British Airways Plc, Europe's third- largest airline, will begin flights to New York from Paris and Brussels to take advantage of a new trans-Atlantic air services agreement and reduce its dependence on London Heathrow.
A subsidiary to be named "OpenSkies", after the accord, will start operations in June with a single Boeing Co. 757, the London-based company said in a statement today. A second 757 will be added this year and the division will have six by the end of 2009, all from British Airways' current fleet.
The open-skies agreement, which takes effect in March, will allow European Union carriers to fly to the U.S. from any of the bloc's airports rather than solely from their home countries. While British Airways will face heightened competition at its Heathrow hub, the new unit will allow the company to respond by challenging some of its European rivals in their own backyards.
"BA have been preparing for open skies for a long time," said Gert Zonneveld, an analyst at Panmure Gordon in London with a "buy" rating on the shares. "It's not just about protecting fortress Heathrow but about expanding their business as well."
British Airways stock fell 10.5 pence, or 3.7 percent, to 273.25 pence. The stock has fallen 12 percent this year following a 41 percent drop in 2007.
Profit Target
The new airline, previously codenamed "Project Lauren," is expected to be profitable by its third year of operation, British Airways Chief Executive Officer Willie Walsh said in an interview. He declined to reveal how much the company is spending on the venture.
"It's not a very big investment because we have the aircraft in our fleet already," Walsh said. British Airways will replace the 757s in its main business with Airbus SAS planes as part of a planned transition to an all-Airbus short-haul fleet.
OpenSkies' aircraft will be fitted with 24 business-class seats that convert into flat beds, 28 in premium-economy class and 30 in economy. The carrier will be managed by Dale Moss, British Airways' former director of worldwide sales.
British Airways had previously suggested it might adopt a premium-only model for the new unit and JP Morgan analyst Chris Avery said a switch to a three-class layout might indicate the economics of focusing solely on business flyers hadn't "stacked up." London-based Avery has a "neutral" rating on the stock.
Maxjet Airways Inc. filed for bankruptcy last month after a year of operations with premium-only seating and European airline stocks declined yesterday amid signs that a weakening economy is beginning to hurt average seat occupancy.
Flexible Approach
"When we looked at the market in Europe we felt that there are only a couple of destinations that can actually support all premium flights," Walsh said. A three-class configuration will allow the new airline "flexibility" to expand across the continent and adjust premium seating to meet demand, he said.
British Airways has 13 Boeing 757s in its fleet, with an average age of 12 to 13 years, Walsh said, giving it an extra seven aircraft to grow OpenSkies if needed. The company will "shortly" file an application for regulatory approval for the new carrier in the U.S. and the U.K., it said in the statement.
The new treaty ends an earlier U.S.-U.K. agreement limiting trans-Atlantic access at Heathrow, Europe's busiest airport, to British Airways, Virgin Atlantic Airways, AMR Corp.'s American Airlines and UAL Corp.'s United Airlines.
BMI, Air France
BMI, the U.K.'s third-biggest airline, has said it plans to start U.S. flights from Heathrow under open skies while Air France-KLM Group, Europe's biggest carrier, and ally Delta Air Lines Inc., the third-biggest in the U.S., will also begin trans-Atlantic routes from the airport.
"BA are seen as providing a high-quality, reliable product and they need to maximize that," said John Strickland, director of London-based aviation specialist JLS Consulting Ltd. "On the other hand we are in this uncertain economic climate. And the European incumbents and U.S. carriers are not going to make it easy for them."
British Airways has been planning the subsidiary since January last year, Walsh said today. The company announced its intention last May to set up the unit and submitted an application to the U.S. Department of Transportation for permission to operate a number of routes by mid-2008 using Boeing 757s and 767s.
About half of British Airways' sales come from the U.K. and about 14 percent come from continental Europe. Flights to the U.S. contribute more than 50 percent of the airline's profits, according to JP Morgan's Avery, with most of that coming from premium seats.
Next Stage
Walsh said the "OpenSkies" identity was chosen after he'd initially favored the standard "British Airways" branding but was persuaded the new name would serve to promote the next stage of the trans-Atlantic agreement, which would allow the carrier to offer U.S. domestic services.
Talks on extending the accord are due to start in May and the EU aims to complete an agreement by 2010.
British Airways said separately it will begin flights from Heathrow to Hyderabad on Oct. 27. The city, known for its computer and biotechnology companies, will be the carrier's sixth destination in India.