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Welcome to London Air Travel’s Monday Briefing for the week beginning 18 April 2022.
On this Easter Monday we take a look at how ten years ago this week a decades long rivalry at London Heathrow came to an end when its second largest airline, bmi, came to merge with BA.
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The Battle Of The Breakfasts
For 30 years BA and bmi were fierce rivals at London Heathrow.
In 1982 bmi, then known as British Midland Airways, started to compete against BA’s relatively spartan domestic Shuttle services with the promise of better service and lower fares.
BA lost a third of its market share from London to Glasgow and Edinburgh to bmi.
One year later, this prompted BA to radically improve its own offering with a rebranded “Super Shuttle” service with complimentary food and drink and allocated seating.
BA marked this with three Concorde shuttle services to Glasgow on the day of its launch.
bmi was, by some distance compared to other airlines, the second largest at Heathrow.
Whilst bmi had nowhere near global marketing clout of BA, nor the PR savvy and chutzpah of Virgin Atlantic, it inspired loyalty from its frequent flyers.
bmi had more stable industrial relations than BA at Heathrow. Many domestic passengers complained BA would always cancel domestic flights first during disruption.
For many years, bmi was deeply frustrated it could not fulfil its ambition to launch transatlantic flights from Heathrow. Due to then Bermuda II treaty, BA and Virgin Atlantic were the only UK airlines that could do so.
bmi even had a fleet of Airbus A330 aircraft which were subsequently used to operate routes from Manchester to the US and Caribbean.
As the sole UK member of Star Alliance bmi also had the financially and operationally thankless task of providing short-haul feed to Star Alliance airlines at Heathrow.
bmi’s Reinvention
Facing increased competition from low cost airlines, bmi sought to reinvent itself as a medium / long-haul airline.
Whilst the difficult launch of Mumbai following the expansion of UK – India traffic rights proved to be short-lived, bmi did launch services to Jeddah and Riyadh in Saudi Arabia and Cairo and Moscow. In the case of the latter it beat Virgin Atlantic to secure traffic rights from the CAA.
bmi also acquired former BA franchise partner British Mediterranean in 2007. This bolstered bmi’s portfolio of medium-haul routes, but many of these were to regions exposed to geopolitical events.
Enter Lufthansa
How bmi came to be acquired by BA dates back to 1999.
bmi’s controlling shareholder Sir Michael Bishop entered into a “put and call” agreement with Lufthansa.
Lufthansa acquired a 20% share of bmi for £91.4m from SAS which held a 40% stake in the airline. This valued the airline at £457m. Lufthansa, along with SAS, would underwrite their shares of bmi’s losses on short haul services. bmi would also join the nascent Star Alliance.
Sir Michael also made a deal where he could exercise an option to sell his controlling stake in bmi of 50% plus one share to Lufthansa for £298m.
In 2008, Sir Michael exercised his option. Lufthansa baulked at the price and reached an out of court settlement. Lufthansa paid Sir Michael £175m to give up his option right and £48m to acquire his share, valuing the airline at just £98m.
Although this was seen by some as a major opportunity for the dominant Star Alliance airline to gain a foothold at Heathrow, it did not turn out that way.
Lufthansa, which is used to having Number 1 positions in its home markets, indicated early on that it might sell bmi.
Lufthansa had to make a number of cash injections into bmi by acquiring the airline’s Heathrow slots and undertaking debt-for-equity swaps. It also suspended a number of routes such including domestic services to Glasgow, Leeds-Bradford and Teesside. International routes to Amsterdam, Brussels, Kyiv and Tel Aviv were also suspended.
That is not to say Lufthansa did not try to turn bmi around. As you can see from the internal video below there were attempts to reposition the airline with reconfigured aircraft and a well received “Great British” international lounge at Heathrow Terminal 1.
At the time Lufthansa had a much more decentralised approach to its subsidiary airlines which had considerably more autonomy compared to IAG. Arguably, if Lufthansa had pursued back office synergies more vigorously – even if this meant unpopular decisions – it could have at least contained its losses.
Lufthansa Puts bmi Up For Sale
In 2011, faced with continued losses and geopolitical instability in many of its markets, Lufthansa decided to entertain offers to buy bmi.
In spite of Virgin Atlantic once again making a lot of noise about merging with bmi, IAG emerged as the only credible bidder. It took control of bmi on 20 April 2012. The whole episode was reported to have cost Lufthansa around £1 billion.
IAG also bought bmi’s sister airlines, bmi regional and bmibaby. The former was subsequently bought by private investors but closed in 2019. The latter was shut down by IAG.
Although merging bmi into BA seemed an obvious move, some at IAG wanted it kept separate due to its lower cost base. BA pilots had to make concessions to ensure that the two airlines were integrated. Though IAG CEO Willie Walsh later said it had no plans to keep the bmi name because of its lack of brand recognition outside the UK.
As part of the deal, BA was required to make slots available to competitors on overlapping routes such as Aberdeen and Glasgow. These were initially taken up by Virgin Atlantic Little Red, and then Flybe.
bmi’s route authority to fly to Moscow was re-advertised by the CAA. Virgin Atlantic once again lost out with easyJet securing the route authority.
Suspended bmi Routes
BA wasted little time reshaping bmi’s Heathrow route network. Many bmi routes were suspended in a matter of months:
Damascus – 29 May 2012
Addis Ababa – 10 June 2012
Dammam – 16 September 2012
Bishkek, Khartoum – 1 October 2012
Tehran – 12 October 2012
Yerevan – 13 October 2012
Amritsar, Casablanca – 28 October 2012
Tbilisi – 31 March 2013
Freetown – 6 August 2014
Agadir – 26 October 2014
Almaty – 11 October 2015
Baku – 26 April 2016
Bergen – 28 October 2017
Stavanger – 28 October 2017
Beirut – March 2020
Very few routes inherited from bmi now remain at BA. The principal ones are Amman, Belfast, Dublin and Hannover.
For BA it meant a return to its former home in Terminal 1 where the airline would stay until it operated the last flight out of the terminal, BA970 to Hannover on 29 June 2015.
With bmi aircraft quickly rebranded there is very little trace of bmi that remains at BA. BA did retain four Airbus A321 aircraft in a “medium haul” configuration to serve routes such as Amman and Moscow. These have not flown since COVID-19.
10 Years On
IAG has always prided itself on “transformational” change. Buying bmi was arguably its single biggest deal, bolstering BA’s position at Heathrow.
IAG has tried to replicate a similar deal for Iberia in Madrid by buying Air Europa. Even though competition authorities are opposed to the deal, IAG remains adamant it can pull this off.
With IAG carrying a significant debt burden post COVID-19, it’s unlikely we’ll see a similar transaction for some time.
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