But Debonair's unique combination of low costs and 'comfortable' service, coupled with rapid expansion, is enough to raise concerns among more than a few casual observers - particularly when there is no precedent, even in the US, against which to gauge the chances of Debonair's success. 'We like to innovate, not imitate,' says Mancassola simply.
However the confidence expressed by the investors in Debonair's £26 million (US$41.9 million) flotation on Easdaq - the pan-European stock exchange - last July, was a powerful indicator in the carrier's favour. Despite losses of nearly $25 million in the first nine months of operations to 31 March 1997, and no prospect of any dividends for some time, 'the market was impressed by an airline which has maintained fully allocated costs of 7 pence per mile,' says Mancassola. He also adds that investors 'saw the potential of a pan-European airline' and liked the fact that Debonair had written off its route development costs. 'We did not capitalise our route development so the investors came in without any baggage.'
Mancassola has a panoply of catch phrases to explain Debonair's strategy. 'The revenue is an envelope and all the cost must fit inside it,' he is fond of saying. More specifically, he claims that Debonair's costs per mile are lower even than its rivals Ryanair and EasyJet. But how can Debonair's costs be lower when it fits only 96 seats on each of its BAe 146-200s to maintain a 33 inch seat pitch, and distributes only 38 per cent of its tickets direct to the public? For the remainder it relies on the traditional travel agent relationship, paying 9 per cent commissions as well as fees to all of the big computer reservations systems.
Mancassola stresses that Debonair makes major savings by contracting out every 'non-essential' function. Maintenance and check-in rentals are charged according to 'power by the hour' or the number of passengers carried respectively. Check-in staff are provided by Servisair. Debonair also achieves high levels of productivity and aircraft utilisation, operating its 146s for 10h15m a day, says Mancassola.
The use of travel agents helps avoid the heavy advertising and promotion costs that go with direct sales and is important to reach the business traveller, adds Mancassola. 'The calculation of commission vis à vis advertising and promotion is a close match,' he says.
Mancassola barely disguises his distaste for the direct marketing, high density, no frills approach taken by Luton-based rival, EasyJet. Though the two carriers compete directly only on Luton-Barcelona, Debonair was due to launch a Nice service in mid-December and EasyJet's lower fares are a source of irritation. 'I would be stunned if they were making money with those fares,' he says.
Mancassola denies that high density seating brings extra revenue, saying there are a lot of hidden expenses such as torn seats and stolen ashtrays. 'If you have 15 more seats you have to put in additional cabin crew and you may not fill the seats . . . This theory that by squeezing the passenger you will earn millions overnight is pure fantasy,' he adds.
The Debonair approach has undoubtedly attracted small businesses. Some 58 per cent of its passengers are business travellers and there is a high level of repeat business, says Mancassola. The airline has also stimulated more visiting friends and relatives traffic through its lower fare structure and pan-European network - the most advanced in Europe.
Debonair has chosen rapid expansion over short-term profitability. In November 1996, three months after startup, the airline brought forward new route launches, such as Rome, which had been planned for 1997. The aim was to establish a strong, more cost effective presence in continental Europe.
Debonair serves six cities out of its main Luton hub - Munich, Dusseldorf/Express, Barcelona, Madrid, Copenhagen and Rome - and operates mini hubs at two of them, Munich and Barcelona. Rome/Ciampino currently has three destinations and Debonair is also likely to develop Dusseldorf/Express as a fourth hub. The goal is to reproduce roughly the same batch of destinations served from Luton at each hub, and this has already been achieved in Munich.
There are many advantages to this strategy. The resulting network creates a web of destinations. For example flights from Copenhagen to Barcelona operate via Munich, while Copenhagen-Madrid services are via Luton. Rapid 20-minute turnaround times and one-way unrestricted fares make these flights an attractive option for the price-sensitive business traveller who wants to visit more than one city, says Julian Sturdy-Morton, director international corporate finance at Credit Lyonnais Securities, which underwrote Debonair's flotation. The airline has also generated new VFR business from people who can now afford to take more frequent trips, he adds.
Marketing a batch of destinations out of a hub is much more cost-effective than for a single destination and brand recognition by consumers rapidly improves. 'The development of the brand in Munich is as good if not better than around North London,' says Sturdy-Morton. Mancassola adds that the strategy spreads Debonair's currency exposure and shields it from the 'wrath' of a single major.
However Debonair already has enough of a presence in Munich to bother Lufthansa, it seems. The German major has objected to Debonair's omission of the passenger airport tax in advertising its fares and played a role in moves to declare its licence invalid. So far Mancassola is relaxed about Lufthansa's limited matching of Debonair's fares but says he would take action if he felt there was predatory behaviour.
Debonair competes directly with Lufthansa from Munich to Barcelona, Copenhagen and Madrid and load factors are as high as 61 per cent on its four times daily seventh freedom route from Munich to Dusseldorf/Express. Its German services account for around 33 per cent of revenues and, post-flotation, 43 per cent of its shareholders are in Germany, says Mancassola. The carrier also flies from Munich to Rome/Ciampino and Luton. Debonair has so far avoided the attention of other majors by choosing underserved markets like Luton and Barcelona and secondary airports like Rome/Ciampino and Dusseldorf/Express.
Debonair makes snap decisions on new routes and signed its first alliance, with Azzurra Air in late October, after just two weeks of discussions, says Mancassola. The two carriers were due to begin codesharing from 26 October on a new daily service by Azzurra between Luton and its Milan/Bergamo base, with through service to Rome/Ciampino. Both airlines have a low cost, quality service concept and say the arrangement lays the foundations for a wider pan-European alliance that could soon include two or three other carriers with overlapping routes and similar equipment.
Mancassola says there are about 350 possibilities for Debonair's own route development. These include a Parisian city airport; Rome/Ciampino-Athens; more seventh freedom routes in Germany or Italy; services in Hamburg or Berlin/Tempelhof, intra-Scandinavia service, and Lisbon to Madrid or Barcelona. Dusseldorf/Express could get more frequencies to Munich as well as services to Hamburg, Berlin or Stuttgart, while the aircraft on the seasonal Barcelona-Rome route could move to Hamburg.
Meanwhile the carrier's pan-European flotation has enabled most of its US-held convertible loan stock to be transformed into equity, giving the company total capitalisation of £70 million and leaving the ratio between EU and non-EU ownership unchanged at 55 per cent versus 45 per cent. The remaining £1.6 million should be converted by the end of the year.
Debonair used some of the proceeds of its flotation to pay down $15.5 million in promissary notes. The remainder will be used as working capital and to fund an additional five leased BAe 146s due to arrive between October and June 1998. Debonair may also purchase the seven 146s it currently leases from US Airways.
With these aircraft on board, Mancassola hopes the airline will reach profitability in summer 1998. 'With those five aircraft we will pause for breath,' he promises. But not for long. The carrier also has 10 MD-95s on order for delivery between September 1999 and 2001. These would be equipped with 117 seats to maintain the 33-inch seat pitch. Mancassola says some 146s will be kept for airports with short runways.
As Debonair looks to the future it must be wary of the Lufthansas of this world. In this respect a strong partnership with like-minded low-cost European carriers would help the carrier build the critical mass it needs.
Source: Airline Business
