Niche player unafraid of aviation's giants

A straight talker with an eye for the big picture, Sir Michael Bishop says the global aviation industry is ripe for consolidation.

Yet the executive chairman of British Midland claims small airlines can survive the change. And Midland, which recently joined the Star alliance of carriers, will be no exception, he says. Such consolidation as may happen will not lead to the carrier being floated, adds Sir Michael, whose 56 per cent stake in the airline is worth more than £255 million sterling (€407 million).

But surely small companies such as Midland and Aer Lingus will be vulnerable to takeover by ever-larger airlines as consolidation takes hold? "Not necessarily," he replies. "There are big players and profitable smaller players. And whatever happens in global consolidations, there are always niche players."

Like many other observers, Sir Michael cites Swissair's planned takeover of the Belgian carrier Sabena as a "very, very significant step".

This is the first time, after all, that an attempt by one national European carrier to subsume another looks like succeeding. In addition, the more recent revelation that British Airways and the Dutch carrier KLM are discussing a "possible combination" of their businesses has fuelled the sense that significant change is underway.

In the US also, major airlines are attempting to forge links.

"We've never been a globally-managed area because of national interests, but that's beginning to be swept away. What we're seeing now is the beginning of a new phase," says Sir Michael. "But this is an extremely fraught area."

Critical here are the bilateral arrangements between states which govern the ownership of airlines. For example, in most EU states, the Republic included, airlines which fly to the US must be 51 per cent owned by nationals of that state.

As things stand, this will have implications for the planned flotation of Aer Lingus, whose shares must be sold to a majority of Irish investors.

That will be just one of the issues facing the State airline's new chief executive Mr Michael Foley, who was appointed this week.

Nevertheless, Sir Michael says the overall system is likely to change. Initially, he suggests, carriers are likely to be reclassified as EU-owned rather than nationally-owned.

But is there any political appetite to implement such change? "What's actually happening is that the very rapid change in the industry's infrastructure is moving faster than governments are moving."

He adds: "The public is out of synch with the concept of the national airline. . . In this day and age, the consumer doesn't care, provided the company has an established pedigree and value."

As for British Midland, Sir Michael sees his immediate priority as bedding down the airline's membership of the Star alliance, whose members include Lufthansa and United Airlines of the US.

A competitor to OneWorld, of which Aer Lingus, British Airways and American Airlines are members, Star is regarded as one of the strongest groupings.

Members gain by introducing "code-sharing" arrangements. This gives airlines access to a greater spread of customers as connecting flights between different carriers are regarded as a single journey for booking purposes.

A possible difficulty, however, is that such groupings are regarded as transient or fickle by industry observers. In a situation where the control of leading global airlines is at stake, many analysts argue that membership of a particular alliance will take second place to the more fundamental question of ownership.

Sir Michael agrees that the point has been made. But he maintains that members of the Star alliance are "pretty solid citizens". A further strength, he adds, is that its co-member Lufthansa has taken a 20 per cent stake in Midland for some £91 million. This was acquired from another co-member, the Scandinavian carrier SAS, which retains a 20 per cent stake in Midland. Sir Michael sees that the airline is "locked" into the alliance by means of these minority shareholdings.

Long term, Star wants to create a European hub at London's Heathrow airport similar to the US hub at Boston airport.

OneWorld and Star control about 80 per cent of landing slots in Boston and Sir Michael argues that this offers "genuine competition" to passengers.

Star expects to have 30 per cent of the slots at Heathrow, in competition with OneWorld's 50 per cent, controlled largely by British Airways. Developing slots at Heathrow has been at the heart of Midlands' investment strategy and the company now holds the largest number after British Airways.

Outside the alliance Midland will concentrate on developing new routes in Europe and the US. The company has introduced services from Heathrow to Madrid, Milan and Rome this year, adding to its existing business from regional centres in the UK and London to cities throughout western and central Europe, and Dublin.

From next year, Midland will enter the US market for the first time on a scheduled basis. The airline operated charter services to the US from 1970 to 1983. While it has secured licences to fly scheduled services into 11 major cities, Sir Michael says this business will take up to seven years to develop.

Only then might an initial public offering on the stock exchange be considered. The company can raise the capital it requires without floating, Sir Michael says, and he is comfortable with its current growth rates of between 5 and 7 per cent each year.

"You should only float if you're comfortable that the post-float situation will provide regular dividends and profits. . . What you have to demonstrate is that you can incrementally increase the business every five years.

"As far as British Midlands is concerned, we're always ploughing our profits back into the business."

He adds that he is not ideologically opposed to the notion of a flotation, stating that British Midlands floated part of its business, which included Manx Airlines, in 1998.

However, the long-term ownership at Midland pans out, Sir Michael is committed to the "full-service" airline business. He states openly that the airline gave serious consideration to adopting the low-cost model when it reassessed its strategy three years ago. There were potential gains, he says, although Midland has repositioned itself in the "least expensive way".

While a move from the full-service market would have had serious implications for the airline's 5,500 staff, Sir Michael does not hide his admiration for Ryanair's boss Mr Michael O'Leary.

Describing Mr O'Leary as one of the most talented people to enter aviation in the past 20 years, Sir Michael is well qualified to make the remark.

Like O'Leary, who has turned around the fortunes of the Irish carrier and grown its business significantly, Sir Michael has seen strong growth at British Midland, which is now worth some £457 million sterling. He acquired 75 per cent of the business for £1.87 million sterling in 1978.

The difference between the low-cost model and the full-service approach pursued by British Midland is "fundamental", Sir Michael says. He describes the Irish company as a "pure" low-cost operator, more focused on the concept than its rivals EasyJet, Go and Virgin Express.

So what of the Irish carrier's lengthy campaign against Aer Rianta's landing charges at Dublin Airport? "Looking across Europe at a range of different airports, there's nothing particularly outrageous about Aer Rianta's charges. But the truth of the matter is that, if the airport was structured in a different way, they could be cheaper."

Arguing that the entire State-owned company should be floated, he dismisses proposals to float up to 49 per cent of Aer Rianta. "What the politicians don't say is that they like playing with airports. Nobody wants to deal with the industrial relations situation and everyone wants to look away from the real issues."

Of Aer Lingus, he says he doesn't see "strategic value" in taking a stake in the State-owned carrier. "It would only make sense if Aer Lingus was in the same alliance."

He adds that regulators might find a possible conflict of interest because of Aer Lingus's ownership of slots at Heathrow. Any airline contemplating flotation should have modest ambition, but prospects for steady growth and profitability, he says. Sounds like British Midland all over.