OpenSkies’ first birthday. Will it be orphaned by birthday #2?

Paris-based OpenSkies celebrated its first anniversary of the launch of services on 19-Jun-2009, but the day passed without much fanfare. It didn't help that its once eager parent, British Airways, was reported in the media the same week to be considering winding up or selling the subsidiary, as part of cost cutting moves. That BA is now spruiking its new all-Business class twice daily service from London City Airport to New York (launching on 29-Sep-2009 with specially configured 32-seat A318s) is a clear vote of no-confidence in OpenSkies.

BA is due to complete a review of OpenSkies’ operations after the Summer. Given the scale of cutbacks BA is facing as its core premium traffic markets have collapsed, an independent future for OpenSkies is likely. Whether a buyer can found is a different question.

Unfortunate timing

Conceived and launched as an attempt to intrude into its European continental competitors’ hold on the North Atlantic premium market, OpenSkies has failed to reach most of the targets laid out under its business plan, as the corporate travel market slumped and trans-Atlantic yields collapsed amid the global economic recession.

By Oct-2008, the fledgling carrier’s forward bookings had started to deteriorate, with Managing Director, Dale Moss, noting a “pronounced change in the marketplace”. He added, “we will adjust to it and ride out."

By Jan-2008, it was reported BA had postponed plans for further expansion of OpenSkies, seeking to sell its 11 remaining mainline B757s for cargo conversion rather than transfer them to OpenSkies.

At the time, BA’s Willie Walsh told the Financial Times that OpenSkies had to “stand on its own feet”. Mr Moss said at the time the decision was “OK by us”, adding, “we have assessed the market for B757s and believe that there are plenty available with the proper configuration when we decide to grow in the future”.

BA has since announced over the past weekend that the remaining three mainline B757s will be grounded in Summer 2010, but did not disclose what it would do with the aircraft.

Attempted evolution

OpenSkies’ product has evolved since launch. The carrier initially offered an 82-seat configuration, including:

• 'BIZ': 24 full flat seats;
• 'PREM +' a 132cm seat pitch: 28 seats;
• Economy: 30 seats.

OpenSkies finally completed its merger with L'Avion in Apr-2009 the independent and struggling all-Business class French airline (the process started in mid-2008). The combined airline doubled OpenSkies’ B757 fleet to four and involved the reconfiguration of the fleet to reflect a new all-Business offering. The carrier’s B757s are now equipped with 84 seats:

• ‘BIZ BED’: 12 lie-flat beds;
• BIZ SEAT (Premium Economy): 72 seats that recline 140 degrees.

But by Apr-2009, Business traffic on OpenSkies’ routes between New York (Kennedy and Newark) and Paris (Orly) and between New York (Kennedy) and Amsterdam (Schiphol) had fallen approximately 45% year-on-year.

OpenSkies faces no direct competition on its services from Paris Orly and Amsterdam to New York JFK and Newark, but faces considerable competition from Air France, American Airlines, Continental, KLM and Northwest (now Delta) on the main routes to/from Charles de Gaulle.

Of the total Paris (CDG and ORY) to New York JFK market, OpenSkies runs a distant third to Air France and American Airlines in terms of frequency share (13.6%), and has just a 4.7% capacity share at present.

Paris (CGD and ORY)-New York JFK capacity (seats) and frequency share* by carrier

*For week commencing 06-Jul-09
Source: Centre for Asia Pacific Aviation & OAG

OpenSkies’ capacity share in the Paris-Newark market is better (rivalling Air France in terms of frequencies), but Continental Airlines truly dominates.

Paris (CGD and ORY)-Newark Liberty capacity (seats) and frequency share* by carrier

Source: Centre for Asia Pacific Aviation & OAG
*For week commencing 06-Jul-09

OpenSkies has only limited penetration of the Amsterdam-Newark market, with a 10.6% frequency share and 4.5% seats share. KLM offers the same frequency levels as Northwest and Continental, but offers larger gauge aircraft, giving it a 43.5% share of total seats in the market.

Amsterdam-Newark Liberty capacity (seats) and frequency share* by carrier

Source: Centre for Asia Pacific Aviation & OAG
*For week commencing 06-Jul-09

OpenSkies’ Amsterdam-New York JFK capacity share is healthier, at 19.2%, but it still lags alliance partners KLM and Northwest by a considerable margin.

Amsterdam-New York JFK capacity (seats) and frequency share* by carrier

Source: Centre for Asia Pacific Aviation & OAG
*For week commencing 06-Jul-09

Gaining market share, but nine-months behind business plan targets

In its first 12 months, OpenSkies handled 92,000 passengers, boasting on-time departure/arrival rates of 92% for the New York/Paris and New York/Amsterdam route for May-2009.

Mr Moss stated on the anniversary of the launch of services last month that the company “continues to gain market share, which is a testament to our employees' hard work”.

He added the deterioration in traffic has since slowed, but the demand environment is not yet improving, and the carrier would only reach its break-even target by the end of its third year of operations.

Mr Moss explained, “yields are not where we would like them to be. They are probably comparable to last year when we were a start-up”. He added, “we are not on the business plan that we set out, but we are not far off - we are probably nine months off where we wanted to be at this particular time” (although that represents a fairly optimistic view of things).

The original business plan – forged in heady economic times – called for the operation of up to seven B757s by the end of 2009 with additional routes from European cities including Amsterdam, Brussels, Frankfurt and Milan to New York. The plan was

Outlook: BA out, who next? And will the “other” Open Skies survive?

BA has given clear hints it will walk away from OpenSkies this Autumn. But that does not necessarily mean curtains for OpenSkies.

The carrier has some attractions, namely a low cost structure and a good potential supply of cheap used B757s with which to grow its operation.

But ironically, the regulatory framework from which the airline had its genesis and draws its name, the EU-US Open Skies agreement, faces considerable barriers in its next round of negotiations. Further delays – or at least the maintenance of the status quo – could play into OpenSkies’ hands as its larger rivals continue to bleed.

Growing unease in Washington over the power of global airline alliances could play to OpenSkies’ advantage, if protectionist pressures in the US Congress continue (under the guise of more rigorous assessments of the alliances structure). Anti-trust immunity requests over the Atlantic are experiencing some turbulence with the recent negative comments from the Department of Justice and the posturing of influential Rep James Oberstar, make for an uncertain regulatory outlook.