British Airways’ “Open Skies” subsidiary: a failing concept that will lead to higher business class fares

British Airways’ recent announcement, that the airline’s Open Skies subsidiary will suspend flights from Paris to Washington, D.C., represents the next to final nail in the coffin of a faltering experiment to expand the carrier’s influence beyond its London hub.  When Open Skies first launched in 2008, British Airways (BA) envisioned this new low cost, premium airline eventually expanding to serve multiple destinations in the U.S. from such European hubs as Amsterdam, Brussels, Dublin, Frankfurt, Madrid, Milan and Rome as well as Paris, but most of this expansion never occurred and the experimental airline has been jettisoning its growth plans, almost since its inception.

BA originally launched Open Skies to take advantage of the newly minted open skies agreement between the U.S. and the European Union (EU).  That agreement allows any U.S. or EU airline to fly between any U.S. destination and any city within the EU.  When the new treaty opened access to London’s Heathrow Airport to many new airlines, BA sought to strike back by expanding transatlantic service to the U.S. from other cities outside the United Kingdom (UK).

It was widely believed that the concept of launching a separate subsidiary was a way to avoid labor union contracts and rules that would have increased costs for the fledgling airline.  BA wanted a low cost airline that could attract premium (business class) traffic and it was likely anticipated that the low cost model could be imported to the UK at some point.

But Open Skies was bound to fail from the beginning for a number of reasons.  For starters, it is very difficult to attract travelers, particularly high end business travelers, when the airline is flying point to point against another airline that operates a giant hub in one of those cities.  Flying out of Paris, for example, French businesses are much more likely to contract for preferred airline prices with a carrier, like Air France, which can take them from Paris to almost anywhere in the world.  In Frankfurt, Open Skies would have come up against a similar daunting situation with Lufthansa.  To make matters more difficult Open Skies is not part of any airline alliance.  The alliances tend to lock up even more business traffic.

Additionally, Open Skies was also most likely conceived to compete with a slew of new, all-business class, discount airlines that had begun operating between the U.S. and Europe.  Small start-ups, like Eos Airlines, MAXjet, Silverjet and Avigion (which BA eventually acquired) threatened to steal market share from BA.  Fortunately for Open Skies, these airlines were unable to remain solvent when oil prices began rising in late 2007 and all three airlines had ceased operations by the time oil prices spiked at over $120 per barrel.

With higher oil prices, a faltering economy, the demise of those upstart competitors and the sheer difficulty of garnering high end business traffic in markets dominated by other airlines, it seems like Open Skies was doomed from the start, particularly since the airline is trying to offer a premium product at a deeply discounted price.

Now Open Skies is left with just one remaining route: Paris to Newark.  My guess is that BA will eventually abandon that route and pursue a growth strategy centered within their UK base or through the acquisition of other major airlines, such as Iberia.  For business travelers who have benefitted from lower business class fares as a result of this increased competition across the Atlantic, those low fares are destined to disappear and we are unlikely to see any new entrants in the transatlantic market while oil prices remain at relatively historically high levels.