If there’s one prediction that would have seemed implausible just ten years ago, but came to be true, it’s that bmi British Midland would be merged into British Airways.
bmi British Midland (“bmi”) and BA were fierce rivals at Heathrow. Although bmi’s history is almost as long as BA’s it was in the 1980s that BA and bmi started to compete head to head on domestic routes at Heathrow, initially to Glasgow to Edinburgh.
This was at a time when route authorities were granted by the Government. BA even went to court to try and prevent the Government from granting bmi to launch a service from Heathrow to Belfast.
“The Friendly Independent”
Positioning itself as the “friendly independent”, bmi competed against BA’s Shuttle services promising better service and lower fares.
BA lost a third of its market to Glasgow and Edinburgh to bmi. This prompted BA to radically improve its own offering with a “Super Shuttle” with complimentary food and drink.
Whilst bmi was by some distance the second airline at Heathrow and it had nowhere near the international presence of BA, it inspired tremendous loyalty from its frequent flyers. It had far more stable industrial relations than BA at Heathrow. Many domestic passengers also complained that BA would always cancel domestic flights first in the event of operational disruption.
For many years, bmi was deeply frustrated that it could not fulfil its ambition to launch transatlantic flights from Heathrow which, due to the Bermuda II treaty, BA and Virgin Atlantic were the only UK airlines that could do so. It had even acquired a fleet of long-haul Airbus A330 aircraft which were subsequently used to operate transtlantic routes from Manchester. As the UK member of Star Alliance it also had the financially and operationally thankless task of providing short-haul feed to Star Alliance airlines at Heathrow.
Facing increased competition from low cost airlines, bmi sought to reinvent as a medium / long-haul airline. Whilst the difficult launch of Mumbai proved to be short-lived, it did launch services to Jeddah and Riyadh in Saudi Arabia, Cairo and Moscow. bmi also acquired former BA franchise partner British Mediterranean in 2007. Whilst this bolstered bmi’s portfolio of medium-haul routes, many of these were to areas very exposed to geopolitical events.
How bmi came to be acquired by BA, dates back to 1999 when bmi’s controlling shareholder Sir Michael Bishop entered into a “put and call” agreement with Lufthansa.
In 1999, Lufthansa acquired a 20% share of bmi for £91.4m, which valued the airline at £457m. Sir Michael also made a deal whereby 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 with Sir Michael. 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 commentators as a major opportunity for the dominant Star Alliance airline to gain a foothold at Heathrow, it did not turn out that way.Continue reading “BA100: 36. The Friendly Independent, bmi British Midland”