British Midland plc

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British Midland plc

Donington Hall, Castle Donington
Derby DE742SB
United Kingdom
Telephone: +44-1332-854-687
Fax: +44-1332-854-255
Web site: http://www.iflybritishmidland.com

Private Company
Incorporated: 1938 as Air Schools Limited
Employees: 6,400
Sales: £613.3 million (1999)
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation; 481212 Nonscheduled Chartered Freight Air Transportation; 48819 Other Support Activities for Air Transportation

British Midland plc, the second largest airline in the United Kingdom, flies more than six million passengers a year to more than 30 cities in Europe. It is a member of the Lufthansa/SAS/ United Airlines-led STAR Alliance. From his headquarters in an 18th-century castle, its chairman, Michael Bishop, has worked to keep European airfares in check for more than three decades.

Early Development

Air Schools Limited was formed in 1938 at Burnaston in Derby to train pilots of the Royal Air Force. Air Schools stopped training RAF pilots in 1953. After the war, the company diversified into passenger and freight charters, aircraft maintenance, and aircraft sales. It carried its first passengers in 1949 as Derby Aviation.

Derby Aviation launched its first international route, to the Belgian city of Ostend, in 1956. It soon began to offer holiday vacation packages. This operation was renamed Derby Airways in 1959. At this time, its U.K. route network connected 15 cities.

Derby Aviation was renamed British Midland Airways (BMA) in 1964. The company’s future chairman, Michael Bishop, joined British Midland the same year at the age of 24 after working at Manchester Airport. BMA had bought the aircraft-handling company he had set up just a year earlier for locally based Mercury Airlines.

Bishop learned his values, work ethic, and people skills from his father, who ran a business of his own. He advanced rapidly through the ranks, becoming general manager in 1969, director in 1970, managing director in 1972, and chairman in 1978. A BMA Argonaut crashed near Stockport in 1967, killing 72. At the age of 25, Bishop had to address the victims’ family members, which he told Management Today was a life-changing experience.

The booming long-haul charter market had taken BMA across the Atlantic by the early 1970s. BMA abandoned the holiday tours in 1972, however, instead devoting its fleet and staff to developing nations eager to operate their own “instant airlines.”

Bishop and his partners John Wolfe and Stuart Balmforth bought BMA for £1.8 million in 1978. It was one of Britain’s first management buyouts, according to Management Today. By 1979, BMA was carrying a million passengers a year.

New Freedom in the 1980s

British Midland acquired its distinctive headquarters building, Donington Hall, in 1980. Formerly owned by the Earl of Huntingdon, this late 18th-century manor built in gothic revival style gave BMA a unique space to grow. The building’s 72-foot-long library housed BMA’s reservations department, while bedrooms were converted to executive offices.

The company acquired slots at London’s Heathrow Airport and, soon, Margaret Thatcher’s government allowed BMA to compete with British Airways on Britain’s major trunk routes, linking London with Glasgow, Edinburgh, and Belfast. The national carrier, British Airways, had had a monopoly on these routes. The new competition, British Midland boasted, immediately brought passengers better service in addition to lower fares. BMA was not competing as a low-fare, low-service airline, however. As Forbes described later, early morning travelers were served breakfast on china rather than plastic plates.

BMA began operating the first trunk route, Heathrow-Glasgow, in 1982. The company competed with lower fares, but improved in-flight amenities. Service to Edinburgh followed in 1983, when Executive Travel voted BMA “Best Domestic Airline.” In 1984, BMA began flying to Belfast and opened its own departure lounge at Heathrow.

In 1985, BMA became simply “British Midland” (BM) and introduced a new red, white, and blue livery for its planes. An open skies agreement between the United Kingdom and the Netherlands allowed British Midland to launch service to its first continental destination, Amsterdam, in 1986. The same year, BM introduced its Diamond Service one-class cabin, which plied passengers with free drinks and better food. The Diamond Club frequent flyer program followed in 1987.

British Midland continued to expand its network throughout Europe, bringing a new alternative to Europe’s state-supported airlines. Dublin and Paris were among the first European destinations added. By the late 1980s, BM was aiming for a 50-50 split between domestic and international flights. It began to refleet with Boeing 737s, while continuing to use existing McDonnell Douglas DC-9 aircraft on international routes.

In 1987, BM established London City Airways to fly out of London City Airport, near the docklands. The venture ultimately failed, however, costing the group £10 million.

BM’s parent company, Airlines of Britain Holdings, included the much smaller Loganair (Scotland) and Manx Airlines (Isle of Man). The group was recapitalized in December 1988, when Scandinavian Airlines System (SAS) bought a 24.9 percent stake for £25 million. SAS became a significant source of international feeder traffic and performed heavy maintenance on BM’s DC-9 aircraft. BM posted a profit of £14.3 million for 1988.

The triumphant year was followed closely by tragedy. British Midland lost a Boeing 737 at Kegworth, England, a few miles from its headquarters, in January 1989. It crashed on the edge of the Ml motorway, killing 47 people.

The airline continued to expand, although at a faster pace than it desired: BM opened a London-Paris route in 1989 to avoid giving up slots it had been awarded at Heathrow. Besides the increased competition from British Airways, British Midland faced rising fuel prices and reduced passenger counts as a result of the Gulf War in January 1990. After losing millions, BM cut a tenth of its workforce, or 300 people.

Meanwhile, British Airways was increasing frequencies on its domestic trunk routes. BM alleged BA was dumping capacity at home to capture feeder traffic for its international routes.

British Midland was already the second largest operator at Heathrow Airport, though British Airways still moved more than twice as many flights through it. Many of BM’s low-fare competitors fell away, as Air Europe had done in 1990. Eurostar, the passenger train service using the Chunnel, was beginning, however, to take the profits out of BM’s cross-channel business. Otherwise, BM’s international growth plans were ahead of schedule.

Michael Bishop was knighted by the Queen in 1991. (The chessboard was rounded out by his counterpart, Lord King, British Airways chairman until 1993.) Bishop credited the success of British Midland with its careful, incremental expansion. He told Director his guiding principle was “not to take risks disproportionate to the size of the business,” explaining that he had always paced himself for a long career. “We don’t want to pay the price of being a pioneer,” he told Aviation Week. He told Director he wanted this epitaph: “Je ne regrette rien.”

New Frontiers in the 1990s

SAS increased its shareholding in BM parent Airlines of Britain to 40 percent in 1992. As Europe prepared for a theoretically open air travel market in 1993, BM continued to upgrade its product. It pioneered vegetarian meal service on domestic and European flights, and in March 1993 introduced business class seating on its European routes that was priced less than its competitors’ economy class seats. That September, British Midland introduced a unique pass, good for five international business class return flights within three months of purchase. It was reflecting with Boeing 737 airliners and smaller Fokker aircraft. BM carried more than four million passengers in 1993 and managed a profit of more than £1 million.

In 1994, Bishop called for European countries to end subsidies to their respective national airlines: Air France, for example, had received a massive US$3.7 billion bailout. Mile for mile, Europe had some of the highest airfares in the world. There were some signs of progress: Lufthansa was being partially privatized.

British Midland continued to add new routes in Europe in the mid-1990s, as its cargo unit partnered with Federal Express. Another unit, International Cargo Marketing, installed a new computer system allowing it to process more inquiries. In 1995, BM claimed to be the first airline to offer Internet flight reservations. The company carried five million passengers in that year.

A fleet renewal program completed in 1996 at a cost of £225 million (US$350 million) gave BM the youngest fleet of jets in Europe, with an average age of less than four years. The airline was already considering buying larger aircraft, however, to leverage its limited slots at Heathrow. It had been leasing most of its aircraft. To accompany the new planes, BM updated the livery on its planes and redesigned its uniforms. It also unveiled business class lounges in several European airports and automatic ticketing machines.

Company Perspectives:

Our Mission: To be the airline of choice. Our Vision: We will ensure that every moment spent with British Midland is time well spent by delivering the outstanding service of a world-class airline. Our Value: Speed and efficiency. Charm and hospitality. Style in service delivery. Innovation. Honesty in communication.

BM’s international traffic accounted for 60 percent of its business. It had more than a dozen code share partners, including United Airlines and American Airlines, which also had a strategic partnership with British Airways. BM declined for the moment, however, the opportunity to join a global alliance such as STAR or the British Airways/American Airlines-led oneworld.

In March 1997, British Midland placed a US$1 billion order for 20 Airbus Industrie A321 and A320 jetliners. It was Airbus’s largest British order to date. A dozen of the planes were to be leased from International Lease Finance Corporation; the rest were bought outright.

BM had a banner year in 1997: income of more than £17 million on revenues of £529 million. Traffic to Ireland in particular was booming. The carrier competed with a wave of budget start-ups such as easyJet. BM aimed for the business traveler, pitching itself as “the airline for Europe.” It focused on shorter routes than those of its most visible private sector counterpart, Richard Branson’s Virgin Airways.

With an open skies agreement between the United States and the United Kingdom pending in March 1998, British Midlands applied for permission to fly to ten U.S. destinations from Heathrow. BM had not flown to the United States since 1983. Its competitors, American Airlines and British Airways, were being pressured to give up 350 slots at Heathrow to allay regulators’ antitrust concerns regarding their close alliance. BM flew into the last remaining British Airways domestic monopoly route, Heathrow-Manchester, in March 1998. Bishop bemoaned the difficulty of keeping up with pacesetting British Airways in the area of information technology.

Although European skies ostensibly began to be liberalized (deregulated) in the early 1990s, access to airport landing slots and ground services proved a practical barrier to new entrants hoping to challenge state airlines on their own turf. The chief constraint on BM’s growth was the lack of capacity at Heathrow Airport, the largest international airport in the world. Nearly half of BM’s employees were based there.

In September 1998, British Midland launched a public relations campaign called “Make the Air Fair.” It attacked the lack of competition on the transatlantic market from Heathrow Airport, whose business fares to the United States were nearly double those from Amsterdam. BM claimed this differential was costing U.K. businesses £2.4 billion a year.

Half of SAS’s shareholding (20 percent) was sold to Lufthansa in 1999. BM finally joined the STAR Alliance, led by Lufthansa and United Airlines. Austin Reid, who had arranged for the SAS share purchase, was named CEO in November 1999. A former executive at Hertz Rent-A-Car Europe, Reid had joined Airlines of Britain in 1985 and previously served as finance director and managing director. BM posted profits of £13.7 million on sales of £613.3 million in 1999.

Services from Heathrow to Rome, Milan, and Madrid were launched in May 2000. British Midland operated these in cooperation with Lufthansa and SAS. BM planned to begin service from Manchester to Washington (Dulles) and Chicago (O’Hare) in the spring of 2001, with United Airlines as a code share partner.

Principal Divisions

BM Commuter; Cargo; Commercial; Engineering; Handling; Marketing; Operational Sales.

Principal Competitors

British Airways plc; easyJet; Virgin Group PLC.

Key Dates:

1938:: Air Schools Limited is founded.
1949:: Air Schools carries first passengers as Derby Aviation.
1956:: Derby Aviation launches first international service, to Belgium.
1964:: Michael Bishop joins Derby Aviation, renamed British Midland Airways.
1978:: Bishop and partners buy British Midland.
1982:: BM begins competing with British Airways on London-Glasgow.
1988:: SAS buys a stake in BM parent Airlines of Britain.
1997:: Lufthansa buys half of SAS’s shares; BM orders US$1 billion worth of Airbus planes.
1998:: BM lobbies to “Make the Air Fair” at Heathrow.
2001:: Service to the United States is planned.