As equity investments begin to lose their shine, franchising is gaining appeal as an alternative form of alliance building that allows incumbents to protect and spread their brand and generate revenue on minor routes, without the risk of capital investment.
Franchisees pay to use a major's brand and all services associated with that brand, with the intent that passengers feel as though they are flying with the major airline. This concept allows carriers to marry minor airlines' low cost operations with a major airline's distribution power and strong brand.
In Europe, British Airways has pioneered the trend, dubbing franchising as 'one of the success stories of the 1990s'. In the year ending 31 March 1996, BA's six franchise arrangements with CityFlyer Express, Maersk Air, Brymon Airways, Loganair, Manx Airlines Europe and GB Airways generated more than £50 million (US$77.7 million) for BA in service fees and feed revenue.
The six franchisees carry a combined 3.4 million passengers a year to 80 destinations, with a fleet of 76 aircraft. Most operate under the name British Airways Express, but the jet operators Maersk Air and GB Airways fly as British Airways. The franchisees pay BA a fixed fee for the use of obligatory services such as reservation systems, and a royalty fee for the use of the BA brand, at a rate dependant on an airline's financial performance.
BA intends to 'at least double' the revenue generated from franchising over the next three years. Manx Airlines and Loganair are to take over BA's Scottish Highlands and Islands air services in October 1996, affecting six routes: Aberdeen to Sumburgh and Kirkwall; Kirkwall to Sumburgh; Glasgow to Stornoway and Benbecula; and Inverness to Stornoway.
Moreover, BA is now exporting the concept overseas through arrangements with Danish regional airline Sun-Air, as of August 1996, and Comair of South Africa, from October this year.
Sun-Air will spread the BA name to an additional seven destinations, linking up with BA at Copenhagen, Oslo and Stockholm, while the Comair route network will link with BA at Johannesburg, Cape Town, Durban, Harare and Gaborone.
Access to BA's frequent flyer scheme and distribution power will allow the two new franchisees to compete effectively in domestic markets dominated respectively by the SAS/Lufthansa alliance and by South African Airways. 'Franchising is a particularly attractive option for an country's second carrier,' declares Lewis Scard, general manager of franchises and alliances at BA.
Comair's managing director Pieter van Hoven projects a 35 per cent increase in revenue during the airline's first year as a BA franchisee. 'Comair's market recognition will improve out of all proportion,' he predicts. 'We're an unknown quantity as yet in the rest of the world.' While 50 year old Comair has an established presence within South Africa, Van Hoven says BA can help here, too. 'Access to BA's Air Miles programme makes our product more saleable in South Africa's domestic market.'
BA is also set to franchise its flights to Beirut, Amman and Damascus in October 1996 via an agreement with British Mediterranean Airways. BA says that restrictions on the frequencies it can fly to the Levant and the political situation in the Middle East have made it impossible for it to operate the routes profitably.
In addition, British Mediterranean will start services in BA colours to Alexandria this winter and add Bishkek, Tbilisi and Tashkent in summer 1997. Ironically, BA and British Mediterranean have been engaged in a bitter fight for the limited frequencies available since the A320 startup operator began services to Beirut in 1994.
Scard sees the latest additions to BA's burgeoning franchise family as marking only the first stage in its plans to take the BA brand to the other corners of the world. BA is 'looking hard' at others parts of Europe to export its brand, though it recognises that the BA name may be better accepted in anglophile markets further afield.
Scard admits that it is 'quite feasible' that BA will start franchising its longhaul operations. The carrier is also keen to work closely with its alliance partners to capitalise on the localised power of brands such as Qantas in Australia.
Nearer to home, franchising allows BA to sustain regional routes by operating at the same cost level as a minor airline, in much the same way as the US majors have had franchise agreements with regional carriers for years. Franchising offers what BA terms 'the Heineken effect - reaching the airports that BA cannot'. Indeed, Amar Iman of Arthur D Little speculates that franchising has taken off more in the UK than in Europe due to the shortage of slots at London/Heathrow.
But there are other reasons for BA's European rivals being slow to follow its franchising example. Lufthansa cites potential 'personnel and political' problems as having dissuading it from franchising until recently. 'Lufthansa would face union problems if it were to pursue franchising as employees would feel that work that should be carried out by Lufthansa is being given to other companies,' explains Lufthansa's executive vice-president of alliances, Friedel Rödig.
However, Lufthansa has now started franchising via an agreement with Contact Air, which has been operating as Team Lufthansa since May. Contact Air operates from Stuttgart to Munich, Brussels, Cologne, Düsseldorf and Munster/Osnabruck; from Bremen to Munich and Paris; and from Munich to Geneva, Paris, Marseilles and Bologna. Lufthansa intends to add six Fokker 50s to Contact Air's existing fleet of four by May 1997. All aircraft will be painted as Team Lufthansa and in-flight service aims to echo that offered by Lufthansa.
Significantly, Rödig predicts that increasing price pressures will soon push the German carrier further towards franchising to shift its costs offshore. 'Lufthansa is sitting on a high cost structure, particularly as it operates out of Germany.'
Inam predicts that franchising will take off across the continent as airlines' finances stabilise. He agrees that Lufthansa will be the next carrier to pursue the trend wholeheartedly, owing to the German carrier's 'adequate' financial health. He says BA's financial strength has enabled it to experiment with the franchising option, while others have been preoccupied with financial crises. Inam says BA enjoys other advantages, including strong in-house business management skills and greater experience in managing partnerships.
Air France says it views franchising as 'one of the best means to respond . . . to the interests of the passenger and the development of carriers', and declares its intention to follow in BA's footsteps 'gradually'.
The French carrier currently has a franchising arrangement with Brit Air, which started operations between Paris/Charles de Gaulle and Southampton in June. The flight is operated using Brit Air cabin crew and aircraft, with Air France flight numbers. Brit Air benefits from Air France's distribution system and frequent flyer programme, though it carries out its revenue management independently. Air Littoral operates routes such as Toulouse-London under the Air France-Air Inter Europe Express name, but this stops short of a fully fledged formal franchise arrangement.
Other major carriers seeking potential franchisees will not be short of applicants, eager to benefit from the additional intraline traffic and an improved bottom line that stems from the reassuring seal of approval given by a major's global brand recognition.
Access to a major's international brand also prevents a minor airline from being categorised as a regional operator, according to Peter Kenworthy, commercial director for GB Airways. Kenworthy declares that GB Airways' franchise arrangement with BA helped establish the airline as a mainstream scheduled operator and negate its previous image as the Gibraltar carrier, prevailing since its origins as Gibraltar Airways.
GBAirways can boast of being the first franchisee to span more than one continent, with flights from London/Gatwick to North Africa in addition to destinations in the Mediterranean. The carrier forecasts a doubling in passenger numbers from 350,000 to 700,000 next year.
Bradley Burgess, managing director of BA's first franchisee, CityFlyer Express, says the carrier's traffic has increased by 35-40 per cent and profits are up on the last year, with about 20 per cent of its passengers transferring to or from BA at London/
Gatwick. 'It's difficult to believe that we could have sustained that rate of growth without the deal with BA,' he says.
Whereas success may appear to come easily via the franchise route, the franchisees face a more daunting task than simply donning another airline's suit of clothes. Burgess points out that the franchisees remain beholden to BA and any related problems, such as this year's threatened pilot strike, which reduced CityFlyer's bookings as well as BA's. 'You're sleeping next to the proverbial 800 pound gorilla, that could roll over and squash you,' he points out.
The franchisees have to battle continually with cost problems, as they need to operate to the same high standards as the major and pay for degrees of sophistication they would otherwise need, yet they must maintain much lower costs to justify their existence.
The recent emergence of a new generation of low-cost startups has increased the pressure on franchisees to keep costs down. Still, Burgess maintains that CityFlyer's costs are as low as the new no-frills operators when adjusted according to aircraft size, yet the carrier still manages to offer a highly respected brand and a high quality ground and cabin product.
BA insists that the franchisees undergo rigorous auditing and continuing training to ensure persistent high standards, aware that passengers will always be ready to judge the major by the worst manifestations of its brand.
Apart from these annual audits, however, the franchisees have relative commercial freedom. Indeed, Burgess asserts that CityFlyer's relationship with BA has allowed the carrier to remain independent and operate without equity participation.
The franchisees coordinate with BA to avoid compromising point to point traffic. Ultimately, however, the franchisees stand or fall by their own commercial decisions on frequencies, flight times and fares. BA has the ultimate say in any route development, though it encourages its franchisees to identify potential new routes.
The agreements with BA leave the franchisees free to fly independently under their own name if they wish. Manx Airlines Europe flies independently from its Isle of Man base to nine destinations under its own name, though it concedes that this is to avoid the high cost of including the routes in the BA franchise scheme.
Not only are the franchisees free to compete on the same routes as BA, but sometimes they even demand higher fares than the major. 'BA accepts that there will always be price competition. If it wasn't us competing it would be someone else, who wouldn't offer BA fees and feed,' maintains Burgess.
Katherine Gershon of Arthur D Little sees little sense in the two partners competing as the airlines are effectively cannibalising themselves, by dividing a limited number of passengers on a route between two aircraft at double the operating cost.
Limited price competition between partners is not preventing franchising from attracting regulatory attention. Critics charge that it is anticompetitive 'due to the significant marketing and advertising advantages that it gives franchisees over any other small airline that wants to come onto that route,' says David Relf of London lawyers Sinclair Roche & Temperley. Alain Alexis of the European Commission's competition directorate says: 'The franchise becomes, de facto, a part of the major's group and cooperates not competes with the incumbents.' The Commission has not launched a formal investigation but would be obliged to follow up if there were any complaints about franchising.
Despite being given free rein commercially, some franchisees may still want to break away eventually, once out of their formative years. 'There comes a time when a child might want to leave home', asserts Pat Byrne, chief executive of CityJet, which has done just that. The Irish airline now 'feels proud' to be marketing itself under its own brand as of the end of July, after building up its expertise and bottom line during 30 months as a Virgin Atlantic franchisee, offering services from Dublin to London City and Brussels. Byrne describes Virgin 'as a very steady brother to have had' though he admits that CityJet never saw the franchising agreement as 'a marriage for life'. Byrne now feels that CityJet has 'sufficient expertise to operate routes on its own', in its own colours.
The two airlines' 'amicable parting' was prompted by a 'potential conflict of interests' following Virgin's recent move into shorthaul services with its recently acquired Belgian subsidiary, Virgin Express. Virgin saw scope for confusion from the association of the Virgin name with both CityJet's full service image and Virgin Express' low cost product on shorthaul services.
As BA adds more franchisees to its clan, gathering speed with what it refers to as 'babyfarming' techniques, Arthur D Little's Inam urges more ambitious BA franchisees not to leave the fold but instead to acquire one or more of its franchise counterparts or some of their routes before the franchising market consolidates. The dominant franchisee could then help BA coordinate its rapidly expanding franchise network and cut down on management time and costs.
Other franchisees do not look set to emulate CityJet's example and break away from their agreement with their franchisor. CityFlyer is already discussing renewal terms for its five-year agreement which expires in 1998. 'It's impossible to consider not renewing,' says Burgess. 'If CityFlyer Express fell out with BA, we would look for someone else to franchise with.' CityFlyer is aware that although it may acquire relative financial stability and commercial expertise from franchising, the greatest benefit, namely the power of the major's brandname, is not transferable.
But why does the endorsement of the BA brand hold so much sway with consumers? According to John Harrison, senior director of Fitch Consultants, BA's brand owes its success to its 'consistent, balanced personality'. BA's Scard stresses that BA ensures that franchisees offer a 'full, undiluted brand' as 'passengers don't like surprises'.
Other airlines, meanwhile, have mistakenly mixed the major's brand with that of the franchisees, resulting in what Harrison calls a 'half-hearted' mongrel brand. This results in a 'schizophrenic experience' that confuses the passenger and a brand image that he/she cannot relate to.
Harrison says BA has succeeded in developing its brand to keep up with modern consumer values, focusing its promotional campaigns on softer, emotional attributes rather than just the visual elements. In Harrison's eyes, BA has developed a ubiquitous, global brand that does not just appeal in its home country. 'BA has made an unending investment during the last 15 years in shifting its portrayal as the best national carrier to being the best carrier in the world.' Many other carriers, such as Air France and Alitalia, have continued to focus on marketing national characteristics that inhibit the global acceptance of their brands.
The wide acceptance of BA's name will prompt it and other airlines to move on from franchising routes to franchising others parts of their business, such as ground handling services. Harrison predicts that BA will develop a 'transumer' brand, stretching the brand to other forms of transport, such as rail services, or even to other sectors of industry.
Yet Harrison warns that in a world of marketing hybridisation, where dominant brands offer a range of similar services, there is a risk of consumers reacting against standardised brands in favour of a more individual approach, such as the one personified by Virgin Atlantic.
Virgin's maverick, personalised brand, led by the populist figurehead of Richard Branson, reacts against standardisation and could take the lead over other airlines' faceless brands. CityJet's Byrne says customers trust the Virgin product because of Branson's personality, and says Branson is a rare example of a character infusing personal charisma into a major, modern brand.
As franchising takes hold in Europe, it will add another element to the challenge facing carriers which will be coerced into following the franchise option. As well as dealing with the inticracies of franchising itself, airlines will have to take a close look at their own branding strategies. They face the need to develop a more personalised brand, yet offer one that has sufficient global appeal to allow franchisees to distribute it worldwide.
As franchising takes hold in Europe, it will add another element to the challenge facing carriers which will be coerced into following the franchise option. As well as dealing with the inticracies of franchising itself, airlines will have to take a close look at their own branding strategies. They face the need to develop a more personalised brand, yet offer one that has sufficient global appeal to allow franchisees to distribute it worldwide.
Source: Airline Business
