Deutsche BA’s Low-Cost Strategy Bears Fruit

For Deutsche BA, the German subsidiary of British Airways Plc, a recent change of strategy is starting to bear fruit.

The carrier, which three months ago switched its focus towards offering low-cost flights, is now confident that its new concept will lead it to enter profit in 15 months from now.

“We got off to a good start and are on target,” said Deutsche BA chief executive Adrian Hunt.

DBA is currently offering rock-bottom prices of as little as 20 euros on domestic routes in a bid to compete with German national carrier Deutsche Lufthansa AG.

Some 800,000 passengers flew with DBA between the period April to June this year, a rise of 14% from the year-ago period. According to the airline, its market share on seven domestic routes rose to 43.6% from 36%. Its load factor, i.e. the average proportion of seats taken up in each flight, edged up two percentage points to 63.5% while the airline at the same time increased the number of seats on offer by 14%.

But there are still doubts as to whether DBA’s low-cost strategy will ultimately pay off. One development that appears to be particularly worrying in this respect is that revenue for the June to April period declined on the year, as Hunt confirmed. But he said that by lowering costs DBA had been able to reduce its losses from the year-ago period. “Today our production costs are already 20% below those of Lufthansa and we continously are increasing our productivity,” he said.

Around one third of DBA’s flights are currently booked via the Internet. The airline also scrapped free on-board meals and newspapers. In addition, DBA is profiting from the weak dollar because it makes its aircraft fuel less expensive.

Airline analyst Ralf Hallmann at Bankgesellschaft Berlin nevertheless remains skeptical. “First DBA has to present some concrete figures,” he said. In 2001, the British Airways unit was still operating at a steep loss.

Meanwhile, budget carrier Easyjet’s plans to take over DBA have become subject to a slight delay. In May, Easyjet announced that, it would sign an option to acquire DBA that would entail an immediate payment of 5 million euros and monthly payments of 600,000 euros to DBA until the option is exercised.

The signing, which was announced for the end of June, has not taken place yet. “We are expecting the signing in the next few days,” Hunt said. The signing of the deal was delayed because Easyjet is still in the process of taking over rival Go. By acquiring both Go and Deutsche BA, Easyjet hopes to become the largest budget carrier in Europe.