British Airways Wins the Right to Buy bmi: Winners and Losers

LHR - London/Heathrow

Last week, it was announced that British Airways parent IAG had won the lottery, so to speak. The group has now reached an “agreement in principle” with Lufthansa to buy its bmi subsidiary. This is all about one thing: slots at Heathrow. We don’t know if this will be completed or not, but if it goes through, it’s a big move. It’s obviously great news for BA, but there are other winners and losers here. Let’s take a look.

BA wins bmi

The general assumption here is that the purchase will effectively just add slots to the IAG portfolio at Heathrow. IAG (owner of British Airways and Iberia) will see its slot holdings rise from 45 percent to 53 percent. It’s expected that BMI regional will be sold off as will bmiBaby, the low cost airline. That is, however, assuming anyone wants to buy them. If this scenario plays out, here’s who wins and who loses.

bmi – Mixed
Shall we start with the most obvious, bmi itself? The airline has languished for years as a distant second fiddle in the UK behind BA, but people did like the frequent flier program and it gave Star Alliance fans a good base within the UK for travel. Still, there wasn’t much hope that bmi would survive on its own, so having the airline sold off as a whole instead of taking it apart, piece by piece, means there is some hope for those who work at the airline today. Of course, there would have been a much greater outcome for those folks had someone like Virgin Atlantic taken over. This is one of those, “could have been worse, could have been (a lot) better” scenarios.

British Airways – Winner
The most obvious winner here is British Airways. Being based in the anti-aviation UK is not easy, and it can’t grow capacity to save its life because the government is too blind to understand how important it is. BA will now get its hands on a nice chunk of slots at Heathrow so it can finally grow. According to management, BA is eyeballing east Asia destinations like Korea and Vietnam, so that will give BA the ability to better compete with foreign flag carriers. It should be noted that BA will still just have over 50 percent of slots at Heathrow, so it’s hardly a massively dominant position. But it will increase concentration, and that will certainly get some hard scrutiny from the competition authorities.

Virgin Atlantic – Loser
The biggest loser by far is Virgin Atlantic. Virgin had hoped to purchase bmi to give itself some heft and possibly as an easy way in to an alliance partnership with Star. This had the makings a big coup for both sides. Star would gain a stronger player in London, Lufthansa would be rid of the money-losing ownership stake, and Virgin Atlantic would finally have a strategy on how to compete going forward. But it’s not to be. Virgin Atlantic’s bid wasn’t high enough, so instead all those slots will go to Virgin’s arch-rival. I’m sure we can expect to see some slogans painted on the back of Virgin planes, maybe “bmi + BA = no way”? Virgin’s best hope now lies with the regulatory agencies.

Lufthansa – Mixed
I think of bmi like a vampire that’s slowly draining Lufthansa’s blood. After being forced to buy bmi two years ago, the long nightmare is over and Lufthansa will get a nice little payday out of the sale. But it’s also enabling one of its biggest European competitors, BA, to become more effective. With these slots, BA can ramp up and provide better schedule coverage. It can also woo Star Alliance loyalists in the UK away because that simply isn’t much of an option anymore.

Other Star Alliance Airlines – Loser
The impact is not as great for other Star Alliance airlines, but over all, this is bad for them. It helps British Airways to build a bigger and better strategic hub at the expense of a Star Alliance presence in one of the most important cities in the world. It cuts down on options for Star loyalists and makes BA stronger. For that reason, Star members can’t be happy, mostly because they didn’t have a financial interest in that sinking ship. They just wanted to take connecting traffic from the airline and let Lufthansa suck up the losses.

UK Travelers – Mixed
Finally, let’s talk about the traveler. The bad news is that any Brits who liked to fly on Star Alliance airlines will now have their options dramatically reduced. And to make things worse, the next best option is just a bigger and stronger British Airways. For some people, bmi provided a good, more manageable option than BA with a nice little mileage program to boot. Those people will be sorely disappointed by this.

On the other hand, we have people who only flew bmi because they had no choice. For example, if you had to fly to Casablanca or Beirut, BA wasn’t an option. In fact, North Africa, the Middle East and some of the former Soviet republics in the south were bmi territory. Though BA seems to be hoping to do more in the Far East with these slots, I imagine that at least some of the existing bmi cities will be able to hold on to service with BA. That can be good for travelers, though it remains to seen what fares would do.

Customers will also pay the price in terms of the Heathrow operation. BA squeezes as much as it can into its Terminal 5 at Heathrow with the rest along with its oneworld partners stuck in Terminal 3. With all these new flights, BA will likely once again be spread across the airport, making connections more annoying for travelers once again. Will they need to keep a presence in Terminal 1 where bmi is today? Ugh, that would be a pain.

Now we just sit back and wait to see if this actually goes through. Will the UK require massive slot divestitures that make this deal a no-go? It wouldn’t shock me. If that happens, then maybe Virgin Atlantic can step back in and make a go at it. I anticipate there will be a lot of fighting before this whole thing is said and done.

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19 comments on “British Airways Wins the Right to Buy bmi: Winners and Losers

  1. How much more was the BA bid over Virgin? Would it have been better for Lufthansa to take the Virgin offer with some conditions, such as applying for anti-trust immunity and revenue sharing on certain routs and membership in Star? That would provide a long term revenue stream from the sale. If United/AC/Lufthansa could add US-London into the revenue sharing, it could have been a win for all of the Star members. Now Lufthansa has basically given up market share forever (or for when BA goes into receivership, whichever comes first).

    1. We don’t know anything about the bids, but speculation is that this was around GBP 300million from BA. You have to assume that the Virgin Atlantic bid was way below it.

      I also wonder if Lufthansa may know something we don’t. For example, maybe in talks with Virgin Atlantic, the airline showed no interest in Star. There is always that risk that Virgin could stay independent or could take its toys over to Skyteam as well. So maybe Lufthansa wasn’t convinced this was going to be a good thing, so it had to discount the Virgin bid further.

  2. The UK may not permit BA to grow which could turn all this around. They could say BA will have to give up slots. Can they stop the sale all together which could put Virgin back in the game?

    But since Britian likes to kiss up to the USA they could follow what the Feds did here and give LHR to BA like the USA gave Delta LGA and USAir DCA. It’s the travelers who will loose since London it a high $$$$ O/D city and making BA more powerful isn’t going to change that.

    1. That’s what I’m thinking is likely to happen. The UK competition people are undoubtedly going to want to extract a pound of flesh from BA for this to go through. You have to assume that BA is prepared to divest some slots but if the UK wants too much, then forget about it. This is far from over.

    2. Just a minor clarification, David:

      “But since Britian likes to kiss up to the USA” should read “But since the British government likes to kiss up to the USA”, as the rest of us think your politicians, like our own, should stop dicking about where they’re not wanted.

      Other than that, I agree entirely with your sentiments!

  3. This goes further in showig that, seemingly, the European countries by themselves are not markets large enough to support more than one major network carrier each. The UK are an interesting exception, but seemingly not so much anymore.

    Air Berlin seems to also be suffering under being second to Lufthansa, however it will be interesting to see what AB and BA come up with if this sale goes through.

    Overall, this is one step towards only three significant blocks left in Europe and I am seeing some similarities to deregulation in the US.

    1. Given the negative for Virgin and Star Alliance overall and the mixed outcome for LH vs BA being a winner, it’s surprising that LH didn’t take Virgin’s bid. Of course, I don’t know how much Virgin was able to offer, but it almost seems like while LH may get some cash in the short term, they likely lose out in the long term with a more competitive BA/IAG.

      Just curious – how much money is Branson plowing into Virgin Galactic while Virgin Atlantic is struggling? Does he actually have any long term successful business left that carries the Virgin brand?

    2. I’m not sure that’s the case in the UK. I think London could potentially support two carriers, but with slot limitations, it’s very difficult to really make a good number two viable. The UK needs more capacity at Heathrow but the government refuses time and time again. With limitations in place, fares will be higher and competition will be limited.

      And Oliver – as for Virgin Galactic, I’m glad to see Branson pumping money in. That’s a business that needs a visionary because otherwise it can’t look like a smart business to invest in. But the Virgin brands haven’t been so successful in the airline world. Virgin Australia is probably the shining star of the portfolio right now.

      1. Visionary or clever marketer who knows he gets a TON of free press out of the Galactic venture? ;)

  4. I think what Lufthansa did not want was another Star brand stealing its thunder or top customers so to speak. VS taking over BMI’s slots will eventually lead to a lot more UK long haul capacity to mostly destinations that BA already serves. Plus, VS is a higher profile brand and could take connecting traffic away from Brussels, Frankfurt, Munich, Vienna, and Zurich (think I got them all). With BMI largely gone, LH is free to poach as much of the UK market as it likes from BA, much as KLM has done.

    As for BA, I see them walking away with 30 slot pairs, about 50% of LHR’s slots, with the remaining 3% or 18 slot pairs being divested to say Virgin or another competitor, ala a blind auction as the FAA will do for LGA/DCA. Personally, I hope Jetblue bids because LHR would be a perfect extension of JFK/BOS service on A330’s but I doubt that will happen.

    BA could spin it much as Delta/US have done, providing more competition on routes not served by British carriers and more service to small cities in the UK such as Inverness, Belfast City, and maybe even some of odd balls such as Douglas/Isle of Mann or Blackpool. Amman, Casablanca, Dublin, Freetown, and a few other profitable ones (ie Amman would be more profitable for BA than BMI due to Royal Jordanian’s feed). Underserved international destinations such as Seoul, Ho Chi Minh City, Guangzhou and a few second tier Chinese cities, Karachi/Lahore, Jakarta/Kuala Lumpur, Perth (via Singapore), Auckland (Via Singapore or LAX), Taipei, Manila, Colombo, Charlotte, Minneapolis/St Paul, Lima, Santiago de Chile, Durban, Harare, and many many more.

    1. Some of these could also happen when BA 787’s are delivered. Nice list of destinations there Zack. Most of them are good, B6 to LHR with A330’s ain’t happening :)

      VS better be forced to pay market price if slots are divested. However I don’t think BA need to spin anything about competition. The UK government understands the threat of Gulf carriers, and BA sees more competition on 5 dailies to DXB than LH sees in a whole day at FRA or MUC.

    2. Some of these could also happen when BA 787’s are delivered. Nice list of destinations there Zack. Most of them are good, B6 to LHR with A330’s ain’t happening :)

      VS better be forced to pay market price if slots are divested. However I don’t think BA need to spin anything about competition. The UK government understands the threat of Gulf carriers, and BA sees more competition on EK’s 5 dailies to DXB than LH sees in a whole day at FRA or MUC.

    3. If Lufthansa had tried to bring the new airline in on a joint venture across the Pond, then it would have become more interesting. Maybe Virgin Atlantic wasn’t interested since it spent so many years fighting the BA/AA joint venture.

  5. Too many things to think about, so I’ll list em. (Love the image, BTW)

    1. Some of the niche BMI destinations will be great for BA (e.g. Baku). Some might move to Gatwick, and some Gatwick destinations will come to Heathrow. You can also bet to see Kuala Lumpur on BA to connect with future OW member MH, and probably Seoul.
    2. LH would rather BA be strong than Etihad (through VS) get a hold of a sizeable chunk of Heathrow slots.
    3. UK travellers should not worry. Star needs to work together a la SkyTeam at Heathrow to create a substantial operation feeding the other Star hubs. I think between LH, SN, Swiss, and possibly SAS they can feed Star connections to the rest of the UK, and connections in mainland Europe may be easier.
    4. VS had plenty of chances to buy BMI when BA was in trouble for the last couple of years. They seem to be looking for free or reduced price slots which is not going to happen. Even when AA/BA went through it was DL, not VS that took those BOS/MIA routes.
    5. Yes, this will complicate the LHR terminal situation once again. But that’s the least of the problems right now.
    6. Overall I think SkyTeam and AFKL/CityJet are the big winners. KLM has amazing coverage from 12 destinations in the UK to AMS (London’s third airport) and if Star doesn’t step up I see SkyTeam making some moves in the UK market to solidify second place.

    1. On point 6 there’s nothing preventing Virgin Atlantic from deciding to join up with Skyteam down the line either. It could be a good fit for the airline. That could really help boost Skyteam if it wants to make a run at London.

  6. This is all coming about because of the Aviation polices of the UK, UK Airports are being frozen in a time warp, and people complain there are no jobs or money and also say I don’t want this infrastructure in my back yard because it upsets the Robin Red Breasts, Its a port/s for god’s sake and like in the yesteryear if you have no outflow or inflow into your economy then your country and work is going to be restricted and you are going to lose vital trade, That BA have had to buy space to expand is ridiculous in this day and age and global economy economics, Airports are now the vital trade links to you countries business system.

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