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Airline Mismanagement

Can an established major airline re-invent itself with a subsidiary that attempts to be different to its parent company?

The US is full of examples of major carriers that have failed at creating low cost alternate subsidiaries.

So the odds are against BA's attempt to do the same with its new OpenSkies subsidiary.  But, so far, it seems to be succeeding.

 
 
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All About BA's New Airline, OpenSkies

BA's response to the various - and now failed - premium cabin point to point trans-Atlantic airlines
 

Avid plane spotters will note an interesting thing in this picture.  The plane is one of OpenSkies two 757s, but it has specially modified wingtips added to give it greater range and fuel efficiency.

Part 1 of a three part series on OpenSkies - please also visit

1.  About OpenSkies

2.  OpenSkies Prem+ (Business Seat) review

3.  OpenSkies Biz (Business Bed) review

 

 

The OpenSkies concept was initiated by BA in mid 2007, in the height of a series of new trans-Atlantic lower cost premium cabin airlines starting up, and with the euphoria of a shortly to be announced open skies agreement between the EU and the US making it easier for new airlines to start service between anywhere in the EU and anywhere in the US.

With the depressed business climate today, and with oil prices that swung way high before dropping, but which could go back sky high again at any moment, and with all the startup trans-Atlantic carriers now having failed, one wonders if BA would again start a new airline today the same way it did 15 months ago.

But, the most important question of all for us as passengers is simply this :  Should we give this new airline our business or not.

Background to the launch of OpenSkies

The mid 2000s saw a sudden rush of new international airlines start, offering service between a secondary airport in London and flying to New York with planes fitted with only business or first class seats.  Maxjet, Eos and Silverjet all launched these types of services, and a French startup, L'Avion, attempted to emulate the apparent success of these three companies by flying between Paris' Orly Airport and Newark.

The main selling point of these startups was that they offered business class type service but at a massively lower price than the major airlines, and by flying medium sized 757s, their planes had fewer than 100 passengers on board making boarding and leaving the plane quick and simple, and with fewer delays to checkin or get luggage at the other end.

For a while it seemed the three startups were succeeding, as they added extra planes and flights to their initial schedules and issued brave press releases about meeting targets and being pleased with their progress.

Improved convenience, a good quality travel experience, and a great value fare all seem to be appealing points for travelers.  As such, the major airlines, charging twice or more the amount that these new carriers did for comparable or inferior service, felt threatened, even though the new startups had very little capacity compared to the massive number of seats being flown across the Atlantic each day by the major airlines such as BA, AA, UA, VS, etc.

The major airlines also had two points in their favor - the fact that they offered feeder service into and out of the two airports on either side of the Atlantic, making it easier for people flying from and/or to further away points to connect through their services, and they also had frequent flier programs and major route systems either in the US or Europe, corporate sales networks (and corporate discounts - sometimes as much as half off the published fares), and other such marketing tools at their disposal.

The established airlines responded in three ways - most of them yawned and ignored the new startups.  But American Airlines launched a competing service at massively discounted rates on the same route between JFK and Stansted Airport in London, while British Airways perhaps decided 'if you can't beat them, join them' and announced plans to create its own similar airline as a wholly owned but independently operated subsidiary, initially known by the marketing code name 'Project Lauren' and then publicly named as OpenSkies when the new airline was formally announced at the beginning of 2008.

Whether it be due to the spiraling costs of jetfuel, toughening economic times making it difficult for the startups to get additional financing, or the competitive impacts of American Airlines (and probably it was a mix of all three), the three startups all closed down between late 2007 and mid 2008.  This is discussed in our article on why these startup airlines failed.

As soon as the third of the US-UK airlines folded, AA immediately discontinued its own service, but BA has pressed ahead with its OpenSkies subsidiary.  It is notable, however, that BA currently does not operate OpenSkies flights on any routes where it would directly compete with itself.

The Early History of OpenSkies

OpenSkies was not a direct competitive response to the three airlines operating between London and New York.  Instead, it was an oblique copying of the business model, with first flights planned to operate between New York (JFK) and Paris (ORY) - it being more in competition with French startup airline L'Avion's service between New York (EWR) and Paris (ORY).

The first OpenSkies flight operated on 19 June 2008, and two weeks later it announced it was to purchase its competitor, L'Avion.  Perhaps the sudden appearance of OpenSkies as a well funded competitor terrified L'Avion and encouraged its owners to urgently sell the airline to its competitor while it still had any value, but who knows what caused the sale.  Perhaps even L'Avion's owners were not displeased with their exit strategy - the sale, with a price tag of 54 million (US$88 million) seemed to place a measurable value on the airline, although included in the purchase was some 26 million in cash that was on L'Avion's books.  The two planes L'Avion operate are leased, so the remaining 28 million of the 54 million represents miscellaneous equipment and assets, and largely a goodwill figure.

Just under a month later, at the end of July, OpenSkies announced plans to add flights between JFK and Amsterdam (AMS), with the first flight taking place barely ten weeks later, on 15 October 2008.

The OpenSkies Business Model

OpenSkies (airline code EC) differentiates itself from its parent company, British Airways, in a number of respects, while also enjoying the synergy of its association with BA when it suits as well.  Managing Director Dale Moss told me that there was no point in copying BA, because if they did that, they'd simply end up as BA, and there is of course no sense in doing that.  He indicated that, among other objectives for OpenSkies is its ability to be a 'test bed' for BA to try out new services and new features.  He said that EC seeks to be a business rather than a luxury brand, it 'can't be all things for all people' and 'wants to be a chic brand'.

Not being all things to all people is certainly starkly different to BA with its four different classes of service, and seeking to be a chic brand (whatever that really implies) suggests perhaps an attempt to copy the successful 'chic-ness' of arch-BA competitor, Virgin Atlantic Airways.

OpenSkies and Open Skies

Ostensibly OpenSkies has as its main raison d'tre the ability to respond to the new Open Skies agreement between the EU and the US which basically allows any airline from either the EU or the US to fly between any EU country and the US (or vice versa).  Prior to this agreement, it would have been very difficult for BA to, for example, get permission from both the French and US governments to operate service between Paris and New York, but now it is an almost guaranteed outcome that any bona fide application to commence air service will be approved.

This new paradigm allows established airlines from one country to easily start operations in another country, 'poaching' from the other country's pre-existing national carriers.  BA actually stands potentially to lose as much as it gains from this new regime - part of the Open Skies agreement opens BA's valuable fortress hub at Heathrow (considered to be the most desirable London airport to fly in/out of) to competition from other airlines (but constrained by the shortage of available takeoff and landing 'slots' at LHR), and perhaps that is part of the reason that motivated BA to try and get benefits where it could as well as prepare itself for increased competition on its home ground.

BA and EC compared and contrasted

Some things are the same between the two airlines, while other things are deliberately different.  OpenSkies has taken sensible advantage, where appropriate, of resources and services available to it from its parent company, BA, but at the same time, Dale Moss says they don't plan to follow exactly in BA's footsteps, because if they did that, they'd end up indistinguishable from BA.

Does that mean that EC will do things differently purely for the sake of being different?  Probably not, but it does mean that one of the secondary purposes of EC is to be a 'test bed' for new services, new products, and new ways of running an airline in general - if it comes up with a winning new formula, BA will probably copy; but if it makes a mistake, then the negative impacts of the mistake will be small and won't intrude on BA's primary brand.

Examples of shared commonalities include allowing passengers flying on OpenSkies to earn miles into a BA Executive Club frequent flier program, sharing BA's lounges, and operating their reservations call center out of a BA call center in Bremen, Germany.

Note that although EC gives mileage credit to BA frequent fliers, it does not have mileage credit agreements with any other airlines, and both is not and has no plans to join the oneWorld airline alliance (of which BA is a key founding member).

Point to Point Service

The most prominent difference between OpenSkies and BA is that EC is strictly a 'point to point' airline.  You have to make your own way to an airport served by EC, and then your own way on from the single sector EC flight you take to any further/final destination.  This mightn't sound like a very big deal, but the devil is in the details, and in this case, the two devils are the inability of other airlines to check you in for an EC flight or for them to receive and/or pass on baggage from/to EC.

So if you're flying another airline before an EC flight, and/or another airline after your EC flight, you'll have to, at the end of each flight, go out of the secure area of the terminal and to baggage claim, wait for your bag, then check in your bag and yourself, then go back in through security and to the gate for your next flight.

This can massively add to the time (and hassle) you need to allow for in scheduling connecting flights - for example, when flying on Delta to JFK prior to flying on to Amsterdam on EC, I had to wait 40 minutes for my bag to appear at Delta's baggage claim, then schlep it over to the EC checkin, rather than just simply walk from terminal to terminal.  It was even more inconvenient when transiting through Amsterdam - I had to collect my bag, then exit through Customs and Immigration, check in for the next flight, and then re-enter through Immigration again (two passport stamps for less than an hour outside the transit area in the airport).

Not participating in interline baggage agreements also makes things slightly more difficult if your bag gets lost or delayed on one or the other flight.  The liability of the two airlines and their willingness to join together and help get your bag to you reduces when you're traveling on two totally different tickets and there's no interline agreement between the airlines.

Even if you only have carry on luggage, and even if you have pre-printed out a boarding pass, you still will have to go out of the airport's secure area, to the EC check-in desks so they can do a 'final passport check'.  This is an asinine and brain dead policy of the highest order - especially when you consider that it required a 27 minute wait, standing in line at the checkin counter.

And it isn't a final passport check at all.  It is the first rather than last time the passport is sighted at the airport (I am quoting Chris Vukelich from EC who chooses to describe it as a final passport check) - plenty more people, including EC staff at the gate - will be looking at it again.

But being sensible and running an airline are all too often oxymoronic.

Under the Hood Differences

One sensitive issue is the potential for OpenSkies to give BA a way to circumvent some of its expensive union contracts with existing staff who work for the main BA airline.  When asked about these issues, Chris Vukelich, EC's VP of Distribution and eCommerce obliquely answered 'EC is a high value premium product with a low cost base.  EC staff are not unionized.  One of the key operating principles of our business is a high productivity level.'

As an example of EC's high productivity at all levels of the company, their headquarters operation comprises a total of approximately 35 staff, which compares very favorably with the now defunct Eos Airline which is believed to have had about 200 people in its headquarters.  It is, of course, very difficult for a very small airline with only two or three planes to support a headquarters staff of 200, but much more practical to support a headquarters staff of 35.

I also asked Chris if he'd care to comment on the statement that 'some people have considered EC as BA's stealth way of breaking the grip of some of its established unions and less productive work practices'.  He chose not to reply.

The airline is about to announce where it will establish its corporate headquarters for the future (until now it has been based in London).  My guess is they will choose Paris as a way to further distance themselves from BA's UK based unions and more costly work practices. (Update - I guessed correctly.)

Pricing Strategies

A careful analysis of the published fares offered by EC and its competitors show that it and the other airlines (other than L'Avion) all have the same level advanced purchase Biz fare between New York and Paris, with minor differences in final price being due to how many surcharges each airline piles onto the underlying published fare.  Apparently EC is slightly greedier when it comes to slugging its passengers with surcharges than its competitors.

Beyond that initial, most restricted, most advance purchase fare, there are another eleven business class fares offered on EC, and between four and six extra levels of fare on AA, AF, CO and DL.

The other airlines have a more restrictive lowest level fare - requiring 50 day advance purchase, compared to 21 days on EC.

  • If you're buying a ticket 50+ days out, all airlines are the same.

  • Between 49 - 21 days, EC is best.

  • Between 20 - 14 days, EC is $200 - $400 cheaper.

  • Between 13 - 7 days, EC is very much better ($2000 or more).

  • For travel less than 7 days ahead, EC's lowest fare is $4500 (plus surcharges and taxes, etc), compared to $8258 on AA and $9033 on the other airlines.

But note that the EC $4500 fare is capacity controlled.  Their highest fare, with no restrictions at all, is $7700 - a lot of money, but still less than the highest unrestricted fares on the other carriers (about $12500).

So what does this all mean?  Few business travelers can book their travel 50 days or more in advance, which means that most of the time, there'll be an appreciable saving by choosing EC's Biz class over other airlines' business class, and the closer to departure you get, the bigger the saving.

It is harder to analyze the Prem+ fare levels, because there are fewer comparable fares on other carriers to put them alongside.

EC's most discounted Prem+ fare requires a 14 day advance payment, and lists for $1137 plus taxes/surcharges/etc.  The next level requires a 7 day advance and lists for $1457, and a no advance purchase fare can be as low as $1777.

In all three cases, these fares are capacity controlled, so depending on loading levels, you may find yourself having to pay more than this.

The Prem+ fares are clearly massively less than the Biz fares - less than half the price.  You'll be saving at least $1800 and probably more if you fly in the Prem+ rather than Biz cabin.

The Future of OpenSkies

OpenSkies says the demise of the discount premium carriers who operated between London and the US in no way impacts on their own future plans, and - inasmuch as EC has not operated on a London-US route, that is probably correct.

Managing Director Dale Moss predicts that within the next year and a half, 'aviation will dramatically change' and that 'lines of demarcation [airline ownership and operating restrictions] will disappear'.  This vision of major change is probably one of the factors that encouraged BA to create EC, giving it a small nimble operation that can quickly respond to changing marketplace conditions and niche opportunities that may appear unexpectedly.

So, from this perspective, the future of OpenSkies could perhaps be considered as being currently largely up in the air - open and ready to respond to future opportunities quickly as and when they arise.

On the other hand, Dale also stressed, repeatedly, that BA was not giving his airline an open check and endless supply of capital.  He said that BA have given EC a finite amount of capital to get established, and there is no promise of further funding if/when EC might exhaust its initial funding.  He is very focused on making his airline profitable and viable, and doesn't feel he has the luxury of moving slowly, but rather needs to get there as soon as possible, and he expects all his staff to be similarly focused.

Integrating L'Avion into OpenSkies

Now that OpenSkies owns the formerly competing airline, L'Avion, we can expect to see the L'Avion brand name gradually disappear.  L'Avion flew from Paris/Orly to Newark Airport, whereas OpenSkies flies from Orly to JFK - at this stage EC says it plans to continue operating the Orly-Newark service as well as its own Orly-JFK service.

The two L'Avion 757s will be reconfigured with EC style seating.  Formerly they had single class seating similar to Prem+ seats, but with a 48" pitch rather than 52".  These two planes will now be given a mix of Biz and Prem+ seats, although interestingly, it seems likely the number of Biz seats will halve, from 24 down to 12, while the number of Prem+ seats will increase from 40 to either 60 or 64.  This would increase the total seats from 64 up to 72 or 76, and shows an interesting lack of commitment to the Biz class on their planes.

It is interesting to compare the seating configurations of different BA and EC planes.

Seating Comparisons

Airplane

First

Business

Premium Coach

Coach

current EC 757

0

24

40

0

future EC 757

0

12

60 or 64

0

BA 747

14

52 or 70

30 or 36

177

BA 777

14

48

40

126

BA 767

8

24

24

144


Quite apart from the omission of coach (and first class) it is interesting to see that the OpenSkies planes have vastly more premium economy seats than business class seats, quite the opposite of the regular BA planes.

This is not necessarily a bad thing at all, indeed, in my reviews of both classes of service, I clearly conclude that the Prem+ service is both very good and very good value, whereas the Biz service is at best average (by general airline business class standards) and much poorer value for money.  Emphasizing their Prem+ service makes a great deal of sense, and one wonders if EC might not, in time, evolve to an all Prem+ operation.

New Routes and Expansion in General

OpenSkies started off with one plane flying between Paris and New York in June 2008.  It quickly grew to two planes, has now added service between Amsterdam and New York, and, having purchased L'Avion and acquired its two planes, is adding extra flights on the New York (ie Newark) and Paris route that were formerly under the L'Avion brand.

What is next?  Managing Director Dale Moss sees the next some months as being a period of consolidation with no new routes or planes expected, and he is probably glad to have a chance to wait and see what the future will hold for the global economy, the demand for any type of premium airline service, and the ongoing cost of jetfuel.  With jetfuel costs having both doubled and now halved in the last year, it is anyone's guess (in mid October 2008) where fuel prices will move to next, and with the massive economic uncertainties, all airlines must have very cloudy crystal balls and find themselves unable to see a clear vision for their respective futures.

However, when the time comes to grow some more, Dale indicated that EC might not only consider more routes across the Atlantic, but might also grow into other markets too, east and/or south of Paris.  He specifically mentioned Dubai, Abu Dhabi, Delhi and Mumbai as routes of interest, although it is unclear which cities these flights might originate from, and is further unclear if the airline would then create some type of hub and have through flights and through fares (and through baggage) so that, perhaps, a person could fly from New York to Delhi with a stop and change of plane in Paris.

Dale very much likes his current 757s, believing them to be an excellent airplane for the use and routes EC is applying them on, but also indicated that he likes the new 787 too and that might be a plane he considers adding to the fleet in the future.

Update Nov 08 :  A week after this was written, a leaked internal BA memo advised that OpenSkies was not meeting its revenue targets due to both fewer passengers than hoped for, and lower average fares received per passenger, and the airline delayed its plans to acquire a fifth plane and add new routes.

The strategic value to BA of its EC subsidiary remains, however.  It is a great bargaining lever to use against its UK unions, and a great testbed to try out new products and services.  Will EC be closed down any time soon?  With plans stretching years into the future, clearly Dale Moss rates this as unlikely - but I see it as far from impossible.

Update July 09 :  After choosing not to expand OpenSkies, British Airways has now announced that it is ending the route between New York and Amsterdam, and is putting the remains of OpenSkies up for sale.

Update Feb 10 :  OpenSkies has announced new service between Dulles and Paris, starting with 5 roundtrips a week in May and planning to extend to 7.  The airline remains for sale.

Reviews of OpenSkies Service

I review OpenSkies' Biz class service and OpenSkies Prem+ class service based on two flights in mid October.  The quick summary - Biz class is no better than other airlines (but perhaps at a better price point), and Prem+ is greatly better than competitors, offering a wonderful value point for travelers willing to pay a moderate amount more than coach class.

Part 1 of a three part series on OpenSkies - please also visit

1.  About OpenSkies

2.  OpenSkies Prem+ review

3.  OpenSkies Biz review

 

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Originally published 24 Oct 2008, last update 19 Dec 2013

You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.

 
 
 

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