Government's "Second Force" policy as well by awarding Air Europe
licences to launch scheduled services on several routes from Gatwick to Continental Europe
in direct competition with existing BCal services. These measures significantly weakened BCal. They also had a detrimental effect on the airline's ability to establish itself as an effective competitor to the major scheduled airlines that were operating from Heathrow.
The conflict of interest that arose out of the UK Government's dual role as the sole owner of BA, at the time by far the largest British scheduled airline accounting for between three quarters and four fifths of the total output of Britain
's entire scheduled air transport industry, as well as the regulator for all UK airlines meant that the interests of the "Second Force" were not always at the top of the Government's list of priorities. This conflict of interest put the Government in a dilemma when it was preparing BA for privatisation during the mid-1980s, knowing full well that this was likely to pose a major threat to BCal without substantial route transfers from the former to the latter, which would have enabled BCal to become big enough to compete with BA and other large scheduled airlines on a level playing field
. At the same time, the Government was well aware that it risked undermining BA's successful flotation
on London's stock exchange
if it agreed to the transfer of several of BA's most lucrative long-haul routes to BCal, as well as the removal of all capacity restrictions on short-haul routes where both airlines were already competing with each other, as recommended by the CAA and requested by BCal itself.
The "spheres of influence" policy, which the Government had imposed on both of Britain's major scheduled carriers as a result of an aviation policy review conducted in the mid-1970s against a backdrop of huge loss
es the airline industry had faced in the aftermath of the early-'70s oil crisis
and which had effectively eliminated long-haul competition between BA and BCal, had fragmented both airlines' networks. This had weakened them internationally in comparison with their main overseas rivals. The resulting weakening of BA's and BCal's international competitive strength was of far greater concern to the latter as it was much smaller than either BA or most of its foreign-based competitors and had a less comprehensive network offering fewer connections than most rival airlines.
At the time of BCal's inception, politicians on the left of the UK's political spectrum — in particular, Labour
left wingers and most of the union
s — opposed wholly private
, independent airlines providing scheduled services in competition with the state-owned corporation
s. These critics' world view had been shaped by their World War II
and early post-War
experiences. They therefore regarded any form of competition as a waste of scarce resources. Some of them were also ideological
ly driven in their opposition to private enterprise playing a prominent role in the UK's air transport industry.
Restrictive bilateral air services agreements that had little or no scope for dual designation meant that BCal was effectively kept out of many markets for which it had already obtained licences from the CAA.
Even where the bilateral air services agreement between the UK and a foreign country enabled BCal to be designated as the second UK flag carrier, the airline was still facing numerous restrictions, in terms of the number of flights it could operate and/or the number of seats it could sell as well as the lowest fares it could offer. For example, the Anglo-French air treaty did not limit the number of airlines the UK Government could designate on the London—Paris
route. However, it stipulated that all British airlines' combined share of the total capacity on that route could not exceed the combined capacity share of all French
airlines, and that all capacity increases needed to be mutually agreed by both sides. As Air France
was the only airline the French government had designated to serve this route, this effectively meant that BA and BCal were compelled to share between themselves the 50% of the total capacity between London and Paris that had been allocated to the UKthe UK's share of total London—Paris scheduled capacity was raised in 1985 by inter-governmental agreement to 55%, to be shared between BA, BCal and Air UK from summer 1986. It also gave Air France an effective veto
over any capacity increase, thereby allowing that airline to dictate the pace at which additional capacity could be added. It took BCal 15 years to attain a 20% share of the London—Paris market's total capacity since it commenced scheduled operations on that route.
BCal tried to work around these restrictions by using larger One-Eleven
500s in a low-density configuration featuring a first class
section on week days and smaller, single-class One-Eleven 200s on week-ends. This enabled it to offer a higher frequency on week days, resulting in a more competitive schedule for business travellers while keeping within its allocated capacity share.
BCal faced similar capacity restrictions on the London—Amsterdam
the CAA lifted frequency restrictions governing BCal's scheduled services between London and Amsterdam in November 1972, overruling BEA
's objections; this resulted in the introduction in April 1973 of a third daily frequency operating on weekdays, increasing the number of weekly round-trips to 19 and London—Brussels
routes, while other Europe
an governments refused requests from their UK counterpart to have BCal designated as a second UK flag carrier, arguing that there was no equivalent of a "Second Force" in their countries that could have matched the additional capacity BCal would have offered, that there simply were no spare capacities to do so, that this would violate the letter and spirit of the relevant bilateral air treaties/pool agreements, or that total British market share already exceeded that of the relevant overseas flag carriers when charter traffic was included as well.
BCal continued operating BUA's former regional routes from Gatwick to Le Touquet and Rotterdam
for several years to provide additional capacity to/from alternative airports that were relatively close to the main airports where its operations were subject to capacity restrictions.
Some countries imposed capacity restrictions on BCal's operations even on regional routes that did not compete with any trunk routes and therefore could not have caused a diversion of traffic from these routes. BCal's London—Genoa
route was a case in point. The only way the Italian
authorities agreed to BCal's request to add an additional Saturday frequency on that route was to compel the airline to enter into a pool agreement with Alitalia
. Under that agreement BCal was forced to share its revenues on that route with Italy
's flag carrier, even after that airline had withdrawn its own Heathrow—Genoa service it had originally operated in competition with the Gatwick—Genoa service provided by BUA/BCal.
Such anti-competitive practices
were not confined to BCal's European operations. The bilateral agreements governing most of BCal's long-haul routes obliged the airline to enter into a pool agreement with the designated foreign flag
carrier[s]. These agreements stipulated that all revenues were to be equally shared by all carriers serving the same route. This usually meant that revenues were shared on a 50:50 basis, regardless of each carrier's actual market share
. The only exceptions to this rule were the US
as well as the Asia
n countries to which BCal flewwith the exception of Saudi Arabia
. As far as the US was concerned, no US airline was allowed to enter into a pool agreement with any other airline — especially, a wholly/majority government-owned, foreign carrier — as this constituted a violation of that country's antitrust
laws. With regard to the Asian countries that received scheduled services from BCal, the UK already had fully liberalise
d or fairly liberal bilateral air services agreements with these countriesother than Saudi Arabia.
These bilateral restrictions seriously impeded BCal's efforts to successfully build a network of short-haul, European feeder services that was essential to provide sufficient transfer traffic for its long-haul routes from Gatwick. Furthermore, these restrictions made it difficult to offer its passengers a more frequent service on certain long-haul routes that could have attracted more high-yield business traffic. It also left the airline with an incomplete network, which resulted in a weak route structure. This, in turn, constituted a major competitive disadvantage.
As a general rule, a full-service scheduled operation at Gatwick with a fare structure that is identical to a similar operation at Heathrow produces a 10% lower load factor. For example, BCal's scheduled load factors at Gatwick rarely exceeded 60% whereas comparable BA load factors at Heathrow were usually above 70%. BCal tried to compensate for this difference in load factors between Gatwick and Heathrow by being a more cargo-oriented carrier than BA. Compared with BA, cargo accounted for a greater share of BCal's total revenues and profits.
Similarly, a scheduled service at Gatwick generates a 20% lower revenue and results in a 15% lower yield than a comparable service at Heathrow.
Heathrow's and Gatwick's respective geographic location as well as the number of people living within each airport's catchment area accounts for this difference in load factors, revenues and yields.
The former has a bigger catchment area than the latter because more people live north of the Thames than south of it. Heathrow's catchment area includes about three-quarters of London's population and roughly two-thirds of the population in Southeast England. London is where most of the demand for air travel in the Southeast originates. In addition, for most Londoners, Gatwick was a far less accessible airport than Heathrow in the days prior to the M25
, as a result of its greater distance from most parts of London. In those days it took almost two hours to drive there from central London despite the low level of vehicular traffic. The only advantage Gatwick enjoyed over Heathrow in terms of ease and speed of access was its direct rail link to London Victoria.
The size of an airport's catchment area and its accessibility are of particular significance for the premium travel market. Back then, Heathrow's relative ease of access meant that it could attract a far greater number of travellers who were living or working in London than Gatwick. Moreover, Heathrow's larger catchment area meant that it was able to offer more frequent flights to a greater number of destinations with more conveniently timed connections. This, in turn, helped attract a greater number of business travellers who were the airlines' most profitable customers. It also meant that there were at least four to five business travellers in Heathrow's catchment area for every business traveller in Gatwick's catchment area.
This constituted a major competitive disadvantage BCal faced at Gatwick compared with other airlines that were based at Heathrow. It was further compounded by the fact that Gatwick had few connecting flights during the 1970s and early 1980s, as a result of the regulatory regime as well as the bilateral air services agreements the UK Government had negotiated with its overseas counterparts. (The former necessitated going through a costly and time-consuming process to gain a licence to operate a scheduled service. This involved lengthy hearings the CAA conducted for each route application where BA and other independent airlines, which felt the Government's policy of making BCal its "chosen instrument" of the private sector discriminated against them, objected to BCal's application and — in cases where there were several rival applications — against each other as well. The latter often had no scope for designating a second British scheduled airline in addition to the incumbent carrier. This meant that even in those cases where BCal had succeeded in securing licences to operate scheduled services on routes of its choice, it was prevented from using these licences if it involved an international service where there was no scope in the relevant bilateral agreement for the UK Government to designate it as the second UK flag carrier.) At the same time, Heathrow was the most important point in the world for interline
traffic with more passengers changing flights there than at any other airport.
Whatever connections there were at Gatwick were mostly provided by BCal itself, at great cost to the airline. Since the early-1970s oil crisis, only the four short-haul BCal routes from Gatwick to Paris, Brussels, Jersey and Genoa had made a positive contribution, with Paris, Jersey and Genoa being the only routes that were genuinely profitable in their own rightafter allocating all overhead
s. However, given the fact that 40% of the airline's scheduled passengers were changing from one of its flights to another at Gatwick, BCal's dependency on providing this limited number of feeder services was such that withdrawing any of these services or significantly reducing frequencies — even those of loss-making services — had an immediate, negative impact on the load
s of the profitable long-haul services and, therefore, on the company's overall profitability
as well. It was with this in mind that BCal's senior management
had always justified keeping its UK mainland domestic trunk routes despite these losing £
2 million each year ever since BA had introduced its high-frequency Shuttle service on these routes from Heathrow. This had led to a reduction in frequency of the competing BCal services from Gatwick as the airport's smaller catchment area did not allow BCal to generate the minimum traffic flows that would have made a competing, high-frequency service from Gatwick viable. BCal's senior management estimated that its short-haul domestic feeder flights generated additional yearly long-haul revenues of £5 million and that the European feeder services added £20 million to the company's long-haul revenues.
The Government's decision to permit a limited transfer of routes from BA to BCal, rather than the major route transfer as well as the removal of capacity restrictions on all short-haul feeder routes proposed by BCal itself and advocated by the CAA's review of airline competition policy ahead of BA's privatisation, did not make BCal big enough in terms of economies of scale and scope to develop an efficient hub-and-spoke operation at Gatwick. This would have enabled BCal to compete with a much bigger, privatised BA as well as the giant US carriers on a level playing field. Instead, the limited route transfer still left BCal in an operationally and financially much weaker position than its far bigger and stronger rivals. This increased the airline's vulnerability to external shocks, thereby seriously undermining its financial strength to withstand such crises.
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
independentindependent of government-owned corporation
Government-owned corporation
A government-owned corporation, state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, or parastatal is a legal entity created by a government to undertake commercial activities on behalf of an owner government...
s airline British Caledonian
British Caledonian
British Caledonian was a private, British independentindependent from government-owned corporations airline, operating out of Gatwick Airport in the 1970s and 1980s...
(BCal) was taken over by newly privatise
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
d British Airways
British Airways
British Airways is the flag carrier airline of the United Kingdom, based in Waterside, near its main hub at London Heathrow Airport. British Airways is the largest airline in the UK based on fleet size, international flights and international destinations...
(BA).
The prime causes for the failure of the "Second Force" concept and BCal's demise were:
- The unwieldy route structure it had inherited from British United AirwaysBritish United AirwaysBritish United Airways was a private, independentindependent from government-owned corporations British airline formed as a result of the merger of Airwork Services and Hunting-Clan Air Transport in July 1960, making it the largest wholly private airline based in the United Kingdom at the time...
(BUA).
- The Government's reluctance to live up to the spirit of the "Second Force" aviation policy through concrete deeds.
- The Government's conflict of interest as the sole owner of British Airways as well as the regulator for all British airlines.
- The 1976 "spheres of influence" policy that left both major British scheduled airlines with fragmented networks, thereby putting them at a competitive disadvantage vis-à-vis their main international rivals.
- The political consensus at the time that was suspicious of private enterprise generally and hostile to the idea of wholly privately ownedPrivate sectorIn economics, the private sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state...
airlines providing scheduled services in competition with wholly or majority government-ownedPublic sectorThe public sector, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.Examples of public sector activity range...
flag carrierFlag carrierA flag carrier is a transportation company, such as an airline or shipping company, that, being locally registered in a given country, enjoys preferential rights or privileges, accorded by the government, for international operations. It may be a state-run, state-owned or private but...
s, especially on the high-profile trunk routes.
- Highly restrictive bilateral air services agreementBilateral Air Transport AgreementA bilateral air transport agreement is an agreement which two nations sign to allow international commercial air transport services between their territories....
s with little or no scope for dual designation.
- The cumbersome process to gain a licence to operate a scheduled service during the 1970s and early 1980s.
- The fact that on identical routes with the same fare structure load factors, revenueRevenueIn business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
s and yieldsthe profitProfit (accounting)In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
per passenger in terms of the average fare paid by each passenger for every mileMileA mile is a unit of length, most commonly 5,280 feet . The mile of 5,280 feet is sometimes called the statute mile or land mile to distinguish it from the nautical mile...
flown, calculated by dividing passenger revenue by revenue passenger mileRevenue passenger mileRevenue passenger miles and Revenue passenger kilometers are measures of traffic for an airline flight, bus, or train calculated by multiplying the number of revenue-paying passengers aboard the vehicle by the distance traveled...
s (RPMs) are significantly lower at GatwickLondon Gatwick AirportGatwick Airport is located 3.1 miles north of the centre of Crawley, West Sussex, and south of Central London. Previously known as London Gatwick,In 2010, the name changed from London Gatwick Airport to Gatwick Airport...
than at Heathrow.
- Gatwick's location and its smaller catchment area compared with Heathrow.
- The Government's failure to fully accept the recommendations of the Civil Aviation Authority's 1984 airline competition White PaperWhite paperA white paper is an authoritative report or guide that helps solve a problem. White papers are used to educate readers and help people make decisions, and are often requested and used in politics, policy, business, and technical fields. In commercial use, the term has also come to refer to...
that would have strengthened BCal's position at Gatwick by considerably increasing the scaleEconomies of scaleEconomies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
and scopeEconomies of scopeEconomies of scope are conceptually similar to economies of scale. Whereas 'economies of scale' for a firm primarily refers to reductions in average cost associated with increasing the scale of production for a single product type, 'economies of scope' refers to lowering average cost for a firm in...
of its operation to enable it to withstand the competitive onslaught from a privatised BA.
The route structure BCal had inherited from BUA at the time of its inception was notable for the unplanned and unsystematic manner in which it had grown since the early 1960s.
At the time, Sir Freddie Laker had begun building up BUA's scheduled route network in his capacity as that airline's managing director. In those days very limited opportunities existed for wholly privately owned, independent airlines to provide fully fledged scheduled air services on major domestic and international trunk routes. This resulted in a poor fit of many routes in BUA's network of scheduled services, thereby making it difficult to offer sensible connections that could be marketed to the travelling public. It also represented the best network structure Sir Freddie was able to put in place under the then prevailing regulatory regime.
The resulting network of domestic, European and intercontinental long-haul scheduled services from Gatwick was a motley collection of routes resembling a rag bag. This made it difficult to develop profitable
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
streams of transfer traffic using Gatwick as a hub
Airline hub
An airline hub is an airport that an airline uses as a transfer point to get passengers to their intended destination. It is part of a hub and spoke model, where travelers moving between airports not served by direct flights change planes en route to their destinations...
. Therefore, it was a challenge to persuade people to fly to Gatwick from relatively minor places like Genoa
Genoa
Genoa |Ligurian]] Zena ; Latin and, archaically, English Genua) is a city and an important seaport in northern Italy, the capital of the Province of Genoa and of the region of Liguria....
or Jersey
Jersey
Jersey, officially the Bailiwick of Jersey is a British Crown Dependency off the coast of Normandy, France. As well as the island of Jersey itself, the bailiwick includes two groups of small islands that are no longer permanently inhabited, the Minquiers and Écréhous, and the Pierres de Lecq and...
in order to make an onward connection at the airport
Airport
An airport is a location where aircraft such as fixed-wing aircraft, helicopters, and blimps take off and land. Aircraft may be stored or maintained at an airport...
to secondary places in Africa
Africa
Africa is the world's second largest and second most populous continent, after Asia. At about 30.2 million km² including adjacent islands, it covers 6% of the Earth's total surface area and 20.4% of the total land area...
or South America
South America
South America is a continent situated in the Western Hemisphere, mostly in the Southern Hemisphere, with a relatively small portion in the Northern Hemisphere. The continent is also considered a subcontinent of the Americas. It is bordered on the west by the Pacific Ocean and on the north and east...
, and an even greater challenge to do this profitably.
At the height of its commercial success in the late 1970s and early 1980s, BCal managed to turn the dilemma the structure of its route network presented to its advantage by focusing on those routes that carried a very high proportion of profitable, oil-related, premium business traffic. It even managed to become the preferred carrier
Airline
An airline provides air transport services for traveling passengers and freight. Airlines lease or own their aircraft with which to supply these services and may form partnerships or alliances with other airlines for mutual benefit...
of high-ranking oil industry executive
Executive director
Executive director is a term sometimes applied to the chief executive officer or managing director of an organization, company, or corporation. It is widely used in North American non-profit organizations, though in recent decades many U.S. nonprofits have adopted the title "President/CEO"...
s based in Texas
Texas
Texas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...
, by providing convenient, hassle-free connections between Houston/Dallas, Lagos
Lagos
Lagos is a port and the most populous conurbation in Nigeria. With a population of 7,937,932, it is currently the third most populous city in Africa after Cairo and Kinshasa, and currently estimated to be the second fastest growing city in Africa...
and Tripoli
Tripoli
Tripoli is the capital and largest city in Libya. It is also known as Western Tripoli , to distinguish it from Tripoli, Lebanon. It is affectionately called The Mermaid of the Mediterranean , describing its turquoise waters and its whitewashed buildings. Tripoli is a Greek name that means "Three...
via the airline's Gatwick base. However, the downside of this initially successful strategy was that it made the company dependent on a small number of markets whose fortunes were tied to the commodity price cycle, in unstable parts of the world, for most of its profits.
Although this worked in BCal's favour when the price of a barrel of crude oil was high during the late 1970s/early 1980s, it worked against it when the oil price collapsed in the mid-1980s. It also further compounded the firm's growing financial problems at the time, culminating in the financial crisis
Financial crisis
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
that led to its takeover
Takeover
In business, a takeover is the purchase of one company by another . In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.- Friendly takeovers :Before a bidder makes an offer for another...
by BA.
Despite BCal being awarded several licences to commence scheduled services on a number of high-profile long-haul routes with a good mix of business and leisure traffic, the Government made little or no attempt to assist the airline in obtaining reciprocal traffic rights from overseas governments that would have enabled it to use all of these licences.
For instance, the Civil Aviation Authority (CAA) had awarded BCal licences to launch fully fledged scheduled services from London Gatwick to New York
New York City
New York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...
's John F. Kennedy Airport
John F. Kennedy International Airport
John F. Kennedy International Airport is an international airport located in the borough of Queens in New York City, about southeast of Lower Manhattan. It is the busiest international air passenger gateway to the United States, handling more international traffic than any other airport in North...
(JFK), Los Angeles
Los Ángeles
Los Ángeles is the capital of the province of Biobío, in the commune of the same name, in Region VIII , in the center-south of Chile. It is located between the Laja and Biobío rivers. The population is 123,445 inhabitants...
, Boston
Boston
Boston is the capital of and largest city in Massachusetts, and is one of the oldest cities in the United States. The largest city in New England, Boston is regarded as the unofficial "Capital of New England" for its economic and cultural impact on the entire New England region. The city proper had...
, Houston, Atlanta, Toronto
Toronto
Toronto is the provincial capital of Ontario and the largest city in Canada. It is located in Southern Ontario on the northwestern shore of Lake Ontario. A relatively modern city, Toronto's history dates back to the late-18th century, when its land was first purchased by the British monarchy from...
and Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
during the 1972 "Cannonball" hearings. However, it took the UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
Government four years to negotiate a new air services agreement with the US government
Federal government of the United States
The federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...
that actually enabled BCal to make use of its Houston and Atlanta licences. Renegotiation of the then very restrictive UK—Canadian
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
air treaty that could have permitted BCal to operate a scheduled service to Toronto took even longer. British Overseas Airways Corporation
British Overseas Airways Corporation
The British Overseas Airways Corporation was the British state airline from 1939 until 1946 and the long-haul British state airline from 1946 to 1974. The company started life with a merger between Imperial Airways Ltd. and British Airways Ltd...
's resistance to opening the lucrative Far East
Far East
The Far East is an English term mostly describing East Asia and Southeast Asia, with South Asia sometimes also included for economic and cultural reasons.The term came into use in European geopolitical discourse in the 19th century,...
ern route to Singapore to home-grown competition by another British scheduled airline was so strong that BCal eventually only managed to obtain a renewable, three-months exempt charter permit, which entitled the airline to operate a small number of seat-only charter flights between Gatwick, Bahrain
Bahrain
' , officially the Kingdom of Bahrain , is a small island state near the western shores of the Persian Gulf. It is ruled by the Al Khalifa royal family. The population in 2010 stood at 1,214,705, including 235,108 non-nationals. Formerly an emirate, Bahrain was declared a kingdom in 2002.Bahrain is...
and Singaporethese flights were exempt from the affinitiy group rules and not subject to bilateral capacity restrictions.
In addition, the UK Government itself began to undermine the "Second Force" concept from the moment it decided to re-allocate BCal's unused Gatwick—JFK and Gatwick—Los Angeles International
Los Angeles International Airport
Los Angeles International Airport is the primary airport serving the Greater Los Angeles Area, the second-most populated metropolitan area in the United States. It is most often referred to by its IATA airport code LAX, with the letters pronounced individually...
licences to rival independent airline Laker Airways
Laker Airways
Laker Airways was a wholly private, British independentindependent from government-owned corporations airline founded by Sir Freddie Laker in 1966. It originally was a charter airline flying passengers and cargo worldwide...
, following Sir Freddie's high-profile, public campaign to get his proposed Skytrain off the ground. The "Second Force" concept was furthermore undermined when the Government overturned the CAA's refusal to grant British Midland
Bmi (airline)
British Midland Airways Limited , is an airline based at Donington Hall in Castle Donington in the United Kingdom, close to East Midlands Airport, and a fully owned subsidiary of Lufthansa...
a licence to begin domestic scheduled services on the two main trunk routes between London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
and Scotland
Scotland
Scotland is a country that is part of the United Kingdom. Occupying the northern third of the island of Great Britain, it shares a border with England to the south and is bounded by the North Sea to the east, the Atlantic Ocean to the north and west, and the North Channel and Irish Sea to the...
from Heathrow, without giving BCal reciprocal access to that airport. The "Second Force" policy was finally killed off when the Government decided to go ahead with BA's privatisation
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
. Moreover, the CAA undermined the Government's "Second Force" policy as well by awarding Air Europe
Air Europe
Air Europe was a wholly privately owned, independentindependent from government-owned corporations British airline, established in 1978 under the working title Inter European Airways. It adopted the Air Europe name the following year...
licences to launch scheduled services on several routes from Gatwick to Continental Europe
Continental Europe
Continental Europe, also referred to as mainland Europe or simply the Continent, is the continent of Europe, explicitly excluding European islands....
in direct competition with existing BCal services. These measures significantly weakened BCal. They also had a detrimental effect on the airline's ability to establish itself as an effective competitor to the major scheduled airlines that were operating from Heathrow.
The conflict of interest that arose out of the UK Government's dual role as the sole owner of BA, at the time by far the largest British scheduled airline accounting for between three quarters and four fifths of the total output of Britain
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
's entire scheduled air transport industry, as well as the regulator for all UK airlines meant that the interests of the "Second Force" were not always at the top of the Government's list of priorities. This conflict of interest put the Government in a dilemma when it was preparing BA for privatisation during the mid-1980s, knowing full well that this was likely to pose a major threat to BCal without substantial route transfers from the former to the latter, which would have enabled BCal to become big enough to compete with BA and other large scheduled airlines on a level playing field
Level playing field
A level playing field is a concept about fairness, not that each player has an equal chance to succeed, but that they all play by the same set of rules. A metaphorical playing field is said to be level if no external interference affects the ability of the players to compete fairly...
. At the same time, the Government was well aware that it risked undermining BA's successful flotation
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
on London's stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
if it agreed to the transfer of several of BA's most lucrative long-haul routes to BCal, as well as the removal of all capacity restrictions on short-haul routes where both airlines were already competing with each other, as recommended by the CAA and requested by BCal itself.
The "spheres of influence" policy, which the Government had imposed on both of Britain's major scheduled carriers as a result of an aviation policy review conducted in the mid-1970s against a backdrop of huge loss
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
es the airline industry had faced in the aftermath of the early-'70s oil crisis
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
and which had effectively eliminated long-haul competition between BA and BCal, had fragmented both airlines' networks. This had weakened them internationally in comparison with their main overseas rivals. The resulting weakening of BA's and BCal's international competitive strength was of far greater concern to the latter as it was much smaller than either BA or most of its foreign-based competitors and had a less comprehensive network offering fewer connections than most rival airlines.
At the time of BCal's inception, politicians on the left of the UK's political spectrum — in particular, Labour
Labour Party (UK)
The Labour Party is a centre-left democratic socialist party in the United Kingdom. It surpassed the Liberal Party in general elections during the early 1920s, forming minority governments under Ramsay MacDonald in 1924 and 1929-1931. The party was in a wartime coalition from 1940 to 1945, after...
left wingers and most of the union
Trade union
A trade union, trades union or labor union is an organization of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with...
s — opposed wholly private
Private sector
In economics, the private sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state...
, independent airlines providing scheduled services in competition with the state-owned corporation
Government-owned corporation
A government-owned corporation, state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, or parastatal is a legal entity created by a government to undertake commercial activities on behalf of an owner government...
s. These critics' world view had been shaped by their World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
and early post-War
Post-War
Post-War is the fifth studio album by M. Ward. It was released on August 22, 2006 by Merge Records. It features the single "To Go Home," a cover of a song written by Daniel Johnston. Guest appearances were made by Jim James of My Morning Jacket , Neko Case and Mike Mogis...
experiences. They therefore regarded any form of competition as a waste of scarce resources. Some of them were also ideological
Ideology
An ideology is a set of ideas that constitutes one's goals, expectations, and actions. An ideology can be thought of as a comprehensive vision, as a way of looking at things , as in common sense and several philosophical tendencies , or a set of ideas proposed by the dominant class of a society to...
ly driven in their opposition to private enterprise playing a prominent role in the UK's air transport industry.
Restrictive bilateral air services agreements that had little or no scope for dual designation meant that BCal was effectively kept out of many markets for which it had already obtained licences from the CAA.
Even where the bilateral air services agreement between the UK and a foreign country enabled BCal to be designated as the second UK flag carrier, the airline was still facing numerous restrictions, in terms of the number of flights it could operate and/or the number of seats it could sell as well as the lowest fares it could offer. For example, the Anglo-French air treaty did not limit the number of airlines the UK Government could designate on the London—Paris
Paris
Paris is the capital and largest city in France, situated on the river Seine, in northern France, at the heart of the Île-de-France region...
route. However, it stipulated that all British airlines' combined share of the total capacity on that route could not exceed the combined capacity share of all French
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
airlines, and that all capacity increases needed to be mutually agreed by both sides. As Air France
Air France
Air France , stylised as AIRFRANCE, is the French flag carrier headquartered in Tremblay-en-France, , and is one of the world's largest airlines. It is a subsidiary of the Air France-KLM Group and a founding member of the SkyTeam global airline alliance...
was the only airline the French government had designated to serve this route, this effectively meant that BA and BCal were compelled to share between themselves the 50% of the total capacity between London and Paris that had been allocated to the UKthe UK's share of total London—Paris scheduled capacity was raised in 1985 by inter-governmental agreement to 55%, to be shared between BA, BCal and Air UK from summer 1986. It also gave Air France an effective veto
Veto
A veto, Latin for "I forbid", is the power of an officer of the state to unilaterally stop an official action, especially enactment of a piece of legislation...
over any capacity increase, thereby allowing that airline to dictate the pace at which additional capacity could be added. It took BCal 15 years to attain a 20% share of the London—Paris market's total capacity since it commenced scheduled operations on that route.
BCal tried to work around these restrictions by using larger One-Eleven
BAC One-Eleven
The British Aircraft Corporation One-Eleven, also known as the BAC-111, BAC-1-11 or BAC 1-11, was a British short-range jet airliner of the 1960s and 1970s...
500s in a low-density configuration featuring a first class
First class (aviation)
First class is a luxury travel class on some airliners that exceeds business class, premium economy, and economy class. On a passenger jetliner, first class refers to a limited number of seats or cabins located in the front of the aircraft which are notable for their comfort, service, and privacy...
section on week days and smaller, single-class One-Eleven 200s on week-ends. This enabled it to offer a higher frequency on week days, resulting in a more competitive schedule for business travellers while keeping within its allocated capacity share.
BCal faced similar capacity restrictions on the London—Amsterdam
Amsterdam
Amsterdam is the largest city and the capital of the Netherlands. The current position of Amsterdam as capital city of the Kingdom of the Netherlands is governed by the constitution of August 24, 1815 and its successors. Amsterdam has a population of 783,364 within city limits, an urban population...
the CAA lifted frequency restrictions governing BCal's scheduled services between London and Amsterdam in November 1972, overruling BEA
British European Airways
British European Airways or British European Airways Corporation was a British airline which existed from 1946 until 1974. The airline operated European and North African routes from airports around the United Kingdom...
's objections; this resulted in the introduction in April 1973 of a third daily frequency operating on weekdays, increasing the number of weekly round-trips to 19 and London—Brussels
Brussels
Brussels , officially the Brussels Region or Brussels-Capital Region , is the capital of Belgium and the de facto capital of the European Union...
routes, while other Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
an governments refused requests from their UK counterpart to have BCal designated as a second UK flag carrier, arguing that there was no equivalent of a "Second Force" in their countries that could have matched the additional capacity BCal would have offered, that there simply were no spare capacities to do so, that this would violate the letter and spirit of the relevant bilateral air treaties/pool agreements, or that total British market share already exceeded that of the relevant overseas flag carriers when charter traffic was included as well.
BCal continued operating BUA's former regional routes from Gatwick to Le Touquet and Rotterdam
Rotterdam
Rotterdam is the second-largest city in the Netherlands and one of the largest ports in the world. Starting as a dam on the Rotte river, Rotterdam has grown into a major international commercial centre...
for several years to provide additional capacity to/from alternative airports that were relatively close to the main airports where its operations were subject to capacity restrictions.
Some countries imposed capacity restrictions on BCal's operations even on regional routes that did not compete with any trunk routes and therefore could not have caused a diversion of traffic from these routes. BCal's London—Genoa
Genoa
Genoa |Ligurian]] Zena ; Latin and, archaically, English Genua) is a city and an important seaport in northern Italy, the capital of the Province of Genoa and of the region of Liguria....
route was a case in point. The only way the Italian
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
authorities agreed to BCal's request to add an additional Saturday frequency on that route was to compel the airline to enter into a pool agreement with Alitalia
Alitalia
Alitalia - Linee Aeree Italiane S.p.A. , in its later stages known as Alitalia - Linee Aeree Italiane S.p.A. in Extraordinary Administration, was the former Italian flag carrier...
. Under that agreement BCal was forced to share its revenues on that route with Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
's flag carrier, even after that airline had withdrawn its own Heathrow—Genoa service it had originally operated in competition with the Gatwick—Genoa service provided by BUA/BCal.
Such anti-competitive practices
Anti-competitive practices
Anti-competitive practices are business or government practices that prevent or reduce competition in a market .- Anti-competitive practices :These can include:...
were not confined to BCal's European operations. The bilateral agreements governing most of BCal's long-haul routes obliged the airline to enter into a pool agreement with the designated foreign flag
Flag State
The flag state of a commercial vessel is the state under whose laws the vessel is registered or licensed.The flag state has the authority and responsibility to enforce regulations over vessels registered under its flag, including those relating to inspection, certification, and issuance of safety...
carrier[s]. These agreements stipulated that all revenues were to be equally shared by all carriers serving the same route. This usually meant that revenues were shared on a 50:50 basis, regardless of each carrier's actual market share
Market share
Market share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...
. The only exceptions to this rule were the US
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
as well as the Asia
Asia
Asia is the world's largest and most populous continent, located primarily in the eastern and northern hemispheres. It covers 8.7% of the Earth's total surface area and with approximately 3.879 billion people, it hosts 60% of the world's current human population...
n countries to which BCal flewwith the exception of Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...
. As far as the US was concerned, no US airline was allowed to enter into a pool agreement with any other airline — especially, a wholly/majority government-owned, foreign carrier — as this constituted a violation of that country's antitrust
Antitrust
The United States antitrust law is a body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are intended to encourage competition in the marketplace. These competition laws make illegal certain practices deemed to hurt businesses or consumers or both,...
laws. With regard to the Asian countries that received scheduled services from BCal, the UK already had fully liberalise
Liberalization
In general, liberalization refers to a relaxation of previous government restrictions, usually in areas of social or economic policy. In some contexts this process or concept is often, but not always, referred to as deregulation...
d or fairly liberal bilateral air services agreements with these countriesother than Saudi Arabia.
These bilateral restrictions seriously impeded BCal's efforts to successfully build a network of short-haul, European feeder services that was essential to provide sufficient transfer traffic for its long-haul routes from Gatwick. Furthermore, these restrictions made it difficult to offer its passengers a more frequent service on certain long-haul routes that could have attracted more high-yield business traffic. It also left the airline with an incomplete network, which resulted in a weak route structure. This, in turn, constituted a major competitive disadvantage.
As a general rule, a full-service scheduled operation at Gatwick with a fare structure that is identical to a similar operation at Heathrow produces a 10% lower load factor. For example, BCal's scheduled load factors at Gatwick rarely exceeded 60% whereas comparable BA load factors at Heathrow were usually above 70%. BCal tried to compensate for this difference in load factors between Gatwick and Heathrow by being a more cargo-oriented carrier than BA. Compared with BA, cargo accounted for a greater share of BCal's total revenues and profits.
Similarly, a scheduled service at Gatwick generates a 20% lower revenue and results in a 15% lower yield than a comparable service at Heathrow.
Heathrow's and Gatwick's respective geographic location as well as the number of people living within each airport's catchment area accounts for this difference in load factors, revenues and yields.
The former has a bigger catchment area than the latter because more people live north of the Thames than south of it. Heathrow's catchment area includes about three-quarters of London's population and roughly two-thirds of the population in Southeast England. London is where most of the demand for air travel in the Southeast originates. In addition, for most Londoners, Gatwick was a far less accessible airport than Heathrow in the days prior to the M25
M25 motorway
The M25 motorway, or London Orbital, is a orbital motorway that almost encircles Greater London, England, in the United Kingdom. The motorway was first mooted early in the 20th century. A few sections, based on the now abandoned London Ringways plan, were constructed in the early 1970s and it ...
, as a result of its greater distance from most parts of London. In those days it took almost two hours to drive there from central London despite the low level of vehicular traffic. The only advantage Gatwick enjoyed over Heathrow in terms of ease and speed of access was its direct rail link to London Victoria.
The size of an airport's catchment area and its accessibility are of particular significance for the premium travel market. Back then, Heathrow's relative ease of access meant that it could attract a far greater number of travellers who were living or working in London than Gatwick. Moreover, Heathrow's larger catchment area meant that it was able to offer more frequent flights to a greater number of destinations with more conveniently timed connections. This, in turn, helped attract a greater number of business travellers who were the airlines' most profitable customers. It also meant that there were at least four to five business travellers in Heathrow's catchment area for every business traveller in Gatwick's catchment area.
This constituted a major competitive disadvantage BCal faced at Gatwick compared with other airlines that were based at Heathrow. It was further compounded by the fact that Gatwick had few connecting flights during the 1970s and early 1980s, as a result of the regulatory regime as well as the bilateral air services agreements the UK Government had negotiated with its overseas counterparts. (The former necessitated going through a costly and time-consuming process to gain a licence to operate a scheduled service. This involved lengthy hearings the CAA conducted for each route application where BA and other independent airlines, which felt the Government's policy of making BCal its "chosen instrument" of the private sector discriminated against them, objected to BCal's application and — in cases where there were several rival applications — against each other as well. The latter often had no scope for designating a second British scheduled airline in addition to the incumbent carrier. This meant that even in those cases where BCal had succeeded in securing licences to operate scheduled services on routes of its choice, it was prevented from using these licences if it involved an international service where there was no scope in the relevant bilateral agreement for the UK Government to designate it as the second UK flag carrier.) At the same time, Heathrow was the most important point in the world for interline
Interlining
Interlining is a voluntary commercial agreement between individual airlines to handle passengers traveling on itineraries that require multiple airlines.-Agreements:...
traffic with more passengers changing flights there than at any other airport.
Whatever connections there were at Gatwick were mostly provided by BCal itself, at great cost to the airline. Since the early-1970s oil crisis, only the four short-haul BCal routes from Gatwick to Paris, Brussels, Jersey and Genoa had made a positive contribution, with Paris, Jersey and Genoa being the only routes that were genuinely profitable in their own rightafter allocating all overhead
Overhead
Overhead may be:* Overhead , the ongoing operating costs of running a business* Engineering overhead, ancillary design features required by a component of a device...
s. However, given the fact that 40% of the airline's scheduled passengers were changing from one of its flights to another at Gatwick, BCal's dependency on providing this limited number of feeder services was such that withdrawing any of these services or significantly reducing frequencies — even those of loss-making services — had an immediate, negative impact on the load
Available seat miles
An available seat mile is the fundamental unit of production for a passenger-carrying airline. A unit in this case is one seat, available for sale, flown one mile. For example, an aircraft with 300 seats available for sale flying 1,000 statute miles would generate 300,000 ASMs for that particular...
s of the profitable long-haul services and, therefore, on the company's overall profitability
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
as well. It was with this in mind that BCal's senior management
Senior management
Senior management, executive management, or management team is generally a team of individuals at the highest level of organizational management who have the day-to-day responsibilities of managing a company or corporation, they hold specific executive powers conferred onto them with and by...
had always justified keeping its UK mainland domestic trunk routes despite these losing £
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
2 million each year ever since BA had introduced its high-frequency Shuttle service on these routes from Heathrow. This had led to a reduction in frequency of the competing BCal services from Gatwick as the airport's smaller catchment area did not allow BCal to generate the minimum traffic flows that would have made a competing, high-frequency service from Gatwick viable. BCal's senior management estimated that its short-haul domestic feeder flights generated additional yearly long-haul revenues of £5 million and that the European feeder services added £20 million to the company's long-haul revenues.
The Government's decision to permit a limited transfer of routes from BA to BCal, rather than the major route transfer as well as the removal of capacity restrictions on all short-haul feeder routes proposed by BCal itself and advocated by the CAA's review of airline competition policy ahead of BA's privatisation, did not make BCal big enough in terms of economies of scale and scope to develop an efficient hub-and-spoke operation at Gatwick. This would have enabled BCal to compete with a much bigger, privatised BA as well as the giant US carriers on a level playing field. Instead, the limited route transfer still left BCal in an operationally and financially much weaker position than its far bigger and stronger rivals. This increased the airline's vulnerability to external shocks, thereby seriously undermining its financial strength to withstand such crises.