Posts: 7769
Joined: Fri Sep 08, 2000 8:46 pm

BMI's Crazy 'low Cost' Move

Fri Jan 11, 2002 9:40 pm

BMI-British Midlands' low cost plan is a half-baked attempt to compete against a real low cost carrier, with a medium to full cost product.

They will use only two Boeing 737-300 aircraft straight from the BD fleet – (hardly economies of scale here).

They plan to start flying in two months, without any marketing, brand awareness, advance bookings, call centre, cabin crew recruitment, pilots, etc.

With such a short time to set up operations I have taken the assumption that they will be using BMI resources – at BMI rates. We then have an airline with full BMI costs, with crew on full BMI salaries and conditions, with fares similar to a low cost operation. The only low cost aspect to the company is the fare.

Also bear in mind that BMI has no current Boeing 737's based in EMA, so they will have to move crew from London at great expense.

Why are they doing it? The only reason is that they want to protect their regional base, at EMA. History shows that BMI have always acted against competition at EMA, most recently forcing both KLMuk and Irish regional CityJet off the routes from the airport. BMI have ensured that they are the only scheduled carrier at the airport.

At the same time they have failed to build the base into a viable and high volume airport, preferring to sit back, and reduce flying there. UNTIL… another carrier comes along, wanting to attract a new traveller to the airport, grow its catchment area, and employ more people.

BMI’s response is typical of a monopolist (which it is in EMA)… fight to get the contenders to leave the market (just like they have done in previous examples).

Whilst the consumer will benefit in the short term… they loose in the long term, as fares will rise... once the competition is eliminated.

My concern is not the losses that BMI will make from the two B737-300’s at EMI, its what it means for the carrier as a whole. I hope that this new project, and the management time it will consume will not make them loose focus on the important part of the market…. A dense relevant business network from London, and the building of a regional base in Manchester.

Load factors on the European international routes are really poor. Latest statistics available point to a 51% load factor. This is not just a post Sept 11th problem. In August they had the lowest load factor of any major European Airline (excluding Luxair). (source AEA).

Compounding this problem, business carryings are far lower than the competition. Their (recently axed) Rome service had allegedly only 2% business carryings, and from personal experience the business cabin on PAR, MAD and DUB is always much less populated than the competition. (EI have 20 rows business ex DUB every AM, BMI have 5). This will be made worse by the reduction of frequencies, making business passengers choose other carriers.

With the collapse in the US economy, the fall off in Transatlantic traffic, and the delay in gaining access to Trans-Atlantic routes from Heathrow, BMI’s global plans are falling apart rapidly. Even when they do gain access to Heathrow, they can expect increased competition from BA and the new routes from DL and NW, who will also gain access to the airport.

My four questions to BMI are:

What do you hope to achieve by this move?
With such poor results, how can BMI afford to do this?
With such difficulties on the mainline routes, how can BMI focus on yet another product development?
How does a full cost (or even mid cost) product make money with a low cost yields?

Greetings from Hong Kong.... a subsidiary of China Inc.
Posts: 6121
Joined: Wed Jun 27, 2001 7:39 am

RE: BMI's Crazy 'low Cost' Move

Fri Jan 11, 2002 10:16 pm

Using the "load factor" theorem, MAN would have retained for starters Air Mauritius and Air India, retained Air Canada as a year-round service and Malaysian wouldn't have just performed a U-turn!

As far as I can work out, it looks like the 737s will be going from LHR to be replaced in the mid to long term by the A321s that are stored at EMA.

Anyway, here’s the results they announced in May 2001:

bmi british midland reports 16.5 per cent turnover growth in 2000

bmi british midland today reported a pre-tax profit of £8.2 million (1999 = £11.1 million), on a 16.5 per cent growth in revenues to £739.2 million (1999 = £634.7 million) for the year ended 31 December 2000.

Passengers carried increased by 8.4 per cent to 7.1 million. Capacity increase in the year was restrained to 4.5 per cent resulting in the load factor advancing from 61.6 per cent to 64 per cent.

The decline in pre-tax profits arose primarily for the costs incurred in migrating part of the airline’s network and systems following entry into a European Co-operation Agreement with Lufthansa and SAS. A number of established routes were suspended and five new routes to Italy and Spain introduced. Additionally all pre-launch costs incurred in 2000 in preparation for the launch of transatlantic services in 2001 have been written off.

Sir Michael Bishop, chairman of bmi british midland, said:

”During 2000, we continued to invest heavily in the future growth and development of the business, in particular in our preparations for long-haul services. Despite this heavy investment, and the intense competition in the domestic and short-haul markets from the UK, we continued to trade profitably.

2001 has started in a promising manner, with year-on-year improvements across a range of performance indicators. I am particularly pleased to see strengthening yields, across all sectors of our business, which is having a positive impact.

During 2000, there were significant cost challenges, however, I am happy to report that overall, costs were held at prior year levels. This is due in part to the successful hedging policy with regards to fuel and currency.

Of particular concern are increased cost in airport charges. Some progress was made with a number of airports. However, airlines must be able to compete on a level playing field and this is an area we will continue to focus upon in 2001.”


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