Privatisation of British Airways: Its Management and Politics 1982-1987

Kyohei SHIBATA

EUI Working Paper EPU No.93/9 European University Institute, Florence, Italy, 1994.

III. 1984: Opposition to route transfer

1983 was a good year for the international air transportation industry. The growth of traffic continued to 1984. As BA had already succeeded in cost reduction, the company posted a series of record profits. However, the more it became profitable, the bigger the concerns of other British air carriers, who were afraid of being overwhelmed by a privatised BA. They argued that BA, if privatised without some trimming, would be too formidable a rival to compete with, and that the government should transfer a part of its routes to independent carriers to secure a competitive environment. Their argument was strengthened by CAA, who proposed route transfer and wanted, as its own preparation for an era of deregulation, more power in economic regulation of airlines' behaviour. Led by King and Marshall, BA fiercely fought against these proposals, and carried the day. Indeed many decisions and actions taken in 1984 by BA, other carriers, and the government, were more or less related to the issue of route transfer, and therefore, to the issue of privatisation. This chapter deals with, first, preparatory steps taken by BA toward privatisation, then the controversy on route transfer, and lastly, fare alterations for domestic, European, and transatlantic destinations.

(1) Preparatory steps toward privatisation.

As stated in the previous chapter, King was in favour of flotation in autumn 1984, but the government decided to privatise British Telecom first. There was no question that BA was next in line, but guesses as to the date ranged from February to March 1985. As the government never specified the date[1],the reasons why this period of the year was chosen remain uncertain. Generally the capital markets are not very buoyant in these months, when institutional investors tend to be on selling side, in preparation of making reports on their investment performance. Probably the government, the sole shareholder of BA since April, was needed to report gains for itself. The timing also would suit BA, having adopted an April-March fiscal regime. Or the capital market, it might have been thought, would be ready to digest BA shares half a year beyond BT flotation.

The management tried to introduce cost controls in two aspects: labour costs and the pension scheme. The pay deal the management offered was to cover two years, worth 4% in the first year with a minimum rise of £6 and 5% in the second. On the other hand, King had already announced in the previous November a profit sharing scheme, under which the employees would be rewarded a bonus equal to a week's pay for each £50m of operating surplus made by the company over £150m.

There were several bargaining bodies in BA on behalf of employees: technical engineering staff, engineering and maintenance staff (6,700), engineering and technical supervisors (1,750), clerical and administrative staff (10,000), pilots (2,400), ground service staff (4,800), flight attendants (430), and cabin crew (4,500), which was composed of long-haul cabin crew (2,800) and short-haul branch (1,700). All employees were proposed the same offer.

On 9 January, engineering and maintenance staff rejected the offer and demanded a higher one-year offer, and went on strike for two hours on 16 January, again for twenty-four hours on 31 January, which caused cancellation of nine long-haul flights from Heathrow. The cabin crew, who were all members of the Transport and General Workers Union, a national labour organisation, also turned down the offer on 17 February, on the grounds that their pay was among the lowest in the industry. A week later, they went on strike for twenty-four hours, grounding more than 90% of flights from Heathrow. Engineering and technical supervisors also rejected the offer at first, but did not take any serious action. The remaining groups accepted.

The management took a hard stance. For example, Howard Phelps, director of operations division, warned cabin crews of suspension of payment up to a month, withdrawal for twelve months of travel concessions (90% discount) and loss of shop stewards' rights. In March, both groups lifted the threat of strike and accepted the original offer.

Obviously, the aim of the two-year deal was to leave no uncertainty about labour cost for the coming period of privatisation. A further step was taken in June when the management withdrew a management directive, known as Group Instruction 64, that no engineering work should be put out on subcontract without the engineering and maintenance staff union's approval. At first the union protested with a threat to black any planes or parts sub-contracted without their consent, but agreed to it once their consultative role was reaffirmed[2]. The management also tried, though failed, to introduce part-time cabin staff and short-time contract for some full-timers.

The pension scheme of BA had been frequently referred to as a major hurdle, alongside its debt, to be cleared before privatisation, since it was fully indexed to the inflation rate. The latest actuarial valuation of the funds at 30 September 1982 was £2,371m for current, deferred and prospective liabilities, representing an average annual increase rate of 6.2% from three years earlier. The employees' rates of contribution, which were different from one job category to another, and by sex, ranged between 7.0% to 8.5% of their salaries[3]. Contributions made by the company averaged 2.3 times employees' contributions as of 1983-84 period. Reflecting the decrease in manpower, the company's contributions were in downward trend: £72.4m in 1981-82, £66.9m in 1982-83, and £59.9m in 1983-84[4].

However, once privatised, BA would be obliged to fill any deficits in case the current asset of the fund was over-estimated. This meant, from the government's point of view, the proceeds of the sale would be reduced by an uncertain amount. From prospective investors' point of view, it meant an equally uncertain portion of their investment would be transferred to an account that contributed nothing to the company's finance. Finally, from the management's point of view, an arrangement that was linked to the Retail Price Index bound the company to honour an un-negotiable bill of inflation every three years.

Dunlop, the financial director, who started reviewing of the scheme in 1982, gave new pension proposals on 25 January to the company's sixteen unions and to the twelve trustees of the pension fund. Under the new scheme, pensions were to be protected against inflation only up to a 5% rise, and benefits would include the basic state pension instead of being in addition to it[5]. On the other hand, the new scheme offered a two percent reduction in contribution levels and, if opted, longer pensionable service. The employees were offered three choices: either to remain with the old scheme, to switch to the new scheme, or to take a lump sum cash in switching to the new scheme but without longer periods of service.

BA appointed Hogg Robinson Benefit Consultants as advisor to employees, who promoted an extensive campaign of presentations. When the deadline came at the end of June, BA announced that 17,000 out of 32,000 had opted to change. The cash payment, a strong inducement, to those who had opted was estimated to be around £80m. Seemingly no union took serious action against the new scheme. This sum can very well be regarded, together with lost revenues caused by strikes over the pay matters, as a cost to reduce uncertainty in payroll[6].

In parallel, a number of agents were appointed for flotation preparations. One noticeable feature of these appointments is that BA and the Department of Transportation (DoT) chose their own teams quite independently. Already, Lazard Brothers had been appointed as merchant bank advisor. In March, BA named Rowe & Pitman and Phillips & Drew as stockbrokers. They made no secret about their intention to look for institutional investors[7]. On the other hand, the DoT had appointed Hill Samuel as its own merchant bank advisor for BA's flotation. In February Hill Samuel started formal procedures to select stockbrokers, which led to the appointment by DoT of Wood Mackenzie and Cazenove two months later[8]. In June, DoT appointed Valin Pollen to handle public relations for the privatisation, while BA had its own PR subcontractor, Shandwick[9]. Obviously King wanted his own advisors and agents[10]. During the controversy over route transfer, he cited often Lazard as City's opinion that the implementation of CAA proposal would seriously hamper and delay the privatisation.

(2) Controversy over route transfer.

In reviewing civil aviation policy, CAA invited any interested parties to submit suggestions and comments. More than one hundred airlines, travel and consumer groups addressed various proposals[11].

Roy Watts, who left the company the previous year, claimed the national interest of Britain would best be served by a single strong international carrier, rather a minority opinion and which the Federation of Air Transport User Representatives in the European Community objected[12]. The Air Transport Users Committee, a statutory body, urged a slimming down BA[13]. Britannia Airways, the country's biggest charter holiday airline and a part of the Thomson Travel Group, argued that BA should withdraw from the whole-plane charter business and should spin off British Airtours before privatisation[14]. Orion Airways of Horizon Travel and Air Europe of Intasun Leisure Group, who were also charter airlines, joined this view[15]. BCal itself sought flotation, declared itself ready to spend £250m for route transfer, and then urged delay of BA's privatisation[16]. The routes BCal wanted to take over were revealed at the end of June[17]. Air UK and BMA argued that BA should withdraw from all its domestic routes except shuttle services between Heathrow and Glasgow, Edinburgh, Manchester and Belfast[18]. BA submitted its own comment on February 1st, stressing, among other things, that route transfer would not promote competition but seriously hamper its privatisation scheme[19], all the while posting a net profit of £214m for 1983-84 and becoming one of the most profitable airlines of the world.

On 16 July, CAA published its view and sent it to the government. The report, Civil Aviation Policy Review (CAP500), was composed of five main recommendations[20]. First, it recommended to transfer to the independents BA's routes between continental Europe and domestic regional airports (Gatwick, Aberdeen, Belfast, Birmingham, Edinburgh, Glasgow and Manchester). Second, transfer BA's routes between Heathrow to Hahare (Zimbabwe), Dhahran and Jeddah to BCal. Third, increase the proposed limit of slots at Heathrow that had been set in connection to the construction of Terminal Four. Fourth, increase of direct competition on domestic routes through abolition of licensing about fares and entry, except in the case of Heathrow and Gatwick. Fifth, increase CAA's own regulatory powers to prevent BA from abusing its strength in charter markets, while rejecting the idea of hiving off British Airtours. Concerning the first and second points, CAA urged the government to take legislative measures.

Of course, CAA was acutely aware that transfer of international routes did not lead to an increase of competition. Competition, especially price competition, can only take place in the same market. In air transportation economics, a market means a pair of cities, i.e., a route. If BCal took over an international route from BA, it simply meant a replacement of a player by another in a duopoly game, in which the foreign airline, the counterpart, most usually operated based on a pooling agreement. If BCal wanted a new fare that was unacceptable to its counterpart, the foreign government would simply reject the proposal. In this regard, BA's argument was legitimate that route transfer would not increase competition and that it would welcome competition under dual (or multiple) designations. However, CAA's main intention was to create the "second force" airline that the Edwards Committee proposed in 1969 before the merger of BOAC and BEA[21]. The Authority maintained that the transfer would have an effect to reduce BA's scheduled service revenue by around 7% and thus would not hamper its privatisation.

BA countered CAA in announcing its own estimate that a full implementation of CAA proposals would result in a loss of £300m in annual revenue (more than double the CAA estimate), £76m in profits, and a further redundancy of 3,600 employees. Then BA would, King stressed, need to create a new track record of profitability, and added:

"Any privatisation would be put back by four years or more -- beyond the life of this Government[22]."

Indeed this was his most powerful weapon during the ensuing months of intensive lobbying. When John Dent, CAA chairman, criticised BA's over-reaction, the company responded vehemently that "any postponement of privatisation or reduction in the price that may be obtained would arise only from the threat to BA contained in the CAA review[23]." On the other hand, Jim Harris, BA's director of marketing, suggested an entire withdrawal from Manchester airport if BA's European routes from the airport were transferred, threatening a loss of 1,000 local jobs[24].

Of course the independents also launched an extensive campaign as well as lobbying. Eight of them appealed directly to the prime minister[25].

The government was split. Ridley and George Younger, Scottish secretary, supported CAA proposals, while Norman Tebbit, Secretary of State for Trade and Industry, a former BOAC pilot and a friend of Roy Watts, and Nigel Lawson, Chancellor of the Exchequer, supported the idea of privatising BA unhampered. The government was not able to produce its own view in response to the last rise of the Commons before summer recess, and set up a cabinet committee[26]. The next cabinet meeting was to be held on 13 September. Then, a hot summer started.

BCal had already applied for a wide range of new routes immediately after the CAA review was published[27]. BMA and Air UK followed suit for fifteen European routes from Birmingham and Manchester[28]. Air Europe proposed to take over BA's Iberian services from Gatwick[29]. BMA wanted to establish a hub at Birmingham and applied for domestic and European routes serviced by BA from the airport[30].

BA, while lobbying aggressively, declared it would not object to BCal's applications to CAA and would welcome the competition[31]. On 5 September, Marshall, at the occasion of announcing a record operating profit for the first quarter, proposed to share twelve international routes with BCal on fixed capacity ratio (80% to 90% for BA)[32].

On the other hand, the management made it clear that if ordered a route transfer, it would not obey the government, so that the government would be obliged to dismiss the board members[33]. Furthermore King reminded everyone that the government had given promises of "no arbitrary transfer" before privatisation[34].

The cabinet deferred decision, primarily due to failure of finding compromise. While Ridley tried to work out one behind the scene, a new limit was set for 5 October, the last cabinet meeting before the Conservative Party conference. The final result was a surprisingly self-contradictory statement of policy, published on 5 October[35].

In this white paper, the objectives of airline policy were "to encourage a sound and competitive multi-airline industry...strong enough to compete aggressively against foreign airlines...; to promote competition in all markets...; to ensure adequate safeguards against anti-competitive or predatory behaviour...; to put the ownership of British Airways into the hands of private investors..[36]." But the decisions stood in sharp contrast.

First, "[t]he Government has decided that there will be no forced reduction in British Airways' size relative to the rest of the industry[37]" because "[u]ncertainty affecting the privatisation of British Airways must be resolved[38]" and, after all, "the independents have grown despite British Airways and should continue to be able to grow given fair competition[39]". On the other hand, BA was to help the independents other than BCal in providing up to £450,000 for each of 15 new route developments undertaken by them from regional airports, which was a de facto subsidy to its rivals[40]. BA's route transfer would not take place. "The Government has received strong representations from local authorities and other interests that British Airways should retain its regional presence[41]" and admitted "a risk that without the major airline operating from Manchester and Birmingham both airports would become less attractive[42]."

Second, the competition must be cautiously promoted because "on some routes for example, both domestic and international, demand is probably too low at present to support more than one British carrier[43]." And "the best prospects for introducing extra competition lie in the short haul routes to continental Europe...[44]" since "[t]raffic on many of the short haul routes is sufficient to support competing British airlines[45]." Clearly the text omits the possibility of increase in traffic to be generated by price-competition. Under competition, airlines struggle to maintain, or increase, their profitability out of lower yield (revenue per passenger distance carried) through cost-cutting and larger traffic volume. If deregulation means where, when and how to generate traffic or to snatch rivals' share are largely or completely at operators' discretion and risk, the above argument is, to say least, very paternalistic.

Third, the government "strongly endorses the Authority's proposal to introduce an area licensing facility...between any two points in the UK [excluding Heathrow and Gatwick],...also welcomes the Authority's proposal that domestic fares should no longer require specific approval[46]", while refusing to give CAA powers against anti-competitive or predatory behaviour on the grounds that "the Authority can attach appropriate conditions to an air transport license...and refuse lower prices[47]". Instead, the Office of Fair Trading and Monopolies and Mergers Commissions were endorsed to handle anti-competitive behaviour.

Probably the whole affair was an inter-ministerial power struggle between CAA and DoT over air transportation policy, judging from a bold statement that "[a]fter very careful consideration the Government has concluded it is unnecessary for the Authority to be given a duty to promote the sound development of a competitive British airline industry[48]."

If CAA was the loser, BA was undoubtedly the winner. Route transfer was wholly rejected. Instead, a deal of swapping some routes between BA and BCal was forged. BA would hand over Jeddah and Dhahran in exchange with BCal's routes to South America. In addition, BCal would surrender licenses to Denver and Morocco, and would not oppose BA's application for Orlando and Tampa[49]. BA was allowed to move its Iberian services from Gatwick to Heathrow[50]. It is no wonder, for example, that Dan Air's chairman fiercely criticised the white paper[51]. It is also curious why BCal did not show discontent. Probably Thomson was glad to take over the routes to Saudi Arabia, so lucrative as to be nicknamed "bankers' route", in exchange for the South American network that had been severely damaged due to the Falklands War.

The talk between BA and BCal began five days after the White Paper was published, and two weeks later agreement was reached to take over each other's routes from March 31 of the next year[52].

The tactics employed by the BA management throughout this crucial controversy were widely ranged, from persuasion, appeasement to open threat. Apart from lobbying and persuading ministers and MPs, it threatened an entire withdrawal from regional airports and secured their support against route transfer; it made clear the intention to defy an order for route transfer with a threat of industrial actions by its unions, together with a threat to blow up the prospect of privatisation if management changed. Also, it was, as we shall see in the following sections of this chapter, active in promoting lower fares, or at least, cautious not to appear as opposed to lower fares, both domestically and internationally. Furthermore, decisions and declarations on purchase of aircraft seems to be politically steered.

As early as January, BA showed a renewed interest in the A320. King met Bernard Lathière in London, president of Airbus Industrie, and paid a visit to the constructor's headquarters at Toulouse in March[53]. Besides Airbus, BA ordered three BAe (British Aerospace) Super 748s for £9m on 10 May[54]. Then on 14 September, the day after the cabinet deferred its decision over the air transfer row, BA formally declared its interest in the A320[55]. Three days later, King gave a personal endorsement to another British-made aircraft, BAe 146, but did not forget to add that the aircraft would be used on its European routes so that route transfer would affect the final decision adversely[56]. No doubt all these aircraft were economical, quiet, and advanced; but it is equally true that these announcements were carefully timed.

As the White Paper admits, regional interests were strongly against route transfer. Manchester International airport opposed the replacement[57]. British Chamber of Commerce and Industry stood on the side of the regional airports[58]. West Midlands Council, the owner of Birmingham airport, opposed the transfer of BA's services from the airport and stated typically:

"...British Airways as the national flag carrier does carry a major prestige factor for the airport, and we strongly believe that as in other European countries, the flag carrier should be operating from major regional airports[59]."

In addition to practical concern about loss of jobs resulting from withdrawal by BA, we find here reflection of two particular assumptions. The first is that status of an airport or the region is affected by having or losing the national flag carrier's service. This is rooted in the second assumption of national flag carrier. Certainly it is wrong to think that BA was not Britain's national flag carrier. But it would also be an obsolescent belief that a country should possess a national flag carrier. If international air transportation deregulation means lower fares and intensive competition through dual or multiple designation (or through no designation process at all), any government who wishes to obtain political gains out of its implementation should necessarily be prepared to have as many competent airlines as possible.

If so, this also suggests an explanation as to why the deregulation of international air transportation has been particularly upheld by such countries as the U.S. and UK. Deregulation of domestic air transport gives rises of venture-minded operators, who, as new entrants, are necessarily prepared to offer cheaper fares. On the other hand, the highly standardised operational procedures and technical requirements in the field of aviation make them, almost from the outset, able to operate on international routes, especially to nearby destinations. Needless to say, possession of this new breed of airlines is a prerequisite for a government that wishes to gain some possibly political advantages in pursuing the policy of international deregulation. In Europe, UK and the Netherlands were the earliest to develop multi-airline industries, out of which they could afford to become "liberal"[60].

To put it otherwise, "the" national flag carrier in the sense of "chosen instrument" was being outmoded, at least for the industrialised countries where consumers cried out for cheaper air transport[61]. The Civil Aeronautics Board, if not the US government, was clearly aware of this implication of deregulation, when it refused Pan Am permission to take over bankrupt Braniff's Latin American routes in 1982. The other governments were slow to realise the change. Also, the government of the People's Republic of China still regarded Pan Am as the national flag carrier of the U.S., and protested to Washington as Pan Am resumed its Taipei service in June 1983, while allowing Northwest Airlines to serve the both countries across the Taiwan Strait[62]. As the posterior course of events showed, the U.S. could do without Pan Am, essentially because it had many other pawns in hand that became competitive out of fierce domestic struggles. In fact, the U.S. had, and still has, more competent airlines than any other country. Therefore, the need for a "second force" airline arose not only from the concern for consumers, but also from the sheer necessity of, say, national interest.

(3) Domestic competition.

London-Edinburgh and London-Belfast routes were the main field of competition that year. Also, BA announced an expansion plan from Manchester to foreign destinations. In all cases, BA at first responded selectively to BMA's challenges, and then used its muscles.

In December 1983, BCal announced a weekend return fare of £60, instead of the normal £118, for Gatwick-Edinburgh flights. BMA brought down its Heathrow-Edinburgh return fare to £74, effective from 1st April. BA responded by introducing a £58 return for a two-month trial from 6 February on off-peak flights on weekdays and all weekend flights, bookable fourteen days in advance, and valid up to a month. The competition was limited to off-peak discounts, aiming at the holiday traveller segment[63]. The idea was later extended to other shuttle services for the summer season[64].

The Heathrow-Belfast route became the theatre of full-scale price competition. BMA started the service on 25 March, with an introductory fare of £29 single for off-peak flights and £37 for peak ones, applicable until the end of April. As soon as these fares were announced, BA quickly matched them and set identical fares[65]. Dan Air, flying between Gatwick and Belfast, did the same[66].

In August BMA introduced a £99 day return fare for its services from Heathrow to Belfast, Edinburgh and Glasgow, then initiated a frequent flier programme[67]. In October BA applied to CAA for an increase, effective from November, while keeping its excursion fare at £95, and later declared its intent to freeze domestic fares next year[68].

As for international services from regional airports, BMA applied to take over New York service from Manchester and Prestwick, of which BA and BCal had not used their licenses. Air Europe won a license to fly scheduled services between Gatwick and Palma (Majorca), while BA had ceased operation between Heathrow and Palma some time ago[69]. In defense, BA announced a "major expansion" plan from Manchester to overseas destinations in November[70].

(4) European routes.

The British government was eager to bring down European fares. It repeatedly advocated at various levels of the EC that "Fortress Europe", i.e., the European "air cartel", should be put to an end in light of the Treaty of Rome. In 1984, the first success was scored.

On 4 May, David Mitchell, Parliamentary Under Secretary of State for Transport, reached agreement with the Dutch government to end the pool system between BA and KLM. Six days later, BA announced a £49 return fare from Heathrow to Schipol, effective from July[71]. BCal followed suit in bringing down its fare to the same level for Gatwick-Schipol, and Air UK for Stansted-Schipol. Virgin Atlantic, which was due to start transatlantic service from June, applied for the Gatwick-Maastricht route at £20 single[72].

The news was much hailed by newspapers. Ridley declared triumphantly at the Council of Ministers that UK airlines were no longer bound to consult their opposite numbers on fare changes before asking the British government's approval[73]. If BA was not bound, it did consult KLM to set up the fare as well as its restrictive conditions. Tickets were to be purchased in advance, seats were to be requested only the day before departure, and ticketholders were to spend a certain period of time before returning. The same fare proposed by BCal was available on one flight each way a day, but bookable.

The Dutch government refused the proposal by BCal on grounds of unfair competition, and requested a uniform package. After hasty negotiations for about three weeks, a new agreement was signed on 20 June, which liberalised fares, routes and capacity of air transportation between the two countries. The most notable feature of the agreement was the "sixth freedom", allowing airlines to carry passengers originating from the other country to a third country via the home country on single flight[74]. As this freedom was requested by the Dutch government, there was a fear in Britain to lose traffic[75].

This freedom is, however, essential to develop international hub-and-spoke operation, especially in such a multi-national and comparatively small region as Europe. Deregulation in this regard would trigger competition not only between airlines, but also between airports to become important hubs, hence, between national governments to provide their airports with competitive capacity to handle traffic[76]. In this competition, geographical elements may play an important, perhaps decisive, role, itself an interesting topic but beyond the scope of the present paper.

BA continued to introduce lower fares for continental flights: German destinations, French provincial destinations, Swiss cities, Budapest, were all made accessible at cheaper rates. Yet, in every case BA worked closely with its counterpart airlines, namely Lufthansa, Air France, Swissair and Malev, in devising fares and restrictions[77]. In most cases, travellers were required to book a fortnight in advance and spend a weekend before returning. These restrictions were designed to be unattractive, or unpractical, to the business traveller segment, while BCal found it extremely difficult to set unrestricted fares. In Europe, lower fares were being introduced, but very much in a concerted way between the flag carriers, who were anxious to fill seats unsold to business travellers. The independents could not crack the cartel yet.

(5) Transatlantic routes.

Transatlantic traffic boomed this year, thanks primarily to the strong dollar. In 1983, 15 to 16 million people flew between Europe and the U.S.; one third of this traffic was between the U.K. and U.S., by far the largest volume. BA was the biggest operator, carrying 1.5 million or 10% of the North Atlantic traffic, followed by TWA with 1.0 million. As on the European routes, BA collaborated with TWA and Pan Am, its American counterparts, in devising lower fares and restrictions. Virgin Atlantic, a new entrant, accused them as "predatory".

In mid-February, British Atlantic Airways applied for the Gatwick-Newark route at £99 single, effective from June. While BCal proposed to resume service on the route for £50 single from next April, the Virgin Records Group purchased 75% of British Atlantic's parent company and changed the airline's name to Virgin Atlantic Airways. Virgin Atlantic proposed the same £99 fare for introductory period, £119 from July until September 15 with £10 weekend surcharge, and then down again to £110. CAA granted the license and certificate. On 24 June the inaugural flight took off, and scheduled service began in July.

The main rival of Virgin Atlantic was supposed to be People Express, an American upstart which began transatlantic service in May 1983. Due to the weakness of sterling, People Express' fare in sterling went up: £99 at the outset, £102 in October 1983, £113 in May 1984, and £122 in August. Virgin's fare was also slated to go up to £129 in November.

On the other hand, BA and other predominant carriers' cheapest fares were on a steady downward trend. For example, BA's standby fare to New York, available only in last minutes before departure, was brought down to £170 in July 1984, from £175 a year earlier. In July, BA announced a series of deep cuts. The standby fare was further brought down to the level of £139[78].

In addition to this, BA announced, with Pan Am and TWA, a Super Apex return fare for the winter season from November to March. Usual restrictions applied: tickets were available for those who booked in the last three days before departure, ticketholders were required to spend a weekend before returning, and no refund was available. The return fare for Heathrow-JFK was £259 instead of £299 in the previous year[79].

On 30 August, Richard Branson, president of Virgin Atlantic, asserted that the Super Apex fare to New York was "predatory" and suggested legal action in the U.S. The price differential was £1 for return. Given the deep cuts that BA was introducing on other American routes, it is difficult to judge the £259 fare as specifically designed to get Virgin Atlantic out of business. Despite the popularity it gained, it was then a tiny airline with only one leased B747. North Atlantic business was buoyant while the breakeven load factor for BA was merely 54.8% for 1983-84. Having posted a half-year net profit surpassing that of the whole previous year, BA had no express need to cut Virgin Atlantic's throat. It is more likely that BA's intention was to cover the budget traveller segment, which the "point-to-point" airlines were appealing to. As the restrictions suggest, it was for BA a question of filling unsold seats. But for Virgin Atlantic, which needed a 70% load factor to attain breakeven, a large enough price differential was essential.

This suggests that upstarts are easily pushed to the wall if big airlines introduce fares enough close to theirs[80]. Added to this, small scale airlines have a peculiar disadvantage. Their narrow margin is crucially at the mercy of exchange rate fluctuations. In fact, People Express did not change its fare in dollar terms ($149), but was forced to raise its price in Britain due to the weak pound. In contrast, BA could afford to shield itself through a large amount of forward transactions[81].

Branson's claim hit a sensitive diplomatic nerve. In the previous June the U.S. Justice Department started a criminal anti-trust investigation on possible conspiracy to drive Laker out of business, which the liquidator of the bust airline alleged in US civil court. In this litigation BA, among others, was on defensive against a $1.05 billion claim. The official view of Britain was that the prices agreed upon among airlines and approved by the both governments under Bermuda II were exempt from US internal law.

DoT requested assurances from the American government that the fares proposed by BA and others would not be prosecuted under anti-trust law. Given the independence of Justice, Washington was reluctant to give such assurances. Then DoT refused to grant cheap fares on 18 October. A week later it announced its intention to charge the difference between the ongoing fares and the prices of Super Apex tickets already sold. As 70% of them were estimated to be bought in the U.S., some 70,000 travellers might be requested to pay at British airports in the most extreme case. Dan McKinnon, the last chairman of CAB, threatened retaliation. As the tickets were to be used shortly, tension mounted. On 30 October, DoT reversed its decision and allowed airlines to honour the tickets sold before they were banned.

In early November BA, TWA and Pan Am again applied for the same fare, only to be refused on 15 November. Four days later, President Reagan ordered the Justice Department to abandon its investigation on Laker case. A month later, the both governments agreed to approve lower winter fares and the Justice Department declared it would not bring anti-trust action against them. Simultaneously, the British government decided to reverse its ban. Virgin Atlantic did not resort to legal challenge.

It is obvious that the British government tried to obtain de facto guarantees that lower fares agreed upon among airlines and approved would not be prosecuted under American law. Although the assurance given by the American authorities was of temporary character, the score was clearly marked in favour of the British. In this regard, the lower fares proposed by BA and threat of court action by Branson were both used to gain a point in principle, which is a highly diplomatic issue. Perhaps Reagan was anxious to secure British support on strategic matters in Europe. His stoppage order to Justice Department certainly displaced a major hurdle for the privatisation of BA, but it should not be regarded as the main aim of British government.

The last topic that needs mentioning is Concorde. The British government and BA agreed to write down Concorde assets to nil in 1978-79, with an amount of £160m in public dividend capital. Surplus earned on Concorde operations were to be divided between them, the government receiving 80% and BA retaining 20%. Thanks to losses brought forward, such payment had never taken place, despite, for example, an operating profit of £11.5m made by Concorde operation for 1983-84.

Since 1983, BA began to employ this unique asset in a promotional fashion; inaugural flights of domestic Super shuttle service and its anniversary a year after were both commemorated by Concorde. In October 1983, Marshall declared his intention to extend its Washington service to Florida. One reason may have been the lower load factor compared to its New York flights[82]. The next month, the Cunard Steam-Ship Company signed a £5.5m contract to charter 130 flights for its round trips to New York on Queen Elisabeth II and Concorde, with three nights at the Waldorf Astoria Hotel in Manhattan[83].

In parallel to the changing status as a public limited company, the profit-sharing scheme between the government and BA was scrapped. On the other hand, BA bought all spare parts that were owned by the government in exchange of cash more than £9 million. Given the overall cost of more than £1.5 billion for R&D and construction, Concorde was hardly a remunerative project for the government[84]. However, it became finally a money-spinner for BA.

---

[1] It was only referred to as "early in 1985". cf. Department of Transport, Airline Competition Policy, Cmnd. 9366, HMSO, 1984, p.5.

[2] The dispute arose when an order for refurbishment for BA's twenty-eight B747s was reported to go overseas. After the settlement, a £10m order for new galley units was given to Sell, a German company, and another £3m order for interior decor, to HongKong Aircraft Engineering Co. cf. FT 10 Apr., p.9, 21 June, p.14, 2 Aug., p.4, 3 Aug., p.7.

[3] The scheme did not apply to local staff overseas, and covered some 32,000 UK staff, including those of some subsidiaries. BA had 19,000 pensioners. cf. FT 23 Jan., p.4.

[4] The figures are for the BA group, including overseas staff. Afterward, they increased to £62m in 1984-85, £67 in 1985-86, and £73m in 1986-87. cf. BA, Reports and Accounts, 1981-82, 1982-83, 1983-84, 1984-85, 1985-86, 1986-87.

[5] Basis of calculation also changed. cf. Times 4 Feb., 1984, p.20.

[6] "As a commercial enterprise, British Airways has to earn sufficient profits to service its debt and capital. Cost control is therefore important and the elimination of uncertain costs such as those relating to pensions is essential." FT 26 Jan., p.44.

[7] cf. FT 9 Mar., p.8.

[8] cf. FT 5 May, p.6.

[9] cf. Times 2 June, p.21.

[10] It might be worthwhile to note that the sale of IAM, handled by S.G.Warburg, was decided in order to take tender process on the government's instructions. cf. FT 11 Mar., 1983, p.1.

[11] cf. CAA, Civil Aviation Policy Review, CAP500, 1984, Appendix 2, pp.28-29. It is no wonder that few supported the idea to privatise BA untouched. Colin Marshall regarded the rivals' attitude "like vultures waiting to swoop." cf. FT 12 Mar., p.5.

[12] cf. DT 31 Jan., p.7.

[13] cf. FT 10 Feb., p.6.

[14] cf. FT 20 Feb., p.5.

[15] The three airlines formed a joint body, the Airport Users' Study Group, which in turn claimed BA subsidiaries were conducting dumping, and urged that CAA should be given power against monopolistic exercise. British Airtours was the second largest charter operator in UK and, perhaps owing to lower equipment purchase costs, was highly profitable and able to undercut rivals' prices. In August, Air Europe was forced to slim down operations because its parent gave a contract to British Airtours. cf. Times 9 Mar., p.3, 31 May, p.21, 11 July, p.21, 12 July, p.23; FT 24 May, p.10, 31 May, p.10; ST 19 Aug.,p.45.

[16] cf. Times 20 Mar., p.3; FT 12 Apr., p.11; Times 1 May, p.19; FT 1 May, p.44.

[17] They were from Heathrow to the Caribbean, Japan, China, Seoul, Kuwait, Abu Dhabi, Istanbul, Cyprus, Athens, Malta, Vienna and Helsinki, and from Gatwick to the Iberian peninsula. cf. ST 1 July, p.53.

[18] cf. FT 23 May, p.7.

[19] cf. FT 2 Feb., p.7.

[20] CAA, op.cit., p.21.

[21] British Air Transport in the Seventies, Cmnd. 4018. cf. FT 28 Feb., p.18; ST 8 July, p.53. As for a brief review of the Edwards report and subsequent CAA policy, cf. ST 19 Aug., p.51.

[22] Quoted in FT 20 July, p.5.

[23] Times 25 July, p.2; FT 25 July, p.5.

[24] cf. FT 27 July, p.7.

[25] Namely BCal, BMA, Air UK, Dan Air, Air Europe, Britannia, Monarch and Orion. cf. Times 2 Aug., p.3; FT 2 Aug., p.4.

[26] For the debates in the Commons on 30 July, cf. FT 31 July, p.12; Times 31 July, p.4. As for the composition of the cabinet committee, cf. ST 12 Aug., p.14; FT 3 Aug., p.6.

[27] cf. FT 18 July, p.8. Overall, twenty-eight routes were applied for.

[28] cf. Times 8 Aug., p.3; FT 8 Aug., p.6.

[29] cf. Times 13 Aug., p.3; FT 14 Aug., p.6.

[30] cf. FT 22 Aug., p.8.

[31] cf. ST 5 Aug., p.45, 12 Aug., p.2; Times 13 Aug., p.3; FT 13 Aug., p.3.

[32] BCal rejected the proposal. cf. FT 6 Sep., p.44; Times 6 Sep., p.2, 10 Sep., p.1.

[33] cf. Times 10 Sep., p.1.

[34] cf. Times 10 Sep., p.12. It is also likely that he himself had promised the employees no further redundancy. cf. ST 16 Sep., p.57; Ashworth and Forsyth, op.cit., p.109.

[35] Department of Transport, Airline Competition Policy, Cmnd. 9366, HMSO, 1984. For a brief appraisal, see John Vickers and George Yarrow, Privatization: An Economic Analysis, MIT Press Series on the Regulation of Economic Activity, MIT Press, 1988, pp.349-350.

[36] ibid., para.4.

[37] ibid., para.15.

[38] ibid., para.14.

[39] ibid., para.15.

[40] ibid., para.20. CAA held hearings from October to November 1985, and allocated routes by January 1986. The assistance by BA did not necessarily take the form of money, as technical co-operation substituted for it. cf. FT 23 Sep., 1985, p.8, 23 Jan., 1986, p.8.

[41] ibid., para.19.

[42] ibid., para.20.

[43] ibid., para. 8.

[44] ibid., para.16.

[45] ibid.

[46] ibid., para.26.

[47] ibid., para. 28.

[48] ibid., para. 31. See also ST 7 Oct., p.57. In this regard, Ridley's position must have been a delicate one. He described the paper a result of "practical politics". cf.FT 6 Oct., p.1.

[49] cf. ibid., para.23.

[50] ibid., para.18. One should note that Iberia and Air Portugal were operating from Heathrow and BA had been complaining about it. cf. FT 4 Mar., 1983, p.7.

[51] cf. FT 11 Oct., p.7.

[52] cf. ibid., 2 Nov., p.9; Times 31 Oct., p.3.

[53] cf. Times 12 Jan., p.1, 26 Mar., p.17.

[54] cf. Times 11 May, p.2.

[55] cf. Times 15 Sep., p.1. BA currently possesses ten A320s, originally ordered by BCal.

[56] cf. FT 18 Sep., p.7; Times 18 Sep., p.3.

[57] cf. FT 12 Sep., p.10.

[58] cf. Times 12 Sep., p.2.

[59] Quoted in FT 23 Aug., p.5.

[60] In the late 1980s, Europe saw about one hundred airlines newly created. A large part of them is in the "liberal" countries. cf. International Civil Aviation Organisation, The economic situation of air transport, review and outlook: 1978 to the year 2000, 1989, p.6 table 2-2, as quoted in Gil, op.cit., p.322 note 8.

[61] Marvin Cohen, chairman of CAB and faithful successor of Alfred Kahn, admits that the U.S. would adopt a flexible attitude toward third world nations. cf. Marvin Cohen, Can Airline Deregulation Work in International Air Transportation?, Flight Transportation Laboratory Report M80-1, Department of Aeronautics & Astronautics, MIT, 1980, p.37.

[62] cf. Kyohei Shibata, "Koku-kisei-kanwa-ka no Pan Am [Pan Am under Deregulation]", Journal of Economic Review No.25, Faculty of Economics, Shinshu University, Matsumoto, Japan, 1986, pp.49-72.

[63] cf. Times 5 Jan., p.2.

[64] cf. FT 4 Apr., p.9; Times 5 Apr., p.3.

[65] cf. Times 13 Mar., p.2; FT 15 Mar., p.8.

[66] cf. Times 26 Mar., p.2.

[67] cf. Times 21 Aug., p.2; FT 21 Aug., p.5.

[68] cf. FT 18 Oct., p.5, 6 Dec., p.7.

[69] cf. FT 9 July, p.6.

[70] cf. FT 2 Nov., p.9. The planned destinations were New York, Munich, Larnaca (Cyprus), Malaga, Cork, Madrid, Lisbon, Oporto, Athens, Malta and Geneva.

[71] The return fare for Club class, BA's brand for business class, was then £156, Eurobudget £132, and APEX, the cheapest, £87. The £49 fare was branded "Latesaver". cf. FT 8 May, pp.1, 36, 11 May, pp.2,11; Times 11 May, p.1.

[72] The service by Virgin Atlantic on this route started on 15 Nov. During the first three weeks the fare was £16, to be raised to £25 afterwards. cf. Times 26 Oct., p.1.

[73] cf. FT 12 May, p.17; Economist 19 May, p.16. However, it should be stressed here that the Dutch government was one of the first European governments, along with the Belgian, that had concluded a liberal air services agreement with the U.S. in the late 1970s. The British government found the Dutch attitude damaging to their negotiation for Bermuda II. cf. Christer Joensson, International Aviation and the Politics of Regime Change, Frances Pinter, 1987, p.124; Alan P. Dobson, Peaceful Air Warfare: The United States, Britain, and the Politics of International Aviation, Columbia Press, 1991, p.263.

[74] cf. ibid., p.33. As for the consequence and evaluation of the Anglo-Dutch air service agreement, see Francis McGowan and Chris Trengove, European Aviation: A Common Market?, IFS Report Series No.23, The Institute for Fiscal Studies, 1986, pp.138-150. For other bilateral agreements liberalised by UK, see Button and Swann in Button (ed), op.cit., pp.94-95, also Paul Stephen Dempsey, "Aerial Dogfights over Europe: The Liberalization of EEC Air Transport", Journal of Air Law and Commerce, vol.53 No.3, 1988, pp.630-634.

[75] cf. Times 8 June, p.2; FT 22 June, p.8; Economist 30 June, p.18. Cooperation between the Dutch government and KLM, "the flying Dutchman", is often close and effective. For another example, see Thornton, op.cit., pp.98-99.

[76] For hub-and-spoke operation, see, for example, Donald Pickrell, "The regulation and deregulation of US airlines", as ch.2 of Button (ed), op.cit., pp.21-23.

[77] For German flights and the difficulties encountered by BCal, cf. ST 29 July, p.1; Times 4 Aug., p.3, 19 Sep., p.3; FT 27 Sep., p.6, 9 Oct., p.9. For French ones, cf. Times 31 Aug., p.3; FT 31 Aug., p.5. For Swiss, cf. Times 7 Sep., p.3; FT 7 Sep., p.8. For Budapest, cf. FT 6 Oct., p.4.

[78] Apart from New York standby fares, Heathrow to Los Angeles or San Francisco was brought down to £199 from £230, Washington or Baltimore £159 from £190, Philadelphia £149 from £180, Chicago £189 from £210, Detroit £189 from £205, and Miami £189 from £195. cf. FT 1 Aug., p.1.

[79] Other reductions were: Heathrow to Boston for £239 from £299, to Washington £284 from £340, and Philadelphia £274 from £334. cf. FT 18 July, p.9; Times 27 July, p.3.

[80] This tactics also proved effective in US. In 1984 People Express started service to Florida, mainstay market for Eastern Air Lines. Eastern succeeded to keep its share with a few dollars on top of People's fares. cf. Shibata(1988), op.cit., p.124.

[81] cf. note 20 of the previous chapter. Virgin Atlantic may be unique in this aspect, as a substantial portion of sales by its parent record company was in dollars.

[82] Concorde service to Washington, three times weekly each way, carried 10,000 passengers per year (load factor around 30%), while New York flights, two times daily each way, carried 75,000 (load factor around 50%). The Miami service started in March, 1984. cf. Air Transport World June 1984, pp.68-70.

[83] Afterward, this kind of fancy charter tour became a characteristic of Concorde's operation by BA; the trips by Cunard were enlarged, a flight to New Zealand to view Halley's Comet was undertaken, and a return flight was provided for executives visiting a computer exhibition in Hanover. cf. Times 2 Mar., 1985, p.3, 29 Oct., 1985, p.3, 3 Dec., 1985, p.18; FT 26 Oct., 1985, p.1, 18 Jan., 1986, p.4. Also, Air Transport World, Jan. 1986, "British Airways Concorde now considered flagship of the fleet", pp.40-45.

[84] For the development and construction of Concorde, see Keith Hayward, The British Aircraft Industry, Manchester UP, 1989, pp.100-108.