Britain's Sunday Times reports that BA has done a deal with bmi for 51 slots per week for £30m. Analysts at ABN Amro today published research suggesting that flights across the Atlantic account for 65% of BA’s profits, and that open skies could see profits from those routes fall by between 25 to 53%. The decline in profits may be high – other numbers estimate 10-15% which may be more accurate, but nobody can be sure.
The airport’s two runways operate at 98.5% capacity. Consequently the price paid by BA is cheap because slots have traded for £10m before. BMI recently bought a British Mediterranean Airways, a BA franchise airline, for £30m, so the amount seems to have gone around, bmi picking up British Mediterranean (a BA franchise airline). Conveniently BA says the deals have nothing to do with each. Whatever.
The need for these slots is interesting. It may indicate what BA’s thinking is in terms of its fleet renewal. BA is going to have a bigger fight on its hands; it will be competing with United, Delta, Continental and US Airways. American is a token ally. To date it has competed with American and United at Heathrow. So the newcomers are going to complicate matters. BA will therefore have to deal with this head on.
What makes sense now? It appears BA might be going for a higher frequency response than bigger planes. With these extra slots, BA could be a much more attractive option for business travelers because it could offer higher frequencies. For example, it could offer many more flights to New York than either Delta or American could. If a business traveler has an option of a dozen flights per day each way, and BA accounts for more than 50%, it stands to reason that BA will pick up more traffic. Given the fact that fares are rising fast, and business travel has picked up big time, BA could reap great rewards.
And what of BA’s fleet plans? Many slots mean many planes. Nobody wastes slots at Heathrow – or at least no rational airline does. There are exceptions. However, it would seem that an increase in slots points to 787s nipping across the Atlantic almost hourly in BA colors.
Where do large planes fit into this scenario? BA has over 50 747s and many of its routes will continue to require “heavy” lift. So a large aircraft continues to play a role. But in the American market we might see a greater focus on frequencies rather than big planes – essentially moving the same number of seats while providing more schedule choice. We might see cities like San Diego get BA service again because a 787 would be much more efficient than a 777 in secondary markets. Other cities might gain new service too, Cincinnati for example. Consequently it appears to us that BA will use smaller planes to the US.
By the way, if we are correct in this analysis, then we see Airbus as out of the picture in terms of the A330/A350. It cannot deliver fast enough to exploit the new slots. However on the larger planes, the A380 cannot be counted out yet (we think).
By the way this deal would make SAS' attempt to sell its stake a lot tougher wouldn't you say? One has to wonder how the fellows at Lufthansa see this deal.
