- British Caledonian in the 1980s
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There were many ups and downs for
British Caledonianduring the 1980s.
BCal suffered a series of major setbacks as a result of several geopolitical events that occurred during that decade.
These events significantly weakened BCal operationally as well as financially. They were the main factors that contributed to the airline's demise during the second half of that decade.
Expansion in the early 1980s
1980 saw the delivery of three more McDonnell Douglas DC-10-30 widebodied aircraft.
The delivery of these planes enabled BCal to launch new routes to Atlanta on
June 1, followed by Hong Kong on August 1"High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 378] as well as San Juan, Puerto Rico, and Dallas/Ft. Worth on October 26. It also enabled the airline to replace the 707s, with which it had inaugurated another new route to St. Louis in April of that year, with its newly delivered DC-10 widebodies at the end of October when St. Louis became a stop on the new Dallas route. During that year the company also added Tangierto its North African network.
This accelerated pace of growth made BCal the fastest growing member airline of the
Association of European Airlines(AEA) for two years in a row, i.e. 1980 and 1981. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 392]
BCal received a boost during 1980 when the CAA approved its application to convert its restricted licence to serve Dubai as a refuelling stop en route to/from Hong Kong only into a full licence permitting it to carry passengers, cargo and mail between London and Dubai as well as Dubai and Hong Kong from the start of that year's winter timetable period, despite BA's objections on the grounds that BCal needed Dubai as a "prop" to support its Hong Kong service. The UAE's "
Open Skies" aviation policy furthermore permitted BCal to gain reciprocal approval within a relatively short period of time, without having to put pressure on the UK Government to renegotiate its bilateral air services agreement with its overseas counterpart or threatening to resort to legal action as it often needed to do in other, similar cases.
Brymon Airways' decision to extend its thrice-daily Gatwick-Birmingham feeder service to
Nottingham East Midlands Airportprovided another boost to BCal as it helped further improve its network connectivity.
The high oil price during that period was a mixed blessing for BCal. It helped the airline fill its premium cabins on its oil-related business routes to Nigeria, Libya and Texas. On the other hand, the escalation of the jet fuel price and the fact that the high price of oil had considerably worsened the severe recession in Britain at that time significantly increased the company's operating costs, while at the same time reducing overall demand for its flights. BCal therefore decided to reduce off-peak frequencies - especially, on week-ends - on most of its short-haul routes from the start of the 1980/'81 winter timetable period. This also included combining week-end, off-peak flights from Gatwick to Glasgow, Edinburgh and Manchester by converting non-stop flights into one-stop operations.
Among the set-backs BCal suffered at that time were the CAA's rejection of BCal's application to add
Manilaas an extension to its Gatwick-Dubai-Hong Kong route and instead approve BA's rival application to begin serving Manila from Heathrow via Bangkok, as well as BA's successful lobbying of the Government to revoke BCal's long-standing Gatwick- Bahrain- Singaporeexempt charter licence in return for having granted it permission to launch a fully fledged scheduled service to Hong Kong.
Overall, BCal ended the 1979/'80 financial year with a healthy profit of £9.7m. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 390]
BCal received another new DC-10-30 widebody in 1981. The delivery of this aircraft enabled the airline to increase frequencies on the prime long-haul routes to West Africa from seven to ten weekly round-trips. It also permitted a frequency increase on the Gatwick-Dubai-Hong Kong route from four to five weekly round-trips.
1981 also saw the completion of BCal's new corporate headquarters - aptly named "Caledonian House" - in
Crawley's Lowfield Heath area close to the airline's Gatwick base, the construction of which had begun the year before. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 360/1] It was the first purpose-built headquarters in the company's history. BCal's new headquarters was a typical 1980s style, high-rise "chrome-and-glass" building resembling the office buildings in the then very popular fictional, American TV series "Dallas". "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 361] It enabled the firm to bring together under one roof all the offices that used to be spread out in various buildings at Gatwick as well as in Crawley's town centre since its inception. BCal had originally intended to build its new headquarters nine storeys high. However, the CAA had objected to this on the grounds that a building of that height sited so close to Gatwick Airport might interfere with the airport's radio traffic. It was therefore decided to build it only seven storeys high. (Following BCal's takeover by BA at the end of 1987, the new owner housed its "Air Miles" and "BA Holidays" subsidiaries in this building, which had meanwhile been renamed "Astral Towers".)
Network connectivity for BCal's high-yield, oil-related business travellers was further improved as a result of Dan-Air's decision to introduce a fourth daily return flight operating between Gatwick and Aberdeen on week days (Monday to Friday).
BCal's search for a more fuel-efficient replacement for its aging BAC One-Eleven fleet - especially, the range-limited One-Eleven 200s - acquired a new sense of urgency during 1981 against a backdrop of further escalating fuel prices. The airline was evaluating both the new
BAe ATPturboprop for entry into service during 1986 as well as the BAe 146, the UK aircraft manufacturer's new, four-engined regional jetliner that was due to enter service in 1983, in addition to Boeing's new 737-300. Both BAe types were rejected because it was felt that they had insufficient range to permit non-stop flights from BCal's Gatwick base to some of the more distant points BCal already served or planned to serve in Europe and North Africa. Moreover, BCal felt that operating a turboprop on trunk routes would meet with passenger resistance as by that time most people had become accustomed to travelling on jets on these routes.
In addition, during 1981 BCal applied to the UK and
Australian authorities for permission to launch a fully fledged, three-class scheduled service between Gatwick and Brisbanevia Melbourneand Colomboas well as between Gatwick and Adelaidevia Perth, respectively, at a frequency of two flights a week each, in both directions. [http://www.flightglobal.com/PDFArchive/View/1981/1981%20-%200352.html?search=BCal%20to%20Australia "Laker and BCal bid for kangaroo route", Flight International, 7 February 1981, p. 330] ] BCal proposed to inaugurate what would have been the first ever scheduled operation Down Underby a wholly privately owned, Independent British airline with McDonnell Douglas DC-10-30s. BCal furthermore held out the prospect of placing an order for brand-new, higher capacity Boeing 747-200SUDs powered by Rolls-Royce RB211 engines to replace the DC-10s on that route as soon as this was justified by increased demand to improve its chances of having its application approved by the UK authorities. It tried to win over the Australian authorities by promising to give a major boost to Australia's inbound tourism from the UK as well as to deliver a steady stream of international transfer passengers to Ansett Airlines, one of Australia's two leading contemporary domestic airlines. Eventually, BCal's application to launch its proposed scheduled route from the UK to Australia did not succeed, mainly because of British Airways' and Qantas' determined opposition to any move by the authorities in the UK and Australia to dilute the lucrative BA-Qantas duopolyon the " kangaroo route". [ [http://www.flightglobal.com/PDFArchive/View/1981/1981%20-%200929.html?search=BCal%20to%20Australia "BCal kangaroo bid hits snag", Flight International, 4 April 1981, p. 955] ] The CAA turned down BCal's application because it felt that there was no realistic chance of obtaining reciprocal approval for the proposed service from the relevant Australian authorities. [http://www.flightglobal.com/PDFArchive/View/1981/1981%20-%201364.html?search=BCal%20to%20Australia "CAA refuses to license new UK-Australia operators", Flight International, 16 May 1981, p. 1366] ] It did however invite BCal to re-submit its application, once the political and regulatory climate in Australia concerning the opening of the UK-Australia route to additional competition was more favourable.
BCal ended its 1980/'81 financial year with a £6.2m loss as a result of high fuel prices, a major recession on both sides of the Atlantic and heavy route development costs. (During an address at the "World Affairs Council" in Los Angeles in the early 1980s the late Sir Adam reportedly made the following statement: "Recession is when you have to tighten your belt. Depression is when you have no belt to tighten. When you have lost your trousers, you are in the airline industry." ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 428] )
Development of Eastern routes
As a result of the network structure BCal had inherited from BUA, an exclusive North-South airline, it became a predominantly North-South orientated carrier as well. Although there was a small Western component to the US, the Eastern component was completely lacking. The predominant North-South route structure had been further reinforced by the 1976 "spheres of influence" policy, which had effectively locked the airline's long-haul operation into two continents - Africa and South America - that were often characterised by political instability and economic mismanagement. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 375]
BCal's senior management realised that it needed to develop the traffic flows across its network in an East-West direction to increase the network's reach and to enable its passengers to make omnidirectional flight connections. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 340] This was also essential to enable the airline to increase its
economies of scaleand to reach the minimum size envisaged in the Edwards report. BCal's senior management moreover realised that an expansion of the airline's network to the East would give it access to fast-growing markets that were politically stable and well-managed economically, thereby helping to counterbalance the politically unstable African and South American markets where economic mismanagement seemed to be the order of the day.
The Hong Kong route had come about as a result of the UK government decision in 1979 to open up the lucrative route between London and the then
Crown Colonyof Hong Kong to additional competition. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 377 ] This was to be provided by a second British scheduled carrier to ease the shortage of capacity passengers were experiencing at peak times on the ten-times-a-week monopoly service operated by BA between Heathrow and Hong Kong.
A competitive race for the additional daily scheduled service on offer ensued when BCal, Laker and
Cathay Pacific, Hong Kong's home town airline as well as its de facto"flag carrier", all filed their own application with the CAA in London.
BCal had proposed running a conventional scheduled service from Gatwick to Hong Kong via Dubai utilising its rapidly growing fleet of McDonnell Douglas DC-10-30 widebodies in a three-class configuration featuring a first and an executive class in addition to an economy cabin. BCal had also agreed to offer a limited number of low fares that would match the lowest fares Laker had proposed. (Laker had proposed to run a daily "Skytrain" service linking London Gatwick and Hong Kong via Sharjah to be initially operated with single-class, 380-seat McDonnell Douglas DC-10-30s while Cathay Pacific had proposed a daily, conventional three-class service linking its Hong Kong base with Gatwick via Bahrain.)
However, Hong Kong's Air Transport Licensing Authority (ATLA) unexpectedly refused to endorse BCal as the official, second British carrier on the London-Hong Kong route because many influential people in the Crown Colony felt very upset that Cathay Pacific was going to be excluded from one of the world's most lucrative air routes. This caused a minor diplomatic row between the UK government and the colonial administration in Hong Kong. Cathay Pacific immediately began a "back-door" lobbying campaign in the Crown Colony as well as in London, stressing that it had invested millions of pounds in the British economy at a time of high unemployment in the UK by placing large orders for
Rolls-Royce RB211-powered Boeing 747s. The UK government eventually relented and allowed Cathay Pacific to join Laker in appealing to John Nott, at the time the UK's Secretary of State for Trade and Industry, against the CAA's award of a licence exclusively to BCal.
The Secretary of State for Trade and Industry decided to overturn the CAA's decision and to throw the route open to all three airlines, i.e. BCal, Cathay Pacific and Laker, without imposing any restrictions on the frequencies of their proposed services.
As far as Laker Airways was concerned, this unfortunately turned out to be only a "partial victory" because the ATLA continued to refuse granting it a reciprocal permit, without which Laker's proposed service remained grounded.
On the other hand, Cathay Pacific's simultaneous entry into the London-Hong Kong market necessitated a reduction in frequency of BCal's planned service. BCal decided to operate only four weekly round-trips instead of offering a daily service as originally planned. (This had negative consequences for revenue and profit projections because any prime long-haul business route operated at a frequency of less than one flight per day in each direction constitutes a less attractive product for business travellers. It also means that it takes longer for the route to be in profit. Nonetheless, over the coming years traffic grew faster for all airlines than initially predicted, partially as a result of subsequently obtaining full traffic rights to carry passengers, cargo and mail between London and the intermediate stops in the Gulf as well as between those points and Hong Kong. This in turn, enabled BCal to operate a daily service within two years from the date of the route's launch. It also provided the platform for BCal to strengthen its competitive position in the former Crown Colony in subsequent years when it established its own handling agent at Hong Kong's old
Kai Tak Airportas well as its own air terminal in the city centre. BCal's competitive position in the London-Hong Kong market was further strengthened by the MOD's decision to award BCal the contract to carry members of the UK armed forces and their dependants between the UK and Hong Kong.)
In the event, Cathay Pacific commenced a thrice-weekly service between Hong Kong and Gatwick via Bahrain on
July 17 1980using a Rolls-Royce RB211-powered Boeing 747-200B ahead of BCal, which began a four-times-a-week Gatwick-Hong Kong service via Dubai on August 1, 1980 using a McDonnell Douglas DC-10-30.
BCal subsequently obtained traffic rights to fly to a number of additional points in the Gulf as well as the Saudi Arabian capital Riyadh. Following the 1985 route swap with BA, BCal became the sole UK flag carrier to the whole of Saudi Arabia.
In May 1987 BCal launched its second route to the Far East when it began a thrice-weekly service from London Gatwick to Tokyo. At the time of BCal's application to the CAA for a licence to begin scheduled services to the
Japanese capital, it had also applied to have BA's unused licence to serve Seoul, which was not served by any British scheduled airline at that time, transferred to itself. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 517, 523] BCal had hoped that gaining access to both of these prime business destinations would give it a foothold in the air travel markets of Japanand South Korea, then Asia's two leading economic powerhouses. The CAA eventually awarded BCal both licences.
Since its inception BCal had relied on third parties to overhaul all of its aircraft's engines. (For example, at that time BCal had a contract with BOAC to overhaul the
Rolls-Royce Conwayengines of its VC-10s.)
However, with the growth in its widebodied fleet during the early 1980s - most of which had been acquired direct from their manufacturers and were powered by GE CF6-50 or CF6-80 engines, it started making sense to bring the maintenance of the engines powering a substantial part of the fleet back in-house and to sell any spare capacity to third party airlines whose aircraft had the same powerplants.
In 1981 BCal opened its new engine overhaul plant at
Prestwick Airportnear Glasgow in Scotland. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 353] The new engine overhaul plant was owned and run by Caledonian Airmotive, a dedicated, wholly owned subsidiary of the airline, which had been set up with technical support from GE and had qualified for a local government grant.
As Caledonian Airmotive's engine overhaul business grew and the plant was expanded, the overhaul of other engine types - including non-GE types - was added as well.
March 4 1987Caledonian Airmotive was sold to the US-based transport, logisticsand supply chain managementspecialist RyderSystems as part of a major asset disposal programme, which was initiated to keep the British Caledonian Group afloat during the crisis it faced at the beginning of the second half of the 1980s.
Falklands Warwas an unexpected, major setback for BCal. Argentina's decision to close its airspace and airports to all UK-based airlines as well as to all UK-registered aircraft and Peru's decision to follow suit as an expression of its solidarity with Argentina resulted in the loss of the most profitable parts of BCal's South American network, especially Buenos Aires - its most profitable destination in that part of the world - and the lucrative "fifth freedom" traffic rights between Madridand Buenos Aires. Instead, that conflict left the airline with an unprofitable "rump" network because the remaining routes to Brazil, Venezuela and Colombia did not generate sufficient traffic to be profitable on their own, even after a reduction in frequencies. (The closure of Argentina's airspace had also made BCal's operations to/from Santiago de Chileunprofitable as BCal's aircraft had to take a long detour en route between Brazil and the Chilean capital. This almost doubled the flying time, resulting in significantly higher fuel consumption. This, in turn, made the airline's operation on this sector prohibitively expensive, thereby rendering it unviable.) Another negative consequence for BCal was that one of its eight McDonnell Douglas DC-10-30 widebodied jets suddenly became surplus to its long-haul scheduled requirements, forcing the airline to look for alternative work to increase long-haul fleet utilisation.
Laker Airways' collapse at the beginning of February of that year provided BCal with additional work to utilise its spare aircraft capacity. BCal assumed Laker Airways' contract to operate the twice weekly Gatwick-
Luxembourg- Barbadosservice of Caribbean Airways (as International Caribbean Airways had become by then). BCal also accepted a contract from Air Seychellesto launch a twice-weekly Gatwick- Frankfurt- Mahéservice on behalf of that carrier and took over KLM's contract to provide a weekly service on behalf of Surinam Airwaysbetween Amsterdam and Paramaribo.
Laker Airways' demise furthermore enabled BCal to relaunch a daily service between Gatwick and Los Angeles as well as to acquire six aircraft from the failed carrier's estate and to move into the hangar it had occupied at Gatwick. [ [http://www.flightglobal.com/PDFArchive/View/1982/1982%20-%200626.html?search=Brenpage,%201982 "Laker’s routes are frozen", Air Transport, Flight International, 13 March 1982, p. 596] ] The ex-Laker aircraft that joined BCal's fleet included two DC-10-10s as well as four BAC One-Eleven 300s. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 398] BCal used the former aircraft to set up a new, wholly owned charter subsidiary. The latter aircraft as well as three second-hand One-Eleven 500s that had been acquired from other sources replaced BCal's seven, aging One-Eleven 200s. (BCal sold the entire seven-strong One-Eleven 200 fleet to Florida Express, a new start-up carrier in the US.)
Other positive developments for BCal in what was a difficult year included the first expansion of its short-haul European network in eight years as well as the establishment of a dedicated commuter network. [http://www.flightglobal.com/PDFArchive/View/1982/1982%20-%202562.html?search=British%20Caledonian%20Commuter%20Services "BCal launches commuter service", Flight International, 13 November 1982, p. 1424] ]
In addition, 1982 was the first time a Boeing 747 wearing BCal's full livery joined the airline's fleet on a long-term lease to provide additional passenger and cargo capacity on the prime long-haul route to Lagos. Moreover, 1982 saw the adoption of a new policy to carry all scheduled air freight in the belly-holds of the airline's passenger aircraft only. That year generated a lot of free, positive
publicityfor the airline as well when it was chosen to provide the aircraft - a Boeing 707 and a BAC One-Eleven as well as a dedicated helicopter operated by British Caledonian Helicopters - that carried Pope John Paul IIand his entourage during the official papalvisit to the UK. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 402-405]
Despite being a difficult year for BCal, it managed to stay in the black during that period. The airline made a pre-tax profit of £1.1m, which translated into a £300,000 retained profit, in the financial year to
October 31 1982.
Following Laker Airways' collapse during the first quarter of 1982, BCal decided to re-enter the whole-plane charter business by establishing British Caledonian Charter as its dedicated charter subsidiary.
This enabled the airline to take over several lucrative charter contracts that had originally been awarded to Laker Airways. The unexpected collapse of that airline removed a considerable chunk of capacity from the whole-plane charter market, resulting in a recovery of the UK market's typically depressed charter rates. Therefore, BCal's re-entry into that market seemed opportune at the time.
BCal sold a 50% stake in British Caledonian Charter to the Rank Organisation.
British Caledonian Charter was subsequently renamed
Cal AirInternational. A modified, predominantly white livery prominently displaying a red Lion Rampant on the aircraft's fin was introduced as well. [http://www.jetphotos.net/viewphoto.php?id=6014598&nseq=116]
Following BA's acquisition of the British Caledonian Group, Rank became the sole owner of Cal Air. (Rank's decision to acquire 100% ownership of that airline resulted in another change of name to
Novair International Airways.)
To further improve its network connectivity and to transform Gatwick into a US style airline hub, BCal established a dedicated commuter services network under the British Caledonian Commuter Services
brandat the start of the 1982/'83 winter timetable period. BCal's commuter network was modelled on the Allegheny Airlines commuter system, the first dedicated commuter operation in the world launched in 1967. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 431/2]
The first airline to join the British Caledonian Commuter scheme in 1982 was
Humberside-based Genair. [ [http://www.timetableimages.com/ttimages/en2.htm Airline timetable images] , Timetableimages.com] [ [http://www.eraa.org/inside-era/aboutera/eraboardmem.php ERA Board] , European Regions Airline Association] That airline acquired a small fleet of Shorts 330and Shorts 360commuter turboprop planes, which were repainted in the British Caledonian Commuter colour scheme. Genair used these aircraft to launch new feeder routes linking BCal's Gatwick base with Humberside, Norwich, Teesside, Leeds/ Bradford, Liverpool, Bristoland Cardiff. All flights on the aforesaid routes were operated under BCal flight numbers using the BR designator.
Other airlines that joined the British Caledonian Commuter scheme at its inception included Brymon Airways and Guernsey Airlines. The former operated the feeder routes from Gatwick to Birmingham and Plymouth while the CAA had transferred
Air UK's Gatwick-Guernsey licence to the latter following numerous passenger complaints about the service Air UK had previously provided ever since it had assumed the former BIA operation on that route.
Genair, the British Caledonian Commuter scheme's founding member, eventually folded in what had been a very difficult operating environment for small, Independent regional airlines in the UK during the early 1980s.
However, Genair's loss was made good by other airlines that joined the British Caledonian commuter scheme in subsequent years. These included Connectair, a newly formed regional airline based at Gatwick itself, and Metropolitan, a regional affiliate of Dan-Air based at
Bournemouth. RFD, a German regional carrier based at Dortmund, and Southend-based British Air Ferries (BAF) - the successor to British United Air Ferries- eventually became part of the British Caledonian Commuter scheme as well. [http://www.flightglobal.com/PDFArchive/View/1984/1984%20-%200972.html?search=British%20Caledonian%20Commuter%20Services "BCal markets commuter services", Flight International, 2 June 1984, p. 1484] ]
Connectair inaugurated a new feeder route from Gatwick to
Antwerpand subsequently took over the operation of BCal's Gatwick-Brussels service. Metropolitan linked Gatwick with Bournemouth, Exeter and Southampton. It also linked Glasgow with Newcastle. RFD operated a feeder link from Gatwick to Paderborn. BAF revived Gatwick's regional link with Rotterdam, which had been dormant for several years.
BCal even tried to persuade
Brit Air, a regional affiliate of Air France that had provided regional services from Gatwick to several provincial towns in Northern France for a number of years, to join its commuter scheme and to feed passengers from French provincial towns into its worldwide network via Gatwick. In the event, Brit Air declined BCal's offer under pressure from Air France and the French authorities who did not favour a link-up between one of their regional airlines and a foreign carrier.
Expansion of European routes
Following BA's decision to abandon the short-haul routes it had been operating from London Gatwick at low frequencies since 1978 and to surrender a number of unused licences to the CAA, BCal, Laker Airways and Dan-Air requested the CAA to transfer these licences to themselves.
BCal applied to take over BA's scheduled operation between London Gatwick and Frankfurt as well as BA's dormant Gatwick-Geneva licence. BCal was awarded both licences. (Laker Airways was awarded licences formerly held by BA from Gatwick to Berlin Tegel and Zürich. Dan-Air obtained the Gatwick-Dublin and Gatwick-Düsseldorf licences BA originally held.)
The fairly "liberal" bilateral air services agreements between the UK and Germany as well as between the UK and Switzerland - compared with other, contemporary air services agreements the UK Government had concluded with its overseas counterparts - enabled BCal to commence double daily scheduled services in each direction on both routes within a relatively short time span following the award of the licences. This was the first time since 1974 that BCal was able to launch new routes from Gatwick to Europe. These were BCal's first scheduled services to Germany and Switzerland, which were going to be important sources of feeder traffic for the airline's long-haul services from Gatwick.
The launch of the two new routes coincided with the introduction of a dedicated
business classcabin on all of BCal's short-haul flights to Europe, the first time the airline had offered two classes on its short-haul routes since its inception - with the exception of a brief period in the early 1970s during which it had offered a first class on the Gatwick-Paris route. (BCal used the "Executive Class" brand for both its new European as well as its longer established long-haul business class.) However, all of the airline's short-haul domestic services - including Gatwick-Jersey - remained one-class.
In addition to BCal's expanded European schedule, the airline launched several new regional, UK domestic routes from its Gatwick base, which were operated by its partner airlines participating in the British Caledonian Commuter scheme. (BCal also resumed scheduled operations to Los Angeles and added
Doualato its network during that time.)
On the downside, BCal further reduced its frequency on the Gatwick-Glasgow and Gatwick-Edinburgh trunk routes to a maximum of only three round-trips per day as a result of the Government's decision to overturn the CAA's rejection of British Midland's application to launch scheduled services on the main London-Scotland trunk routes from Heathrow. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 431]
Introduction of narrowbodied aircraft
In 1983 BCal became the first airline in the world to order the
Airbus A320. BCal placed a firm order for seven A320s and took an option on another three, with deliveries of the aircraft on firm order due to commence during the spring of 1988. The options were subsequently converted into firm orders as well. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 451/2]
Although the A320 was bigger than BCal's actual requirement, it was the technologically most advanced contender with 27% lower seat-mile costs than the BAC One-Eleven. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 452] Airbus Industrie had also offered the airline a generous discount to sign up as the aircraft's first customer. Having BCal launch a brand-new narrowbodied aircraft, gave the manufacturer added credibility in its global sales campaigns. This was of particular importance in the all-important US market, which Airbus needed to penetrate with its new aircraft if it wanted to break the stranglehold archrival Boeing had enjoyed in this market segment with its venerable 737 for over one-and-a-half decades. Airbus knew that the major US carriers that were prime targets of its North American sales campaign would be highly suspicious of the new aircraft's commercial credentials if state-owned, foreign flag carriers like Air France and Lufthansa were the only launch customers it had. Therefore, having a wholly privately owned, successful Independent airline with a major, worldwide scheduled presence like BCal order a brand-new, technologically advanced aircraft came in handy.
BCal intended to use its A320s to replace the aging One-Elevens on its short-haul European and its medium-haul North African routes. (It intended to keep a small number of One-Elevens for a few more years following the delivery of its first A320s to continue plying UK mainland domestic routes.)
1983 was also the year the late BCal chairman and chief executive was knighted for his services to the airline industry when he became "Sir" Adam Thomson. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 429]
Furthermore, 1983 finally saw the introduction of daily flights on BCal's Gatwick-Dubai-Hong Kong route. This coincided with the launch of a new, enhanced long-haul business class, which BCal branded "Super Executive Class". ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 450] ["It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, p. 85] (The launch of BCal's enhanced long-haul business class helped it win "Executive Travel" magazine's "Airline of the Year" award for 1983, one of the UK travel industry's most prestigious awards. [BCal managed to win the same award the following year as well.] ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 449] )
During that year BCal and its affiliated companies also adopted a new organisational structure to reflect the growth in the group's business as well as the diversification into new activities in recent years. British Caledonian Group became the new holding company. It had a paid-up share capital of £20m. Apart from the airline itself, its other subsidiaries included British Caledonian Aircraft Trading, British Caledonian Flight Training, British Caledonian Helicopters, Caledonian Airmotive, Caledonian Hotel Holdings and Caledonian Leisure Holdings. (Caledonian Hotel Holdings acquired ownership of all the airline's hotels in the UK and overseas while Caledonian Leisure Holdings became the owner of the company's tour operators.)
In addition, this was the time BCal, which had always prided itself on its exemplary industrial relations record - it never lost a full day's work as a result of industrial action, a remarkable achievement in strike-prone 1970s' and early '80s' Britain - began implementing a new co-operative, industrial relations strategy. The airline termed its new industrial relations strategy "The Way Ahead". ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 513] This strategy was designed to make the airline the most productive among its peers in Europe by redefining established working practises. Its aim was to achieve a significant reduction in labour costs through increased productivity, thereby putting the firm ahead of its rivals. It was hoped that this would ultimately translate into higher profits as well.
In a nutshell, the aforementioned strategy sought to gain acceptance among eligible BCal employees by offering them a higher basic rate of pay and a greater personal involvement in the management's decision-making process in return for forgoing their overtime pay and agreeing to new, more efficient working practises that resulted in increased labour productivity.
The subsequent, successful implementation of the new industrial relations strategy made BCal employees the highest paid airline staff in the UK at the time.
1983 turned out to be another tough year for BCal. Although BCal's airline operation incurred a loss of £655,000 in the financial year to
October 31, 1983, the airline managed to make an overall pre-tax profit of £2.6m during the aforesaid financial period. This translated into a £300,000 retained profit at group level. [http://www.competition-commission.org.uk/rep_pub/reports/1987/fulltext/219c04.pdf "British Airways Plc and British Caledonian Group plc; A report on the proposed merger"] , Chapter 4, Competition Commission website] ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 471]
1984 was another record year for BCal that exceeded the record financial performance of 1978. It ended the financial year to
October 31 1984with a pre-tax profit of £17.1m. This translated into a £10.9m retained profit at group level. These profits were the result of the much improved state of the British economy, which had staged a recovery from the severe recession of the early 1980s, as well as BCal starting to reap the benefits of the new industrial relations strategy it had begun implementing the year before.
1984 saw the arrival of two brand-new A310-200 widebodies at BCal's Gatwick base. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 471, 508]
Moreover, that year the CAA awarded BCal a licence to commence scheduled services from Gatwick to Riyadh in preference to BA's rival application for a licence to launch a scheduled Heathrow-Riyadh operation. BCal's Riyadh licence also permitted it to operate dedicated scheduled services to
Abu Dhabi, Doha, Dubai and Muscat, rather than serving these destinations as intermediate points only. [http://www.flightglobal.com/PDFArchive/View/1984/1984%20-%200317.html?search=BCal%20to%20Muscat "Riyadh decision angers BA", Air Transport, Flight International, 25 February 1984, p. 497] ] "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 476]
Apart from Riyadh ,
Librevillewas added to the network during 1984. At the start of the summer timetable period frequencies to Frankfurt and Geneva increased to three daily round-trips. Connectair and RFD joined the British Caledonian Commuter scheme adding new, regional feeder routes from Gatwick to Antwerp and Paderborn. Connectair also assumed the operation of BCal's Gatwick-Brussels route. BCal furthermore decided to withdraw its Glasgow-Newcastle-Amsterdam regional service to focus its operations on providing worldwide scheduled services from London only. (The Glasgow-Newcastle-Amsterdam route was taken over by Air UK. [BCal's Edinburgh-Newcastle-Copenhagen service had already been withdrawn several years before.] ) BCal moreover decided to retire the four ex-Laker One-Eleven 300s and to acquire another second-hand One-Eleven 500, giving it a total fleet strength of 13. This enabled the airline to standardise its short-haul, narrowbodied fleet on the same aircraft sub-type, thereby enhancing its ability to interchange aircraft across that fleet. In addition, BCal decided to hush-kit the entire One-Eleven fleet to comply with stringent noise abatement rules that had come into force at some of the airports on the Continent to which it used to fly, especially in Germany and Switzerland.
1984 also marked the end of the long-haul, narrowbodied era for BCal when the last Boeing 707 left its fleet. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 508]
The acquisition of transatlantic ABC flight and package tour market leader Jetsave in 1984 enabled BCal to improve its economy class loads on its US routes by filling seats that would otherwise have remained empty with Jetsave customers.
A number of major events that were to have a decisive impact on BCal's future occurred during 1984 as well.
Most importantly, the UK Government began to prepare then wholly state-owned BA for privatisation in earnest by appointing a new
board of directorswith several years' experience in private industry as well as by changing its legal status from a Crown Corporationto a public limited company. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 464, 491] BCal's senior management saw this as a major threat to the company's continuing existence as the UK's second largest international scheduled airline. ["It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, p. 82] (At that time the late Sir Adam reportedly passed a hand-written memorandumsaying "For BCal, the writing is now on the wall." round the boardroom. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 507] ) According to BCal's own calculations, the relevant figures for 1983 had shown that BA alone accounted for 82% of all UK scheduled airline capacity measured in tonne kilometers as opposed to a mere 17% for BCal itself. (The comparable figures in terms of passengers carried were 82% for BA and only 11% for BCal.) According to these figures, Heathrow's share of international, scheduled air traffic was 79% compared with 14% for Gatwick. [http://www.flightglobal.com/PDFArchive/View/1983/1983%20-%202044.html?search=Share%20out%20BA "Share out BA or we abandon Gatwick, warns BCal", Air Transport, Flight International, 12 November 1983, p.1268] ] ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 363, 444] This meant that a privatised BA on this scale would enjoy far greater financial clout than BCal. It also meant that BA's market power would be disproportionate compared with that of any other UK airline as a result of its much greater economies of scale. Furthermore, the Government's decision to proceed with BA's privatisation inevitably meant the end of the "Second Force" policy, which had guided BCal's development for one-and-a-half decades since its inception, as well. In addition, the transfer of BA's ownership from the public to the private sector meant that BCal could no longer rely on the indirect protection Government ownership afforded it to prevent BA from abusing its power - for example, by engaging in anti-competitive behaviour against BCal. These views were generally shared by the UK's other Independent airlines.
To redress this competitive imbalance, BCal proposed to the Government the transfer of several of BA's most lucrative long-haul routes to itself - including BA's highly profitable Saudi Arabian routes as well as that airline's routes (including unused licences) to Abu Dhabi,
Kuwait, Harare, Islamabad, Kolkata(then still called Calcutta), Singapore, Kuala Lumpuras well as Tokyo, Seoul and Beijing. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 482, 499] [http://www.im.shinshu-u.ac.jp/staff/shibata/ch_3.htm#_ftn17] BCal also proposed the transfer of BA's short-/medium-haul routes from Heathrow to Vienna, Helsinki, Athens, Istanbul, Maltaand Larnaca, which it wanted to serve from Gatwick, as well as the removal of capacity restrictions on its existing short-haul European routes from Gatwick. [http://www.im.shinshu-u.ac.jp/staff/shibata/ch_3.htm#_ftn17] The airline furthermore proposed to take over BA's services from Gatwick to the Iberian peninsula as well as that airline's services from Gatwick to the Caribbean. [http://www.im.shinshu-u.ac.jp/staff/shibata/ch_3.htm#_ftn17] Moreover, BCal wanted the Government to pursue additional opportunities for dual designation in its [re-] negotiations of existing and new bilateral air services agreements with foreign governments on its behalf - in particular, to the Far East and Australia as well as to East and South Africaand Canada at a later stage. BCal was prepared to pay BA between £200m and £250m for the routes to be transferred as well as for the associated staff and infrastructure. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 445 ] BCal estimated that it would require nine more aircraft - six long-haul and three short-haul planes - to operate the additional routes. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 483] It also reckoned that this would allow it to grow to the minimum size that was required to turn its Gatwick base into an efficient hub to enable it to prosper in the post-BA privatisation environment. BCal was furthermore of the opinion that this would allow it to increase its scheduled capacity to about 20% of all UK scheduled airline capacity while permitting BA to continue in its role as the dominant UK scheduled carrier, which would still have accounted for 70% of total scheduled capacity. [http://www.im.shinshu-u.ac.jp/staff/shibata/ch_3.htm]
BCal's senior management told the Government that the only alternatives to this proposal were shifting its existing scheduled operation from Gatwick to Heathrow's then new Terminal 4 "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 496] , which it expected to produce an additional annual profit of £20m ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 448, 455/6] , or to merge with BA. [http://www.competition-commission.org.uk/rep_pub/reports/1987/fulltext/219c05.pdf "British Airways Plc and British Caledonian Group plc; A report on the proposed merger"] , Chapter 5, Competition Commission website] BCal's senior management also told the Government that its preferred option was to remain at Gatwick and to strengthen its position there through the proposed route transfers to enable BCal to turn it into an efficient hub-and-spoke operation that would allow it to compete with BA and the US "mega" carriers on a
level playing field. The airline's senior management furthermore told the Government that a merger with BA was its least preferred option.
The late Lord King of Wartnaby, BA's newly appointed chairman, infamously dismissed BCal's offer to purchase BA's assets for £200m+ as a "smash-and-grab raid". He also made it clear to the Government that he and his fellow board members fiercely opposed transferring any of these assets to BCal. Lord King also left the Government in no doubt that it would find itself in the highly embarrassing situation of having to dismiss the entire board if it imposed a route transfer to BCal against the BA board's will. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 466/7]
The opposing views of Britain's two main scheduled airlines on the future shape of the British air transport industry led to a review of the Government's airline competition policy by the CAA. The result was "CAP 500", a Government-commissioned
White Paperin which the CAA outlined the findings of its review of existing UK airline competition policy. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 488-490] "CAP 500" also contained a number of recommendations that were designed to ensure that a competitive balance between BCal and the UK's other Independent airlines on one hand and a privatised BA on the other was maintained.
The CAA broadly endorsed BCal's proposals by recommending the transfer of BA's routes to Saudi Arabia and Harare as well as its Caribbean and Iberian peninsula routes to BCal. The CAA also recommended removing all capacity restrictions on BCal's existing short-haul European routes. It furthermore advocated increasing the opportunities for designating BCal as the second UK flag carrier on additional long-haul routes where BA was the only UK scheduled airline. This was to be achieved through appropriate amendments to the relevant bilateral agreements. (In addition, the CAA favoured a scheme under which BA would give financial assistance to other Independent airlines to take over some of BA's existing regional operations as well as to launch new regional routes.) "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 488-490, 499] [http://www.im.shinshu-u.ac.jp/staff/shibata/ch_3.htm]
Full implementation of "CAP 500" would have resulted in strengthening BCal's position at Gatwick by making it the sole UK scheduled airline on all trunk routes from that airport while maintaining BA's status as the dominant UK scheduled carrier at Heathrow. (It would also have resulted in a substantial reduction of BA's presence in the regions.) [http://www.im.shinshu-u.ac.jp/staff/shibata/ch_3.htm]
In the event, under pressure from BA's board as well as to ensure BA's successful flotation, the Government decided not to accept the CAA's recommendations in full. Instead, it settled on a limited route transfer from BA to BCal. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 503-506] This entailed transferring BA's highly profitable Saudi Arabian routes to
Dhahranand Jeddahto BCal to add to its new route to the Saudicapital Riyadh. [http://www.im.shinshu-u.ac.jp/staff/shibata/ch_3.htm] The Government thought that this would strengthen BCal by making it the sole UK flag carrier to all of Saudi Arabia and that it would tie in well with BCal's "linking the oil capitals of the world" corporate strategy, which it had successfully pursued since the late 1970s. To be seen as "even-handed" by both parties as well as to counter BA's accusations of displaying "favouritism towards BCal", the Government required BCal to hand over its loss-making South American routes as well as its unused licences to serve a number of additional destinations in the US and Morocco to BA. [http://www.im.shinshu-u.ac.jp/staff/shibata/ch_3.htm]
The limited route transfer on which the Government had decided was far less ambitious than either BCal's own proposals or the CAA's recommendations and would still leave it far smaller than BA and the emerging US "mega" carriers. Although this was less than it had bargained for, BCal's senior management decided to accept the Government's decision because they estimated the two Saudi Arabian routes BA was going to transfer to be worth £18m in additional annual profits. [ [http://www.flightglobal.com/PDFArchive/View/1986/1986%20-%200503.html?search=BCal%20to%20Muscat "Arabian flights disappoint BCal", Air Transport, Flight International, 8 March 1986, p. 7] ] This would be only £2m less than BCal expected to earn in extra yearly profits from its existing network had it been able to transfer its entire operation to Heathrow. Given these magnitudes as well as Heathrow's already tight slot situation at peak times, BCal's senior management considered this difference in annual profitability "immaterial".
The route transfer was to take place at the start of the 1985 summer timetable period.
The fatal shooting of Woman Police Constable (WPC)
Yvonne Fletcher, a young, female police officer of the London Metropolitan Policeforce, on April 17 1984while on duty in front of the so-called "Libyan People's Bureau", the Libyan embassyin London's St. James's Square, and the British Government's subsequent decision to sever its diplomatic relationswith Libya was a major setback for BCal. It resulted in the sudden loss of BCal's highly profitable Gatwick-Tripoli route - at the time its most profitable route after Gatwick-Lagos - when the Libyan authorities' decision to close their airspace to British airlines and aircraft forced a BCal BAC One-Eleven en route to Tripoli to return to Gatwick. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 478]
The loss of the Tripoli route led to the decision to dispose of both newly delivered A310s as well as to cancel the delivery of the third aircraft BCal still had on firm order.
A comparatively very minor setback BCal suffered at the time was the CAA's decision to turn down Connectair's application to take over British Midland's Gatwick-Belfast operation as part of the British Caledonian Commuter scheme and to transfer the licence to Dan-Air instead. (The CAA felt that Dan-Air's proposal to replace British Midland's thrice-daily turboprop service with a twice-daily mainline jet operation represented a "materially superior" proposition to provide a scheduled air service on a trunk route compared with Connectair's rival proposal to use unpressurised 30-seater commuter planes to maintain the same frequency as British Midland.)
1985 was the year that broke all previous financial records at BCal. The pre-tax profit in the financial year to
October 31 1985reached an all-time high of £21.4m. (The retained group profit for that period was £11.3m. The profit attributable to BCal's airline operation represented an improvement of almost £12m compared with the previous year's results. ) During that year BCal carried 8% more passengers as well as 20% more cargo compared with the year before.
The limited route transfer on which BCal had agreed with BA and the Government took effect at the start of the 1985 summer timetable period when BCal commenced scheduled operations from Gatwick to Dhahran and Jeddah, replacing the BA service from Heathrow. At the same time BCal relinquished its traffic rights to
Recife, Salvador, Rio, São Paulo, San Juan, Caracas and Bogota. BA acquired these traffic rights and began serving most of these destinations from Heathrow.
A second 747 wearing BCal's full livery joined the fleet permitting the resumption of a daily Gatwick-JFK service during the summer of 1985, after the airline's absence from that route for over a decade. (BCal's 1985 re-launch of scheduled Gatwick-JFK services coincided with the introduction of its "door-to-door" limousine service. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 511] )
The temporary lease of a Viscount sporting the full BCal livery for the duration of the 1985 summer timetable period enabled the airline to increase capacity on the Gatwick-Brussels route by replacing smaller aircraft Connectair had used to operate that service under the British Caledonian Commuter scheme as well as to add more capacity on week-ends on the busy Gatwick-Jersey route.
Two more, second-hand DC-10-30s were acquired to replace both of BCal's A310s, which left the fleet when the additional DC-10s arrived. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 568]
1985 also saw the establishment of British Caledonian Flight Training, a new flight crew training facility. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 514]
As Gatwick became busier, BCal's senior management called on the Government to ban all charter flights from the airport and to move those services to
Stanstedinstead. (In 1979 the BAA had struck a legally binding agreement with West SussexCounty Council obliging the airport operator not to build a second runway at Gatwick for 40 years in return for gaining the council's approval to begin construction of a second terminal there. BCal's senior management was concerned that in years to come Gatwick would run out of a sufficient number of viable slots. BCal needed these slots to continue expanding at the airport and to transform it into a proper hub-and-spoke operation.)
The Government decided to meet BCal's request for a ban on all charter flights from Gatwick "half-way" by agreeing to give preference to scheduled services in all future slot allocations at the airport.
The collapse of the oil price during the mid-1980s had serious repercussions for BCal's revenue and profit projections as this impacted the oil-related business routes on which the airline had depended for most of its profits since the late 1970s. All of these routes carried fewer premium business travellers than anticipated. This, in turn, led to a sharp decline of those routes' profitability and, hence, their contribution to the airline's overall profitability. In the case of the newly acquired Saudi Arabian routes this meant that they delivered less than half the projected profits. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 519, 568]
The limited route transfer had allowed BCal to grow its scheduled capacity to about 18% of all UK scheduled airline capacity, while BA only suffered an insignificant reduction in its share of total scheduled capacity.
BCal's 18% share was still far less than the minimum size BCal needed to acquire the economies of scale to compete with BA as well as the US "mega" carriers on a level playing field. It was also far less than envisaged in the Edwards report prior to BCal's formation. (That report had considered 4,000m seat-miles per year by 1975 the minimum size for the "Second Force" to become economically viable. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 201] )
This situation was unsatisfactory for the airline as well as unrewarding for its shareholders.
Therefore, under pressure from its controlling shareholder 3i, the search for a new, long-term strategy began. "It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, p. 83]
As a consequence of its main shareholder's dissatisfaction, the British Caledonian Group's board of directors established contact with ILG's board in November 1985. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 525] The purpose of this meeting was to begin exploring ways of combining BCal's and
Air Europe's separate short-haul operations in a new joint venture that would have enabled both airlines to acquire the economies of scale to compete with a privatised BA on a level playing field. Another objective of this exercise was to smooth out each other's peaks and troughs, for BCal's peaks occurred during week days while Air Europe's peaks occurred on week-ends. This meant that both airlines could offer their spare capacities to each other to achieve an overall higher level of equipment utilisation as well as higher load factors throughout the week. ILG's dominant position in the inclusive tour market would also have helped BCal to significantly increase its generally low short-haul loads by filling seats that would otherwise remain empty with ILG's clients, especially on week-ends. A series of meetings ensued. The result was a 150-page study entitled "An Airline for Europe". It envisaged the commencement of joint scheduled operations from Gatwick to Hamburg, Munich, Düsseldorf, Milan Linate and Nicein 1987. The next stage of development was to occur during the 1988/'89 winter timetable period when further routes linking Gatwick with Copenhagen, Stockholm, Vienna, Romeand Athens were to be added. The study also envisaged adding services from Gatwick to Zürich, Dublin, Madrid and Lisbonat a later stage to enable the joint venture to acquire sufficient economies of scale to become a viable entity in the long term. However, it also recognised that it might be difficult to implement the last stage of the envisaged expansion as the relevant routes had already been licensed to Dan-Air. ["It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, pp. 86-89]
The study also made profit projections for each stage of the envisaged joint venture's development.
* £3.7m for 1987/'88.
* £5.5m for 1988/'89.
* £25.2m for 1989/'90.
The latter represented a return on total equity employed plus previously retained earnings of 18.2%. This was substantially better than BCal's short-haul operation could ever have hoped to achieve on its own. ["It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, p. 87]
Despite several rounds of talks being held that lasted well into the first half of 1986, both sides eventually decided not to proceed further with their joint venture study and to go their separate ways.
British Caledonian Flight Training
As part of BCal's overall 1980s diversification strategy, during September 1985 the airline's senior management decided to establish British Caledonian Flight Training as a wholly owned flight training academy in a joint venture with
Rediffusion Simulation, the Crawley-based flight simulatormanufacturer. This enabled BCal to train its own flight deck crews in-house, rather than having them trained by other airlines. (For example, prior to the establishment of British Caledonian Flight Training, BCal had sent its One-Eleven flight deck crews to train in the flight simulators of Aer Lingus and Allegheny Airlines/ US Airat various times.) It also enabled BCal to sell any spare capacity to third parties.
The new flight training academy was sited in the old American Airlines Gatwick Flight Training Centre in the Manor Royal industrial area of Crawley, close to the British Caledonian Group headquarters at "Caledonian House" and within easy reach of Gatwick Airport. Initially, BCal had a DC-10 and the then latest 737 model simulator installed in its new flight crew training facility. Later on, it was equipped with several new, state-of-the-art flight simulators for a range of contemporary narrow- and widebodied aircraft types.
Following BCal's asset disposal programme in the wake of the 1986 crisis,
GECASacquired sole ownership of the former BCal flight training academy.
BCal had high hopes for 1986. It intended 1986 to be a "super year" during which it expected to make record profits representing a substantial improvement on the previous year's pre-tax profits of £21.4m (an £11.3m retained group profit), in itself a record performance. ["It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, p. 90] The British Caledonian Group expected its turnover to exceed half-a-billion pounds while BCal expected to carry just under two-and-a-half million passengers. The year's crowning glory was to be the flotation of the British Caledonian Group on the
London Stock Exchange.
Instead, 1986 turned out to be BCal's "
annus horribilis" during which it was facing its most acute crisis as a result of events beyond its control. The airline was never going to recover from this crisis, which ultimately sealed the company's fate.
The events that brought about a dramatic turn-around in BCal's fortunes plunging it into a £19.3m pre-tax loss (a £14.4m retained group loss) [http://www.flightglobal.com/PDFArchive/View/1987/1987%20-%201254.html?search=Harry%20Goodman,%201987 "British Airways bids for dominance", Air Transport, Flight International, 25 July 1987, p. 4] ] "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 530] included
* the American bombings of Libya during April 1986 in retaliation for that country's alleged involvement in the bombing of the West Berlin discotheque "La Belle" the same year during which several US servicemen as well as a Turkish woman were killed "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 523] "It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, pp. 89/90]
* the adverse impact of the Nigerian
naira's devaluation on BCal's earnings from passenger and freight bookings originating in Nigeria and paid for in the local currency, which the Nigerian government of the day prevented from being repatriated to the UK. "It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, p. 103]
The first two events almost emptied the cabins of BCal's widebodied planes plying the transatlantic routes linking Gatwick with Houston, Dallas and Atlanta as well as New York JFK and L.A. because of a sudden surge in cancellations, especially from passengers based in the US. Many of BCal's American passengers cancelled or postponed their trips at that time because they feared retaliatory attacks by Libyan secret service agents and did not want to risk exposing themselves to the
radioactive falloutfrom the Ukrainian nuclear catastrophe while conducting their business or spending their holidays in Europe. At the time BCal's transatlantic scheduled services accounted for a quarter of the airline's worldwide revenues as well as 37% of its passenger traffic. The Libyan bombings also dashed any hopes BCal had to resume operations on its highly profitable Gatwick-Tripoli route later that year, resulting in a further loss of expected revenues and profits.
The third had a serious impact on BCal's finances at a time of crisis as it denied the airline speedy access to a substantial amount of money derived from passenger and cargo sales in its most important, as well as most profitable, overseas market. This resulted in a significant revenue loss.
What was already a bad situation for the airline was made worse by the continuing, steep decline of the oil price, which had started the year before. This rapid fall in the oil price reduced the oil industry's spending power, thereby significantly reducing the number of oil-related business passengers planning to fly with BCal in future. As these passengers used to account for a major share of the airline's high-yield premium bookings, future revenue and profit projections needed to be revised as well to take account of much reduced demand for the company's most expensive tickets.
In addition, the Government announced the withdrawal of BCal's licence to operate the high-frequency Gatwick-Heathrow Airlink helicopter shuttle service as a result of the completion of the M25 London orbital motorway, thereby denying the airline's passengers easy access to connecting flights from Heathrow as well as depriving passengers travelling with airlines based at that airport of the opportunity to avail themselves of convenient onward connections from Gatwick. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 524] The resulting reduction in the number of passengers changing flights at BCal's Gatwick base was expected to have a detrimental effect on load factors on the airline's profitable long-haul routes. This, in turn, was expected to reduce the profitability of these routes as well as the airline's overall profitability.
As a result of the problems it was facing during that time, BCal was forced to announce 1,000 job losses (out of a total worldwide workforce of 7,700). [http://www.flightglobal.com/PDFArchive/View/1986/1986%20-%201144.html?search=BCal%20to%20Muscat "BCal: the good news", Air Transport, Flight International, 24 May 1986, p. 4] ] It also needed to make adjustments to its schedule to take account of the expected changes in traffic patterns. This led to an immediate reduction in the number of weekly frequencies on BCal's underperforming Saudi Arabian routes. The aircraft capacity thus released was redeployed on BCal's well-performing route to Dubai and Hong Kong (increasing the number of weekly round-trips from seven to nine).
Altogether BCal suffered a total revenue loss of £80m - £35m for losses related to the US military action in Libya and the Ukrainian nuclear catastrophe, another £35m related to the devaluation of the Nigerian currency and £10m for the voluntary severance programme to achieve a reduction in the head count - while the airline itself lost two-and-a-half million pounds every month at that time.
The airline embarked upon a major asset disposal programme to compensate for this significant revenue loss as well as to have sufficient
funds to keep the business running. These asset disposals included the highly profitable sale of two, relatively young McDonnell Douglas DC-10-30 widebodied aircraft to Continental Airlines, the sale and lease-back of the entire 13-strong, short-haul BAC One-Eleven fleet, the sale of six of Caledonian Hotel Holdings' hotels - including the sale of both Copthorne hotels to Aer Lingus, the sale of the Caledonian Airmotive engine overhaul subsidiary to US-based Ryder Systems, the sale of the Caledonian Leisure Holdings tour operator subsidiary and the eventual disposal of British Caledonian Helicopters the following year. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 530, 545, 568]
Despite facing a major crisis, BCal continued adding new aircraft, routes and flight frequencies in an effort to maintain a competitive operation.
Two more 747s joined the fleet during 1986. This permitted a major capacity increase on the popular Gatwick-Dubai-Hong Kong route by replacing the DC-10-30s, with which BCal had operated that route since its launch in 1980.
During that year Muscat ,
Gaboroneand Aberdeen joined the network. As a result, BCal extended some of its Saudi Arabian services to Muscat, it made Gaborone an extension of its twice-weekly Gatwick-Lusaka service and served Aberdeen as a continuation of the daily mid-day service between Gatwick and Manchester. (The reason BCal decided to add Aberdeen to its domestic network was a major frequency reduction - from four to two daily round-trips - in Dan-Air's Gatwick-Aberdeen schedule as a result of reduced demand in the wake of the mid-'80s oil price collapse. That airline's decision to cut the number of flights it operated on the aforesaid route in half negatively impacted BCal's network connectivity at Gatwick, especially for its premium business travellers working in the oil industry who depended on well-timed connections between Aberdeen and BCal's long-haul flights serving important oil destinations in Texas, the Middle East and West Africa.)
BCal's acquisition of a fifth 747 the following year permitted the launch of a new route from Gatwick to Tokyo on
May 31, 1987, at a frequency of three return flights per week. [http://www.flightglobal.com/PDFArchive/View/1987/1987%20-%200731.html?search=BCal%20to%20Tokyo,%20June%201987 "BCal starts non-stop Tokyo service", World News, Flight International, 13 June 1987, p. 37] ] Two of these flights were operated non-stop in each direction, making BCal the first UK airline to fly non-stop between London and Tokyo. (BCal managed to beat BA, whose competing non-stop Heathrow-Tokyo service commenced on June 4of that year, by four days. ) The third flight was operated with a stop in Moscoweach way. (At the time the Soviet authorities demanded that most West European airlines whose aircraft were passing through its airspace en route between Europe and Japan operate at least one flight in each direction with a stop in the USSR's capital. ) In addition, for the first time in five years, two new European routes were launched from Gatwick. These served Milan Linate and Nice at a frequency of ten and three return flights per week, respectively.
In June 1987 BCal formally objected to Air Europe's application to the CAA to launch eleven new scheduled routes from Gatwick to Europe, many of which would compete with BCal's existing services. "It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, p. 113] According to contemporary press reports, the late Sir Adam commented on Air Europe's plan to launch several new routes from Gatwick to Europe in competition with BCal that "there was no sense in the two small boys beating each other about at Gatwick while the big, fat cat was sitting at Heathrow".
As late as
November 18 1987, when the battle to gain control of the ailing British Caledonian Group was in full swing and a decision on its eventual fate was only a few weeks away, BCal filed a counter application for additional route licences to commence scheduled services from Gatwick to Copenhagen, Stockholm, Oslo, Rome and Athens with the CAA. (Air Europe announced its intention to launch eleven new scheduled routes from Gatwick to Europe at a press conference in London later that day.) ["It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, p. 96]
Orders for MD-11 aircraft
Despite its precarious financial position, McDonnell Douglas managed to persuade BCal to sign up as a launch customer for its proposed
MD-11trijet, the successor to the DC-10, ahead of the programme's formal launch on December 30 1986. [http://www.flightglobal.com/PDFArchive/View/1986/1986%20-%203356.html?search=BCal "Orders boost MD-11 launch chances", Flight International, 13 December 1986, p. 4] ]
In addition to qualifying for a significant manufacturer discount as a launch customer, BCal chose the MD-11 over competing, new aircraft models because of the high degree of
commonalitywith its existing DC-10 fleet, thereby helping it minimise crew conversion and maintenance costs.
Eventually, BCal's MD-11 order was taken over by American Airlines.
By July 1987 BCal had already exhausted most of the proceeds from the asset disposal programme.
The proceeds from the sale of two DC-10s to Continental Airlines was all that was left to keep the airline in business. Senior management realised that the company was unlikely to survive on its own and that it needed to act fast if it wanted to avoid BCal's collapse. ["It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, pp. 100, 103]
Therefore, the search for a financially strong partner acquired a renewed sense of urgency.
Several rounds of talks that were aimed at achieving a full-scale merger ensued with various airlines in the UK, the US, Canada and Europe.
BCal's future prospects as a stand-alone, medium-sized airline operating a variety of short-, medium- and long-haul scheduled services were rapidly diminishing against a background of looming consolidation in the airline industry. This was driven by the emerging US "mega" carriers that had begun channeling their traffic flows into powerful
hub-and-spokeoperations, rather than feeding these into the networks of BCal and other international partner airlines, in the wake of US deregulation. In addition, BA's impending privatisation and the Government's refusal to fully implement the recommendations contained in the CAA's airline competition White Paper meant that BCal was unable to acquire the economies of scale it needed to compete with these airlines on a level playing field. This prevented BCal from achieving higher volumes over which to spread its fixed costs. It also deprived the airline of the capacity to generate the funds to continue investing in fleet renewal, further network expansion and new IT systems.
BCal's basic dilemma at the time can be summed up as follows:
It had become a mid-sized airline that was too big to be a specialist, niche operator. Yet it was too small to effectively compete with BA and the US "mega" carriers in terms of economies of scale and scope. At the same time, it was unable to match the significantly lower costs of emerging, aggressively expanding Far East competitors, such as Cathay Pacific. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 512]
BCal's precarious financial position made it obvious for most of BCal's rivals and seasoned industry observers that the ailing airline lacked the financial strength to survive on its own for much longer.
BCal had valuable traffic rights to operate scheduled services on a number of lucrative, long-haul routes to parts of the world that were not served by any other British airline at that time. It therefore became a desirable takeover target and a bidding war ensued between several potential suitors.
The chief protagonists in this takeover battle were BCal's archrival BA as well as ILG/Air Europe and SAS.
16 July 1987both the late Sir Adam Thomson and the late Lord King of Wartnaby, then the respective chairmen of British Caledonian Group plc and British Airways plc, announced at a press conference the intention of the latter to acquire the former in an agreed £237m bid to a stunned world. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 528/9, 537/8] They had agreed on this deal only the day before. Officially this was presented as a "merger between equals". However, within the industry it was widely acknowledged as a mutually agreed rescue deal to avoid BCal's collapse. ["It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, p. 100] In addition, BA, which had been privatised only in February of that year, was keen to get hold of its main home-grown competitor's most valuable assets. These assets included BCal's lucrative traffic rights to those parts of the world BA could not serve itself as a result of the now defunct "Second Force" policy, which itself had resulted in a "spheres of influence" policy for BA and BCal by preventing both airlines from competing with each other on a number of important long-haul routes. BA also saw this as a "necessary" move to fill the gaps in its global route map to acquire the economies of scale that would permit it to compete against the then emerging US "mega" carriers on a level-playing field. It therefore wanted to get hold of these assets before any competitor could lay its hands on them. Moreover, BA wanted to prevent BCal's assets from passing into the hands of any partially foreign-owned or controlled competitors. It felt that under such a scenario the long-term competitiveness of the entire UK air transport industry was threatened.
(Atul and Virendra Patel, the owners of a small London travel agency named "Travel Eye Ltd.", reportedly submitted a counter bid to take over the ailing BCal on
August 13 1987. According to contemporary news reports, they were prepared to match the price BA had agreed to pay for the entire British Caledonian Group on July 15 1987. However, BCal maintained that it had never received any such bid. The Patel brothers themselves decided to withdraw their bid a few days after it had become public. [ [http://query.nytimes.com/gst/fullpage.html?res=9B0DE7DC143EF937A2575BC0A961948260 Company News: British Caledonian] , "The New York Times", August 14, 1987] )
Following Lord King's outright rejection of ILG chairman Harry Goodman's offer to purchase BCal's short-haul operation - including BCal's 13-strong fleet of hush-kitted BAC One-Eleven 500s that was used to operate the airline's short-haul domestic and European scheduled services as well as the associated staff that kept these services running - for a "fair" price [ [http://www.flightglobal.com/PDFArchive/View/1987/1987%20-%201306.html?search=Vultures%20hover%20over%20BCal "Vultures hover over BCal", Air Transport, Flight International, 1 Augustl 1987, p. 4] ] [http://www.flightglobal.com/PDFArchive/View/1987/1987%20-%201466.html?search=Government%20stalls%20BA "Government stalls BA/BCal merger", Air Transport, Flight International, 15 August 1987, p. 4] ] , and to merge that operation with the short-haul operations of ILG subsidiary Air Europe in return for not having the proposed BA-BCal deal referred to the MMC, ILG decided to launch a new counter bid for the entire British Caledonian Group at the end of July 1987. ["It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, pp. 102/3]
(This was the second time ILG had made a bid to acquire British Caledonian Group. ILG had launched its first takeover bid, which had valued British Caledonian Group at £36m, in May 1986. ["It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, p. 92] That bid had materialised after several rounds of inconclusive talks exploring ways of combining the short-haul businesses of Air Europe and BCal in a new joint venture, which had taken place between ILG and British Caledonian Group since the end of 1985. At the time BCal's senior management had dismissed ILG's bid as "derisory" because it had valued the entire British Caledonian Group's assets far below their minimum expectations. ) ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 525]
Air Europe was concerned that a new entity combining BA and BCal had the power to destroy the UK's remaining Independent airlines, especially with regard to their ability to compete with such a behemoth. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 544] At the time Air Europe had ambitions of its own to become a major short-haul scheduled operator. It was planning to launch eleven new routes from Gatwick to Europe, thereby replacing and enhancing the services BCal had provided. [ [http://www.flightglobal.com/PDFArchive/View/1986/1986%20-%203152.html?search=Air%20Europe,%201986 "Air Europe bids to compete in Europe", Air Transport, Flight International, 29 November 1986, p. 6] ] Given a combined BA-BCal's superior financial strength, considerably lower borrowing costs and far greater economies of scale, Air Europe's management felt that it would be imprudent to launch these new routes if it had to compete with BA out of Heathrow and Gatwick as well. Therefore, its parent ILG had decided to make a counter bid, which it hoped would either kill off BA's proposal to take over BCal lock, stock and barrel or result in it being referred to the MMC.
To enhance its credibility as a serious contender, Air Europe's bid contained a detailed proposal to return BCal to profitability by way of a reorganisation. This proposal had been prepared by a retired BA head of route planning whom ILG had specifically hired for this purpose. The proposal itself entailed separating BCal into four discrete businesses, each of which would have had its own management who would have been accountable for the performance of their own business unit. The businesses into which BCal was to be split included a long-haul operation using the existing BCal brand, a short-haul operation to be merged into Air Europe's existing short-haul operation using the BCal brand to serve business routes and the Air Europe brand to serve leisure markets as well as an engineering and a ground handling unit.
The long-haul operation was to be re-equipped with a brand-new fleet comprising six Boeing 747-400s and ten
Boeing 767-300ERs to achieve a substantial reduction in operating costs and to permit an increase in frequencies. There were to be fewer services to Africa - where the new management wanted to keep only the really profitable routes to Nigeria and Ghana - while a second daily service to New York JFK was to be launched, Dubai was to be de-linked from the Hong Kong service and Hong Kong was to be served non-stop with the new 747-400s (none of the existing aircraft in BCal's long-haul fleet had the range to reach Hong Kong non-stop from the UK with a viable payload). In addition, there were to be more flights to the Middle East making use of a number of unused licences to serve additional destinations in the region, which BCal had obtained during the early 1980s. There was also a plan to apply for traffic rights to serve other destinations in the Far East non-stop from Gatwick in competition with BA's existing services from Heathrow. This combination of more non-stop flights and higher frequencies to prime long-haul destinations would have resulted in a more attractive product for high-yield business travellers, thereby enabling the revamped BCal to become profitable again within a short period of time.
The short-haul operation was to have brand-new aircraft as well, which would have resulted in replacing BCal's 13 aging BAC One-Eleven 500s with the new Boeing 737-300s Air Europe had on order. It would also have resulted in adopting the Air Europe short-haul in-flight product, which was of a higher standard than BCal's contemporary short-haul product.
BCal's senior management rejected ILG's renewed bid on the grounds that it still did not adequately reflect the value of the group's assets, in particular those of BCal. In addition, BCal's senior management felt that both airlines' nature of operations and their business strategies were incompatible and that therefore there were no synergies to be gained from combining BCal with what they regarded as "essentially a charter company".
The October 1987 stock market crash and ILG's successful referral of the original BA-BCal "merger" proposal to the MMC resulted in BA tabling a revised bid to take over BCal. However, the new bid was far less generous than the original one. It was worth only £156.7m. [http://www.flightglobal.com/PDFArchive/View/1987/1987%20-%202378.html?search=BA%20cleared "BA cleared to make new bid for BCal", Air Transport, Flight International, 21 November 1987, p. 4] ] [ [http://news.bbc.co.uk/onthisday/hi/dates/stories/july/16/newsid_2503000/2503947.stm "1987: Great British airline ready for take off"] , "On This Day, 16 July 1987", BBC News] BA's materially inferior offer to buy out the shareholders of the British Caledonian Group led to BCal's senior management, most of whose members were also on the British Caledonian Group's board of directors, turn against BA and to recommend to their shareholders not to accept the revised bid. [http://www.flightglobal.com/PDFArchive/View/1987/1987%20-%202710.html?search=BCal,%201987 "BCal bidders raise the stakes", Air Transport, Flight International, 19 December 1987, p. 4] ] ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 542/3, 554] Instead, with the backing of BCal's controlling shareholder 3i, a desperate search for a "white knight", who was prepared to pay the same amount of money BA had offered to pay in its original bid, began. "It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, p. 104] Talks with British Midland, UTA and SAS ensued. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 532, 539, 541/2, 545-555] Among these sets of talks the one with SAS seemed to be the most promising.
SAS was prepared to offer £110m for 26% of the British Caledonian Group's
stock, valuing the entire group at £400m. Jan Carlzon, the then chairman of the SAS group, was well aware that the so-called "nationality clauses" in most bilateral air services agreements as well as most countries' legal framework regulating the ownership of their airlines would restrict SAS's direct involvement in BCal's finances to acquiring a minority stake in its holding company. SAS therefore dispatched a team of executives headed by Jan Carlzon to the UK to work out details of a joint bid. This envisaged setting up an employee trust fund that would hold the same percentage of British Caledonian Group stock on behalf of the group's employees as SAS itself was seeking to acquire, so as to be compliant with any rules limiting the stakes foreign individuals or entities could own in a British airline. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 559-561] They were prepared to extend a loan to the trustees of the envisaged employee trust fund to enable them to acquire an equal number of shares on the employees' behalf. The SAS executives discussed these ideas with BCal's senior management and the unions representing its staff at the British Caledonian Group's Crawley headquarters as well as with Government officials in London. [ [http://www.flightglobal.com/PDFArchive/View/1987/1987%20-%202708.html?search=BCal "BCal choice rests with 3i", World News, Flight International, 19 December 1987, p. 2] ]
SAS faced a barrage of hostile propaganda and delaying tactics from BA that were designed to stall any third party's competing bid to acquire BCal for as long as possible and got a "mixed" response to its planned counter bid for BCal from various departments of the UK Government. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 555-559]
To counter these negative sentiments, SAS's proposals also included a plan to offer Dan-Air to participate in its merger with BCal by merging its scheduled services division with the new airline combine's scheduled operation, thereby strengthening its position at Gatwick and the airport as a hub. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 546]
SAS's rationale for launching a counter bid for BCal was the airline's desire not to be left behind in the then widely expected scramble for consolidation in the airline industry by becoming part of one of the four or five global airline groupings that were then predicted to dominate the entire industry. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 539, 541/2, 545-555] (SAS had already acquired a minority shareholding in
Texas AirCorp., then the holding company of Continental Airlines, which at that time was the third largest airline in the non- Communistworld. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 532/3] During that period it was also courting SABENA with a view to persuade it to become part of the envisaged global alliance.)
SAS thought that BCal's Gatwick base would give it access to a centrally located hub in the world's biggest international air travel market, thereby helping it to overcome its geographic isolation on the margins of
Northern Europe. It also thought that BCal's lucrative long-haul routes from Gatwick to Africa and the Middle East would give it access to markets it could not profitably serve itself from relatively sparsely populated Scandinavia and that this would make a good fit with its short-haul European routes - especially its comprehensive schedule to the UK from Scandinavia. SAS furthermore thought that by agreeing to transfer these services from Heathrow to Gatwick, it could also help solve BCal's long-standing problem of not operating enough short-haul flights to improve its long-haul loads from Gatwick.
Had parallel talks to merge with UTA, at the time the largest wholly privately owned airline in
Franceand the closest French equivalent to a "Second Force", succeeded, this would have resulted in a "near perfect" fit of both airlines' long-haul networks as these were largely complementary. It would also have given UTA access to BCal's short-haul network (at the time UTA was an exclusive long-haul carrier), which could have delivered additional passengers transferring at UTA's Paris Charles de Gaulle base between that airline's long-haul services and BCal's short-haul feeder flights from/to London Gatwick. However, at the time the French authorities were thought to disapprove of establishing an equity link between any of their airlines and a foreign carrier.
Parallel talks with British Midland, which wanted to transfer all of BCal's scheduled services from Gatwick to Heathrow, ended without result at an early stage because BCal's senior management felt that this was not feasible given the tight slot situation at London's premier airport.
BCal maintained that it had held several rounds of "exploratory" talks concerning the airline's potential takeover with a number of US "mega" carriers that were willing to pay a substantial premium over BA's original bid to acquire BCal. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 531/2] These talks had come to nothing because the US carriers feared that there were insurmountable regulatory obstacles to such a cross-border acquisition in the highly regulated airline industry.
Merger with British Airways
Faced with the prospect of its takeover target being "snatched away" from under its nose by SAS, British Airways initially began resorting to bullying tactics. In this it had the implicit backing of
Lord Tebbit, then a prominent cabinet member of Britain's ruling Conservative Party, who publicly referred to SAS as " Vikingraiders" following its attempt to launch a successful counter bid to take over Britiain's second largest scheduled carrier. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 558]
BA was using a mix of "
rational" and " emotive" arguments to "convince" both the regulators as well as the shareholders of the British Caledonian Group that its revised offer was in their "best", long-term interest.
At the time, SAS used to pursue a high-fares-high-yield strategy in its Danish, Norwegian and Swedish home markets. Therefore, BA argued that the SAS bid for BCal would lead to higher fares and thus would not benefit British consumers. In addition, BA also argued that BCal's takeover by SAS, in which the governments of Denmark, Norway and Sweden jointly held a 50% stake at that time (through each government's 50% ownership of its respective national carrier, each of which held the actual traffic rights that formed the legal basis of SAS's domestic, regional and international operations), effectively represented a "back-door" nationalisation of a significant part of Britain's privatised air transport industry and contrasted this with its own, recent privatisation. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, p. 555] In this context, BA highlighted the fact that two of these governments represented countries - Norway and Sweden - that were not even members of the EU at that time and therefore were not bound by the EU's moves to liberalise its member states' air transport markets. BA furthermore argued that this would call into question BCal's international traffic rights as most bilateral air services agreements contained a clause demanding airlines to be substantially owned and controlled by interests based in the countries they represented, and went on to argue that this could force the British Government to make concessions to its overseas counterparts that were not in the interest of the British air transport industry to preserve BCal's UK flag carrier status. BA moreover backed up its arguments with the threat that it would immediately apply to the CAA to have all of BCal's licences to operate scheduled air services revoked. BA based these threats on a clause in the 1982 Civil Aviation Act, which clearly states that any airline claiming UK flag carrier status must be substantially owned and controlled by individuals who are UK nationals or entities whose headquarters are located in the UK.
In the event, the British Caledonian Group's controlling shareholder 3i decided to accept BA's final £250m "shut-out" bid, which it had tabled on
December 21 1987under the proviso that it needed to be accepted or rejected on that day itself. "High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 570/1] As the uncertainty surrounding BCal's future led to a further, significant deterioration of its financial position and BA's final "shut-out" bid trumped SAS's final bid, the fiduciaryresponsibilities of the British Caledonian Group's board towards their shareholders meant that the only realistic "choice" left was to recommend the acceptance of the BA bid. (Although BCal managed to earn a pre-tax profit of almost £10m during its last full financial year to October 31 1987, figures subsequently released by BA showed that BCal had lost £32m during the last five month to March 31 1988. ) The decision of 3i and the other shareholders to sell their stakes in British Caledonian Group plc to British Airways plc meant that they relinquished control of BCal to BA, thereby sealing BCal's fate.
Following BA's successful takeover of BCal, SAS had a giant hoarding erected at the entrance to Heathrow's central area featuring an advertisement that ended with BCal's famous 1980s marketing slogan "we never forget you have a choice".
The referral of BA's original bid to take over the entire British Caledonian Group to the MMC had resulted in the imposition of several conditions before the proposed deal was allowed to go ahead. These included BA releasing a minimum of 5,000 annual slots BCal had held at Gatwick (at the time BCal held just under one-fifth of all Gatwick slots [http://www.competition-commission.org.uk/rep_pub/reports/1987/fulltext/219c05.pdf "British Airways Plc and British Caledonian Group plc; A report on the proposed merger"] , Chapter 5, Competition Commission website] ) to competitors as well as requiring it to surrender to the CAA several of BCal's licences to operate scheduled services from Gatwick on a number of important, short-haul feeder routes. ["High Risk: The Politics of the Air", Thomson, A., Sidgwick and Jackson, London, 1990, pp. 541, 544] Although BA had been permitted to re-apply for these licences, the CAA decided to re-allocate all of them to rival, Independent airlines. "It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, pp. 111/2] [http://www.competition-commission.org.uk/rep_pub/reports/1987/fulltext/219c03.pdf "British Airways Plc and British Caledonian Group plc; A report on the proposed merger"] , Chapter 3, Competition Commission website]
BA also needed to withdraw the objections to Air Europe's application to the CAA for licences to launch new scheduled services on several short-haul routes BCal already used to serve from Gatwick. (BCal had lodged these objections with the CAA at the time Air Europe had submitted the aforesaid application.)
Furthermore, both companies' combined turnover exceeded the minimum threshold that automatically triggers the referral of a proposed merger between two or more companies that conduct a significant part or all of their business in EU member states to the European competition authorities in Brussels. Therefore, the EC's Competition Directorate needed to clear BA's takeover of BCal as well.
In addition to the conditions imposed by the MMC, the EC's Competition Directorate required BA to give a legally binding undertaking that it would not seek to increase its share of Gatwick slots through any additional acquisitions of other airlines and/or their slots at Gatwick until 1992. This measure was intended as a safeguard for other airlines that required access to a sufficient number of attractive slots at Gatwick to launch viable scheduled services in competition with BA.
Air UK was awarded the licences for BCal's former London-Scotland trunk routes from Gatwick to Glasgow and Edinburgh. Dan-Air obtained the licences for the old BCal routes from Gatwick to Manchester and Aberdeen via Manchester as well as from Gatwick to Paris Charles de Gaulle and Nice. The licence for BCal's Gatwick-Brussels route was transferred to Air Europe. The CAA also granted Air Europe permission to increase the frequency on its existing route between Gatwick and Paris Charles de Gaulle, where it had already begun to compete with BCal, so that it could match Dan-Air's frequency. Both Air Europe and Connectair were successful in their applications for BCal's unused European route licences. ["It was nice to fly with friends! The story of Air Europe.", Simons, G.A., GMS Enterprises, Peterborough, 1999, pp. 128]
BA continued serving all of the aforementioned routes until the new licence holders were ready to assume those operations at the start of the 1988/'89 winter timetable period.
BCal ceased to exist as a legal entity at 00.01 hrs. on
April 14 1988.
Cal Air International, the former British Caledonian Charter operation, was not part of BA's acquisition of the British Caledonian Group. Neither was British Caledonian Flight Training part of that acquisition. (It continued as an independent organisation.)
British Airtours, BA's wholly owned, Gatwick-based charter subsidiary, was rebranded Caledonian Airways, with its aircraft being repainted in a modified BCal livery featuring BCal's Lion Rampant on aircraft fins and female cabin crew members taking to wearing the famous Caledonian tartans.
BA replaced the former BCal short-haul fleet comprising 13 BAC One-Eleven 500s with 14 Boeing 737-200 "Advanced". (Some of these aircraft had originally been operated by British Airtours in a high-density, single-class configuration and had subsequently been re-fitted with a two-class, scheduled interior.)
The ex-BCal One-Elevens were transferred to BA's regional bases in Birmingham and Manchester.
The five second-hand 747s BA had inherited from BCal were replaced with its own 747-100/200s. (At the time BA already had two 747s stationed at Gatwick to operate its Caribbean schedules from there.)
In addition, BA stationed a Lockheed L-1011 "Tristar" widebodied aircraft at Gatwick, which was used to operate the former BCal West African coastal schedule as well as a number of new routes to North Africa and the Middle East that had been transferred to Gatwick from Heathrow.
The only former BCal aircraft BA kept for its Gatwick operation were eight McDonnell Douglas DC-10-30s that had formed BA's erstwhile competitor's core long-haul fleet since the early 1980s.
BA transferred the former BCal routes to Tokyo and Saudi Arabia to Heathrow. To compensate for this loss as well as to utilise its full slot allocation at Gatwick, BA moved its routes to
Amman, Baghdadand Cairoto Gatwick.
BA transferred all of its international operations from Gatwick - including those it had inherited from BCal - to the then brand-new North Terminal, which opened in March 1988. (The domestic services BA had inherited from BCal at Gatwick continued using the South Terminal as the North Terminal lacked the facilities to handle domestic flights in those days.)
Delivery of the A320s BCal had ordered in 1983 began to BA's new Gatwick base during the spring of 1988. These aircraft had been painted in BA's contemporary Landor Associates designed livery. BA operated its first commercial A320 service between London Gatwick and Geneva before transferring the entire A320 fleet to its main base at Heathrow later that year.
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