Colin Baker LONDON
British Airways has entered into exclusive negotiations with 3i, the UK venture capital and private equity group, for the sale of Go, its low-cost subsidiary.
It is understood that the bid from 3i values Go at around £100 million ($140 million). 3i has previously been involved in the airline sector with its highly successful investment in 1991 in CityFlyer Express - which operated as a BA franchisee and was taken over by BA for £75 million in late 1999.
BA's decision to grant exclusivity to 3i is a blow to KLM, the Dutch national airline, which submitted a conditional offer aimed at merging Go with buzz, its own low-cost subsidiary. A BA deal with 3i would raise questions over the future of buzz, which operates from London Stansted airport in direct competition with Go and Ryanair.
KLM has been reviewing its engagement in the highly competitive, fast-growing low-cost sector in the face of continuing losses at buzz. It said recently that it could be forced to pull out of the business if it failed in its bid to merge the operation with Go. KLM believes buzz is too small to achieve the scale needed to compete with Ryanair and easyJet through organic growth.
Buzz, which started flying 15 months ago, has a fleet of 10 aircraft and 18 destinations in its summer schedule.
Separately, KLM launched another low-cost experiment in December with the start of Basiq Air, a no-frills service offered by Transavia, its charter airline subsidiary, on a small number of routes out of Amsterdam.
KLM's approach to BA was made jointly with Carlyle group, the US private equity firm, which sought to add a stake in Go to its growing European portfolio. The negotiations with KLM and Carlyle foundered partly on the valuation of Go, but also on BA concerns about the complexity of the KLM proposals.
It is understood that BA feared KLM's proposed merger of Go and buzz could run into problems with the competition authorities. Depending on the size of Carlyle's stake, the deal could also have faced the issue of foreign control and ownership. Under European Union regulations non-EU entities cannot own more than 49% of an EU airline.
BA wants to complete the sale of Go soon as part of its efforts to re-organise its loss-making shorthaul operations in Europe. The Dutch carrier was the only airline remaining on the shortlist of potential buyers for Go, which BA put up for sale last November.
KLM felt unable to change the terms of its conditional offer to meet BA concerns, as the value in the deal for the Dutch airline lay in the merger of the two low-cost airlines in order to achieve operating efficiencies and savings.
If 3i succeeds in taking over Go it is expected to retain the airline's highly regarded management team - led by chief executive Barbara Cassani, who was responsible for its start-up in 1997.
Cassani announced recently that Go would establish a second UK operating base at Bristol airport in south-west England, in addition to its main base at London Stansted, as part of its plan to raise passenger volumes by 50% in the coming year to four million. Services from Bristol to six destinations will start on 22 May.
Source: Airline Business
