British Caledonian in the 1980s

McDonnell Douglas DC-10-30, one of BCals's new aircraft in 1980, at Faro Airport in 1986.

BCal took delivery of three more McDonnell Douglas DC-10-30 widebodied aircraft in 1980.[1][2][3]

These planes enabled the launch of new routes – to Atlanta on 1 June, and to Hong Kong on 1 August, though in the latter Cathay Pacific and Laker Airways were also permitted without restriction on frequency or fares.[3][4][5] Routes to San Juan, Puerto Rico's Isla Verde International Airport, and Dallas/Fort Worth followed on 26 October. It also enabled the airline to replace the Boeing 707s, with which it had inaugurated another new route to St. Louis in April of that year, with its newly delivered DC-10 widebodies at the end of October when St. Louis became a stop on the new Dallas/Fort Worth route.[3][6] During that year, the company also added Tangier to its North African network.

This accelerated pace of growth made BCal the fastest growing member airline of the Association of European Airlines (AEA) in both 1980 and 1981.[7]

BCal received a boost during 1980, when the Civil Aviation Authority (CAA) approved carriers (BCal, Cathay Pacific and Laker – subject to ratification) on the London – Hong Kong route to be able to pick up and put down passengers at intermediate stops in the Gulf states as the Hong Kong route was not otherwise expected to generate enough revenue for four carriers. For BCal this meant using their Dubai refuelling stop to carry passengers, cargo and mail between London and Dubai and Dubai and Hong Kong, despite objections from British Airways (BA) which already had such rights for Dubai and Bahrain.[8][9]

BCal's 10th anniversary on 30 November 1980 coincided with the completion of its new corporate headquarters — aptly named Caledonian House — in Crawley's Lowfield Heath area close to the airline's Gatwick base. It was the first purpose-built headquarters in the company's history, which was designed to accommodate all 1,100 office-based staff at the airline's Gatwick base under one roof.[10][11]

The high oil price during that period was a mixed blessing for BCal. It helped the airline fill its premium cabins on its oil-related business routes to Nigeria, Libya and Texas. On the other hand, the escalation of the jet fuel price and the fact that the high price of oil had considerably worsened the severe recession in Britain at that time significantly increased the company's operating costs, while at the same time reducing overall demand for its flights. BCal therefore decided to reduce off-peak frequencies on most of its short-haul routes from the start of the 1980/81 winter timetable period. This also included combining week-end, off-peak flights from Gatwick to Glasgow, Edinburgh and Manchester by converting non-stop flights into one-stop operations.

Among the set-backs BCal suffered at that time were the CAA's rejection of its application to serve Manila (Philippines) from Hong Kong or Singapore[12] and BA's successful lobbying of the Government to revoke BCal's long-standing Gatwick—Bahrain—Singapore exempt charter licence in return for having granted it permission to launch a fully fledged scheduled service to Hong Kong.[12]

A BCal Boeing 707-320C freighter seen landing at Gatwick in September 1981.

BCal ended the 1979/80 financial year with a healthy profit of £9.7 million.[13]

BCal received another new DC-10-30 widebody in 1981.[2][3][6] The delivery of this aircraft enabled the airline to increase frequencies on the prime long-haul routes to West Africa from seven to 10 weekly round-trips.[14] It also permitted a frequency increase on the Gatwick—Dubai—Hong Kong route from four to five weekly round-trips.

At the start of the 1981/82 winter timetable period, BCal added Douala (Cameroon) to its network.[15]

Also in 1981, BCal opened a new engine overhaul plant at Prestwick Airport near Glasgow in Scotland.[16][17] The new engine overhaul plant was owned and run by Caledonian Airmotive, a dedicated, wholly owned subsidiary of the airline, which had been set up with technical support from GE.[16][18][19]

BCal's search for a more fuel-efficient replacement for its ageing BAC One-Eleven fleet — especially, the range-limited One-Eleven 200s — acquired a new sense of urgency during 1981 against a backdrop of further escalating fuel prices. The airline was evaluating both the new BAe ATP turboprop for entry into service during 1986 and the BAe 146, the UK aircraft manufacturer's new, four-engined regional jet that was due to enter service in 1983, in addition to the McDonnell Douglas MD-80[14] and the new Boeing 737-300.[14] Both British Aerospace types were rejected because it was felt that they had insufficient range to permit non-stop flights from BCal's Gatwick base to some of the more distant points BCal already served or planned to serve in Europe and North Africa. Moreover, BCal felt that operating a turboprop on trunk routes would meet with passenger resistance as by that time most people had become accustomed to travelling on jets on these routes.

In 1981, BCal applied to the UK and Australian authorities for permission to launch a fully fledged, three-class scheduled service[20] between Gatwick and Brisbane (via Colombo and Melbourne), and between Gatwick and Adelaide (via Perth), at a frequency of two flights a week each, in both directions. BCal proposed to inaugurate what would have been the first ever scheduled operation "Down Under" by a wholly private, British independent airline with McDonnell Douglas DC-10-30s. BCal wanted this to be a joint operation with Ansett Airlines, one of Australia's two leading contemporary domestic airlines, and held out the prospect of placing an order for brand-new, higher capacity Boeing 747-200SUDs[nb 1] to replace the DC-10s on that route as soon as this was justified by increased demand. It also promised to give a major boost to Australia's inbound tourism from the UK and to deliver a steady stream of international transfer passengers to Ansett.[21] BCal's application did not succeed, mainly because of British Airways's and Qantas's determined opposition to any move by the authorities in the UK and Australia to dilute the lucrative BA-Qantas duopoly on the "kangaroo route".[22] The CAA turned down BCal's application although it considered it superior to a rival application by Laker Airways as it felt that there was no realistic chance of obtaining reciprocal approval for the proposed service from the relevant Australian authorities, as long as there was no desire on their part to license a second Australian carrier as well. It did promise to look favourably on the application if BCal re-submitted it with specific proposals for a joint Anglo-Australian operation, once Australia no longer opposed licensing additional carriers on that route.[23]

BCal ended its 1980/81 financial year with a £6.2 million loss as a result of high fuel prices, a major recession on both sides of the Atlantic and heavy route development costs.[13]

This British Caledonian Charter McDonnell Douglas DC-10-10 at Gatwick in March 1984 was one of two acquired from bankrupt Laker Airways in 1983.

The 1982 Falklands War was an unexpected, major setback for BCal. Argentina's decision to close its airspace and airports to all UK-based airlines as well as to all UK-registered aircraft and Peru's decision to follow suit resulted in the loss of the most profitable parts of BCal's South American network, especially Buenos Aires — its most profitable destination in that part of the world — and the lucrative "fifth freedom" traffic rights between Madrid and Buenos Aires. That conflict left the airline with an unprofitable rump network because the remaining routes to Brazil, Venezuela and Colombia did not generate sufficient traffic to be profitable on their own, even after a reduction in frequencies.[25] Another negative consequence for BCal was that one of its eight McDonnell Douglas DC-10-30 widebodied jets suddenly became surplus to its long-haul scheduled requirements, forcing the airline to look for alternative work to increase long-haul fleet utilisation.

Laker Airways's collapse at the beginning of February of that year provided BCal with additional work to utilise its spare aircraft capacity.

Laker Airways's demise also enabled BCal to relaunch a daily service between Gatwick and Los Angeles, to acquire six aircraft from the failed carrier's estate and to move into the hangar it had occupied at Gatwick.[47][48] The ex-Laker aircraft that joined BCal's fleet included two DC-10-10s and four BAC One-Eleven 300s.[49] BCal used the DC-10-10s to set up a new charter subsidiary named British Caledonian Airways Charter as a joint venture with the Rank Organisation[50] The latter aircraft and three second-hand One-Eleven 500s that had been acquired from other sources replaced BCal's seven, ageing One-Eleven 200s.[14]

Despite being a difficult year for BCal, it managed to stay in the black during that period. The airline made a pre-tax profit of £1.1 million, which translated into a £300,000 retained profit, in the financial year to 31 October 1982.[51]

In 1983, BCal became the first non-French airline to order the Airbus A320. BCal placed a firm order for seven A320s and took an option on another three, with deliveries of the aircraft on firm order due to commence during the spring of 1988. The options were subsequently converted into firm orders as well.[52][53][54][55]

Although the A320 was bigger than BCal's actual requirement, it was the technologically most advanced contender with 27% lower seat-mile costs than the BAC One-Eleven.[56] Airbus Industrie had also offered the airline a generous discount to sign up as a launch customer. Having BCal [co-]launch a brand-new narrow-bodied aircraft, gave the manufacturer added credibility in its global sales campaigns. This was of particular importance in the all-important US market, which Airbus needed to penetrate with its new aircraft if it wanted to break the stranglehold Boeing had enjoyed in this market segment with the 737 for over 15 years. Airbus knew that the major US carriers would be suspicious of the new aircraft's commercial credentials if only state-owned (and at the time subsidised) airlines (Air France and Lufthansa) of countries, whose aerospace industries benefitted from orders, as launch customers. Therefore, having a successful wholly independent airline with a major, worldwide scheduled presence like BCal order a brand-new, technologically advanced aircraft came in handy.

BCal intended to use its A320s to replace the ageing One-Elevens on its short-haul European and medium-haul North African routes.[55]

1983 turned out to be another tough year for BCal. Continuing restrictions on the airline's South American services and other schedule cutbacks in response to the early 80s recession reduced aircraft utilisation. This led to a decision to fill spare long-haul aircraft capacity with third-party work. BCal's third-party business included a twice weekly Gatwick—Luxembourg—Barbados service on behalf of Caribbean Airways,[57] weekly Gatwick—Frankfurt—Mahé services under contract to Air Seychelles and a wet lease agreement with Surinam Airways to operate a weekly Paramaribo—Gatwick—Amsterdam service. The Caribbean Airways and Air Seychelles contracts used spare capacity on BCal's DC-10-30s, while the Surinam Airways wet lease utilised the ex-Laker DC-10-10s operated by British Caledonian Charter.[58][59] Although BCal's airline operation incurred a loss of £655,000 in the financial year to 31 October 1983, the airline managed to make an overall pre-tax profit of £2.6 million. This translated into a £300,000 retained profit at group level.[51][60]

During the early 1980s, BCal and its affiliated companies adopted a new organisational structure to reflect the growth in the group's business and the diversification into new activities. Caledonian Aviation Group (renamed British Caledonian Group in 1986) became the new holding company. It had an issued share capital of £20 million in June 1987.[51] Apart from the airline, subsidiaries included British Caledonian Aircraft Trading, British Caledonian Flight Training, British Caledonian Helicopters, Caledonian Airmotive, Caledonian Hotel Holdings and Caledonian Leisure Holdings.

In addition, this was the time BCal, which had always prided itself on its industrial relations record, claiming it never lost a full day's operation as a result of industrial action[51][61] began implementing a new co-operative, industrial relations strategy. The airline termed its new industrial relations strategy "The Way Ahead".[62][63][64] This strategy was designed to make the airline the most productive among its peers in Europe by redefining established working practices. Its aim was to achieve a significant reduction in labour costs through increased productivity, thereby putting the firm ahead of its rivals. It was hoped that this would ultimately translate into higher profits as well.[64]

The strategy sought to gain acceptance (among eligible BCal employees) by offering them a higher basic rate of pay and a greater personal involvement in the management's decision-making process in return for forgoing overtime pay and agreeing to new, more efficient working practices that resulted in increased labour productivity.[25][51][63]

The successful implementation of the new industrial relations strategy in 1983 made BCal employees the highest paid airline staff in the UK at the time.

In 1984, the UK Government began to prepare then wholly state-owned BA for privatisation in earnest by appointing a new board of directors with several years' experience in private industry and by changing its legal status from a Crown Corporation to a public limited company.[65] BCal's senior management saw this as a major threat to the company's continuing existence as the UK's second largest international scheduled airline.[27][66][67] According to BCal's own calculations, the relevant figures for 1983 had shown that BA alone accounted for 83% of all UK scheduled airline capacity measured in tonne kilometers as opposed to a mere 13–14% for BCal. These figures also showed that BA carried seven-and-a-half times as many passengers as BCal,[nb 2] and that Heathrow's share of international scheduled air traffic was five-and-a-half times greater than Gatwick's (79% and 14% respectively).[68][69] This meant that a privatised BA on this scale would enjoy far greater financial clout than BCal. It also meant that BA's market power would be disproportionate compared with that of any other UK airline as a result of its much greater economies of scale. Furthermore, the Government's decision to proceed with BA's privatisation inevitably meant the end of the "Second Force" policy, which had guided BCal's development since its inception. In addition, the transfer of BA's ownership from the public to the private sector meant that BCal could no longer rely on the indirect protection Government ownership afforded it to prevent BA from abusing its power — for example, by engaging in anti-competitive behaviour against BCal.

To redress this competitive imbalance, BCal proposed to the Government the transfer of several of BA's most lucrative long-haul routes to itself[68] — including BA's profitable Saudi Arabian routes as well as that airline's routes[nb 3] to Abu Dhabi, Kuwait, Harare, Islamabad, Kolkata, Singapore, Kuala Lumpur, Tokyo, Seoul and Beijing.[70][71] BCal also proposed the transfer of BA's short-/medium-haul routes from Heathrow to Vienna, Helsinki, Athens, Istanbul, Malta and Larnaca, which it wanted to serve from Gatwick, and the removal of capacity restrictions on its existing short-haul European routes from Gatwick.[70][71] The airline furthermore proposed to take over BA's services from Gatwick to the Iberian peninsula and that airline's services from Gatwick to the Caribbean.[70][71] Moreover, BCal wanted the Government to pursue additional opportunities for dual designation in its [re-]negotiations of existing and new bilateral air services agreements with foreign governments on its behalf — in particular, to the Far East and Australia as well as to East and South Africa and Canada at a later stage.[70] BCal was prepared to pay BA between £200 million and £250 million for the routes to be transferred as well as for the associated staff and infrastructure.[68][72] BCal estimated that it would require nine more aircraft — six long-haul and three short-haul planes — to operate the additional routes.[73] It also reckoned that this would allow it to grow to the minimum size that was required to turn its Gatwick base into an efficient hub to enable it to prosper in the post-BA privatisation environment. BCal was furthermore of the opinion that this would allow it to increase its scheduled capacity to about 20% of all UK scheduled airline capacity while permitting BA to continue in its role as the dominant UK scheduled carrier, which would still have accounted for 70% of total scheduled capacity.[68][74]

BCal's senior management told the Government that the only alternatives to this proposal were shifting its existing scheduled operation from Gatwick to Heathrow's then new Terminal 4,[68][75] which it expected to produce an additional annual profit of at least £20 million in the first year itself,[68][76] or to merge with BA.[75][77] BCal's senior management also told the Government that its preferred option was to remain at Gatwick and to strengthen its position there through the proposed route transfers to enable BCal to turn it into an efficient hub-and-spoke operation that would allow it to compete with BA and the giant US carriers on a level playing field.[68][75][78] The airline's senior management furthermore told the Government that a merger with BA was its least preferred option.[75]

Lord King of Wartnaby, BA's newly appointed chairman, infamously dismissed BCal's offer to purchase BA's assets for £200 million + as a "smash-and-grab raid". He made it clear to the Government that he and his fellow board members opposed transferring any of these assets to BCal. Lord King also left the Government in no doubt that it would find itself in the embarrassing situation of having to dismiss the entire board if it imposed a route transfer to BCal against the BA board's will.[79]

In June 1984, BCal's original proposal to share out BA's routes ahead of the latter's privatisation was followed up by a plan BCal had jointly formulated with eight other UK independent airlines. This plan sought to give the independents a greater share of the UK's air transport market by reducing BA's share. Measured in terms of capacity tonne kilometres (CTKs), it would have increased the independents' share from 17% to 40% while reducing BA's share from 83% to 60%. For BCal alone this would have doubled its share from 15% to 30%. In their submission the independents claimed that privatising BA in its existing shape would allow it to dominate and destroy its competition. They also regarded BA's continuing dominance as incompatible with the CAA's goal of a less-regulated air transport market. BA countered the independents' contentions by maintaining that rather than benefiting consumers through increased competition, the independents' intent generally, and BCal's in particular, would merely result in substituting its own services with those of other carriers.[80]

The opposing views of Britain's leading independent airlines on one hand and BA on the other regarding the future shape of the British air transport industry led to a review of the Government's airline competition policy by the CAA. The result was CAP 500, a Government-commissioned White Paper in which the CAA outlined the findings of its review of existing UK airline competition policy.[80][81] CAP 500 also contained a number of recommendations that were designed to ensure that a competitive balance between BCal and the UK's other independent airlines on one hand and a privatised BA on the other was maintained.[80]

The CAA broadly endorsed BCal's proposals by recommending the transfer of BA's routes to Saudi Arabia and Harare as well as its Caribbean and Iberian peninsula routes to BCal. The CAA also recommended removing all capacity restrictions on BCal's existing short-haul European routes. It furthermore advocated increasing the opportunities for designating BCal as the second UK flag carrier on additional long-haul routes where BA was the only UK scheduled airline. This was to be achieved through appropriate amendments to the relevant bilateral agreements.[74][82]

Full implementation of CAP 500 would have resulted in strengthening BCal's position at Gatwick by making it the sole UK scheduled airline on all trunk routes from that airport while maintaining BA's status as the dominant UK scheduled carrier at Heathrow.[74][82]

In the event, under pressure from BA's board and to ensure BA's successful flotation, the Government decided not to accept the CAA's recommendations in full.[83] Instead, it settled on a limited route transfer from BA to BCal.[84] This entailed transferring BA's profitable Saudi Arabian routes to Dhahran and Jeddah to BCal to add to its new route to the Saudi capital Riyadh.[74][84] The Government thought that this would strengthen BCal by making it the sole UK flag carrier to all of Saudi Arabia and that it would tie in well with BCal's "linking the oil capitals of the world" corporate strategy, which it had successfully pursued since the late 1970s. To be seen as even-handed by both parties and to counter BA's accusations of displaying favouritism towards BCal, the Government required BCal to hand over to BA its loss-making South American routes as well as its unused licences to serve a number of additional destinations in the US and Morocco.[74][84][85]

The limited route transfer on which the Government had decided was far less ambitious than either BCal's own proposals or the CAA's recommendations and would still leave it far smaller than BA and the giant US carriers. Although this was less than it had bargained for, BCal's senior management decided to accept the Government's decision because they estimated the two Saudi Arabian routes BA was going to transfer to be worth £18 million in additional annual profits.[25][86] This would be only £2 million less than what BCal expected to earn in extra yearly profits from its existing network had it been able to transfer its entire operation to Heathrow. Given these magnitudes and Heathrow's already tight slot situation at peak times, BCal's senior management considered this difference in annual profitability immaterial.

The route transfer was to take place at the start of the 1985 summer timetable period.

A BCal Airbus A310-200 seen at Paris Charles de Gaulle in May 1984.

1984 was a record year for BCal. It ended the financial year to 31 October 1984 with a pre-tax profit of £17.1 million, which surpassed the record financial performance of 1978. This translated into a £10.9 million retained profit at group level.[51] These profits were the result of improvements in the British economy, which had recovered from the severe recession of the early 1980s, and BCal beginning to reap the benefits of the new industrial relations strategy it had begun implementing the year before.

Also in 1984, BCal received two brand-new A310-200 widebodies at its Gatwick base.[87][88]

In 1984, the CAA awarded BCal a licence to commence scheduled services from Gatwick to Riyadh and authorised the airline to operate dedicated scheduled services to Abu Dhabi, Doha, Dubai and Muscat, rather than serving these destinations as intermediate points only.[89][90]

Libreville was added to the network during 1984. At the start of the summer timetable period, frequencies to Frankfurt and Geneva increased to three daily round-trips. Connectair[91] and RFG[91] joined the British Caledonian Commuter scheme adding new, regional feeder routes from Gatwick to Antwerp and Paderborn. Connectair also assumed the operation of BCal's Gatwick—Brussels route. BCal furthermore decided to withdraw its Glasgow—Newcastle—Amsterdam regional service to focus its operations on providing worldwide scheduled services from London only.

Seen here at Paris Charles de Gaulle in February 1985, this former British United BAC One-Eleven 500 was among 13 BCal hush-kitted in the mid-1980s.

BCal decided to retire the four ex-Laker One-Eleven 300s and to acquire another second-hand One-Eleven 500, giving it a total fleet strength of 13. Standardizing its short-haul, narrow-bodied fleet on the same aircraft sub-type enhanced its ability to interchange aircraft across that fleet. As part of a "mid-life update", of its entire One-Eleven fleet, hush kits were fitted to comply with stricter, post-1985 noise abatement rules. This was to keep the One-Eleven effective until more modern aircraft were delivered in 1988.[92]

1984 also marked the end of the long-haul, narrow-bodied era for BCal when the last Boeing 707 left its fleet.[93]

1985 was the year that broke all previous financial records at BCal. The pre-tax profit in the financial year to 31 October 1985 reached an all-time high of £21.4 million. The retained group profit for that period was £11.3 million.[51] The profit attributable to BCal's airline operation represented an improvement of almost £12 million compared with the previous year's results.[93] During that year, BCal carried 8% more passengers and 20% more cargo compared with the year before.[93]

The limited route transfer on which BCal had agreed with BA and the Government took effect at the start of the 1985 summer timetable period, when BCal commenced scheduled operations from Gatwick to Dhahran and Jeddah, replacing the BA service from Heathrow.[94][95] At the same time, BCal relinquished its traffic rights to Recife, Salvador, Rio, São Paulo, San Juan, Caracas and Bogotá. BA acquired these traffic rights and began serving most of these destinations from Heathrow.[95]

Seen here at London Gatwick in March 1986, BCal used this former Royal Jordanian Boeing 747-200M for its summer 1985 Gatwick–JFK re-launch, including a door-to-door limousine service at both ends.

A second 747 wearing BCal's full livery joined the fleet permitting the resumption of a daily service between Gatwick and New York's John F. Kennedy Airport (JFK) during the summer of 1985, after the airline's absence from that route for over a decade.[94][96] BCal's 1985 re-launch of scheduled Gatwick—JFK services coincided with the introduction of its door-to-door limousine service for premium travellers.[97]

The temporary lease of a Viscount sporting the full BCal livery[98] for the duration of the 1985 summer timetable period enabled the airline to increase capacity on the Gatwick—Brussels route by replacing smaller aircraft Connectair had used to operate that service under the British Caledonian Commuter scheme and to add more capacity on week-ends on the busy Gatwick—Jersey route.[99][100]

Two more, second-hand DC-10-30s were acquired to replace BCal's A310s, which left the fleet when the additional DC-10s arrived.[96][101]

1985 also saw the establishment of British Caledonian Flight Training, a new flight crew training facility.[102]

As Gatwick became busier, BCal's senior management called on the Government to ban all charter flights from the airport and to move those services to Stansted.[25]

The Government decided to meet BCal's request for a ban on all charter flights from Gatwick half-way by agreeing to give preference to scheduled services in all future slot allocations at the airport.

The collapse of the oil price during the mid-1980s had serious repercussions for BCal's revenue and profit projections as this impacted the oil-related business routes on which the airline had depended for most of its profits since the late 1970s. All of these routes carried fewer premium business travellers than anticipated. This in turn led to a sharp decline of those routes' profitability and, hence, their contribution to the airline's overall profitability. In the case of the newly acquired Saudi Arabian routes this meant that they delivered less than half the projected profits.[29][53][103][104][105]

The limited route transfer had allowed BCal to grow its scheduled capacity to about 18% of all UK scheduled airline capacity, while BA only suffered an insignificant reduction in its share of total scheduled capacity.

BCal's 18% share was still far less than the minimum size BCal needed to acquire the economies of scale to compete with BA and the giant US carriers on a level playing field.[25] This was also less than what had been envisaged in the Edwards report prior to BCal's formation.[nb 4][106][107]

This situation was unsatisfactory for the airline and unrewarding for its shareholders.

Therefore, under pressure from its controlling shareholder 3i, the search for a new, long-term strategy began.[103][108]

As a consequence of its main shareholder's dissatisfaction, the British Caledonian Group's board of directors established contact with ILG's board in November 1985.[109] The purpose of this meeting was to begin exploring ways of combining BCal's and Air Europe's separate short-haul operations in a new joint venture that would have enabled both airlines to acquire the economies of scale to compete with a privatised BA on a level playing field. Another objective of this exercise was to smooth out each other's peaks and troughs, for BCal's peaks occurred during week days while Air Europe's occurred on week-ends. This meant that both airlines could offer their spare capacities to each other to achieve an overall higher level of equipment utilisation and higher load factors throughout the week. ILG's dominant position in the inclusive tour market would also have helped BCal to significantly increase its generally low short-haul loads by filling seats that would otherwise remain empty with ILG's clients, especially on week-ends. A series of meetings ensued. The result was a 150-page study entitled An Airline for Europe. It envisaged the commencement of joint scheduled operations from Gatwick to Hamburg, Munich, Düsseldorf, Milan Linate and Nice in 1987. The next stage of development was to occur during the 1988/89 winter timetable period when further routes linking Gatwick with Copenhagen, Stockholm, Vienna, Rome and Athens were to be added. The study also envisaged adding services from Gatwick to Zürich, Dublin, Madrid and Lisbon at a later stage to enable the joint venture to acquire sufficient economies of scale to become a viable entity in the long term. However, it recognised that it might be difficult to implement the last stage of the envisaged expansion as the relevant routes had already been licensed to Dan-Air.[110]

The study also made profit projections for each stage of the envisaged joint venture's development.

These were:

• £3.7 million for 1987/88.
• £5.5 million for 1988/89.
• £25.2 million for 1989/90.

The latter represented a return on total equity employed plus previously retained earnings of 18.2%. This was substantially better than BCal's short-haul operation could have hoped to achieve on its own.[111]

Despite several rounds of talks being held that lasted well into the first half of 1986, both sides eventually decided not to proceed further with their joint venture study and to go their separate ways.[109]

BCal had high hopes for 1986. It expected to make record profits representing a substantial improvement on the previous year's pre-tax profits of £21.4 million.[112] The British Caledonian Group expected its turnover to exceed half-a-billion pounds while BCal expected to carry just under two-and-a-half million passengers. The year's crowning glory was to be the flotation of the British Caledonian Group on the London Stock Exchange.[108][113][114]

Instead, 1986 turned out to be BCal's "annus horribilis" during which it faced its most acute crisis as a result of events beyond its control. The airline was never going to recover from this crisis, which ultimately sealed the company's fate.

The events that brought about a dramatic turn-around in BCal's fortunes plunging it into a £19.3 million pre-tax loss (translated into a £14.4 million retained group loss).[115][116][117] included

• the American bombings of Libya during April 1986 in retaliation for that country's (at the time) alleged involvement in the bombing of La Belle nightclub in West Berlin, which injured over 200 and killed three.[118][119][120]
• the world's worst nuclear accident in Chernobyl in the then Ukrainian Soviet Socialist Republic on 26 April 1986[118][119][120]
• the adverse impact of the devaluation of the Nigerian currency on BCal's earnings from passenger and freight bookings originating in Nigeria and paid for in the local currency, which the Nigerian government of the day prevented from being repatriated to the UK.[85][101][121][122]

The first two events almost emptied the cabins of BCal's widebodied planes plying the transatlantic routes linking Gatwick with Houston, Dallas/Fort Worth, Atlanta, New York JFK and Los Angeles because of a sudden surge in cancellations, especially from passengers based in the US. Many of BCal's American passengers cancelled or postponed their trips at that time because they feared retaliatory attacks by Libyan secret service agents and did not want to risk exposing themselves to the radioactive fallout from the Ukrainian nuclear catastrophe while conducting their business or spending their holidays in Europe. At the time, BCal's transatlantic scheduled services accounted for a quarter of the airline's worldwide revenues and 37% of its passenger traffic.[118] The Libyan bombings also dashed any hopes BCal had to resume operations on its profitable Gatwick—Tripoli route later that year, resulting in a further loss of expected revenues and profits.[118][119]

The third had a serious impact on BCal's finances at a time of crisis as it denied the airline speedy access to a substantial amount of money derived from passenger and cargo sales in its most important and most profitable overseas market. This resulted in a significant revenue loss.[101][120][121][122]

What was already a bad situation for the airline was made worse by the continuing decline of the oil price, which had started the year before. The rapid fall in the oil price reduced the oil industry's spending power, thereby significantly reducing the number of oil-related business passengers planning to fly with BCal in future.[101] As these passengers used to account for a major share of the airline's high-yield premium bookings, future revenue and profit projections needed to be revised as well to take account of much reduced demand for the company's most expensive tickets.[101][114]

In addition, the Government announced the withdrawal of BCal's licence to operate the high-frequency Gatwick—Heathrow Airlink helicopter shuttle service as a result of the completion of the M25 London orbital motorway, thereby denying the airline's passengers easy access to connecting flights from Heathrow and depriving passengers travelling with airlines based at that airport of the opportunity to avail themselves of convenient onward connections from Gatwick.[123] The resulting reduction in the number of passengers changing flights at BCal's Gatwick base had a detrimental effect on load factors on the airline's profitable long-haul routes. This in turn reduced the profitability of these routes, as well as the airline's overall profitability by an estimated £2 million per annum.[64][124]

Seen here at London Gatwick in April 1984, McDonnell Douglas DC-10-30 G-BGAT was one of the aircraft BCal sold to Continental Airlines in 1986.

As a result of the problems it was facing during that time, BCal announced 1,000 job losses out of a total worldwide workforce of 7,700[25][51][123] which given there was no overall reduction in services Flight International described as suggesting "that the slim down was overdue"[125] It also needed to make adjustments to its schedule to take account of the expected changes in traffic patterns. This led to an immediate reduction in the number of weekly frequencies on BCal's underperforming Saudi Arabian routes. The aircraft capacity released was redeployed on BCal's well-performing route to Dubai and Hong Kong.[nb 5][125]

Altogether BCal suffered a total revenue loss of £80 million[nb 6] while the airline itself lost two-and-a-half million pounds every month at that time.[51][121]

The airline embarked upon a major asset disposal programme to compensate for this significant revenue loss and to have sufficient funds to keep the business running.[116][117] These asset disposals included the profitable sale of two, relatively young McDonnell Douglas DC-10-30 widebodied aircraft to Continental Airlines, the sale and lease-back of the entire 13-strong, short-haul BAC One-Eleven fleet, the sale of six of Caledonian Hotel Holdings' hotels,[nb 7] the sale of Caledonian Airmotive to US-based Ryder Systems, the sale of Caledonian Leisure Holdings and the disposal of British Caledonian Helicopters the following year.[53][115][121][126]

Despite facing a major crisis, BCal continued adding new aircraft, routes and flight frequencies in an effort to maintain a competitive operation.

Two more 747s joined the fleet during 1986.[101][125] This permitted a major capacity increase on the popular Gatwick—Dubai—Hong Kong route.[29][125]

During that year, Muscat,[29][125] Gaborone[115] and Aberdeen[127] joined the network.

BCal's acquisition of a fifth 747 the following year permitted the launch of a new route from Gatwick to Tokyo on 31 May 1987, at a frequency of three return flights per week.[25][101][128] In addition, for the first time in five years, two new European routes were launched from Gatwick. These served Milan Linate[25][101][129][130] and Nice[25] at a frequency of 13 and three return flights per week, respectively.

By July 1987, BCal had already exhausted most of the proceeds from the asset disposal programme.

The proceeds from the sale of two DC-10s to Continental Airlines was all that was left to keep the airline in business. Senior management realised that the company was unlikely to survive on its own and that it needed to act fast if it wanted to avoid BCal's collapse.[131]

Therefore, the search for a financially strong partner acquired a renewed sense of urgency.

Several rounds of talks that were aimed at achieving a full-scale merger ensued with various airlines in the UK, the US, Canada and Europe.

BCal's future prospects as a stand-alone, medium-sized airline operating a variety of short-, medium- and long-haul scheduled services were rapidly diminishing against a background of looming consolidation in the airline industry. This was driven by the giant US carriers that had begun channeling their traffic flows into powerful hub-and-spoke operations, rather than feeding these into the networks of BCal and other international partner airlines, in the wake of US deregulation. In addition, BA's impending privatisation and the Government's refusal to fully implement the recommendations contained in the CAA's airline competition White Paper meant that BCal was unable to acquire the economies of scale it needed to compete with these airlines on a level playing field. This prevented BCal from achieving higher volumes over which to spread its fixed costs.[77] It also deprived the airline of the capacity to generate the funds to continue investing in fleet renewal, further network expansion and new information technology systems.[77]

BCal's basic dilemma at the time can be summed up as follows:

It had become a mid-sized airline that was too big to be a specialist, niche operator. Yet it was too small to effectively compete with BA and the US giants in terms of economies of scale and scope. At the same time, it was unable to match the significantly lower costs of emerging, aggressively expanding Far East competitors, such as Cathay Pacific.[132]

BCal's precarious financial position made it obvious for most of its rivals and seasoned industry observers that the ailing airline lacked the financial strength to survive on its own for much longer.

BCal had valuable traffic rights to operate scheduled services on a number of lucrative, long-haul routes to parts of the world that were not served by any other British airline at that time. It therefore became a desirable takeover target and a bidding war ensued between several potential suitors.

The chief protagonists in this takeover battle were BCal's archrival BA as well as ILG/Air Europe and SAS.

On 11 December, the CAA told SAS that it needed a British investor to match the SAS bid or the CAA would recommend to the Department of Trade and Industry that BCal no longer qualified as a British airline and the trade secretary indicated to the House of Commons that in that case he would be likely to revoke BCal's licences.[143]

To counter SAS proposals, BA made an alternative cash offer of £200 million for all of BCal's stock (equivalent to 972 pence per share) while also leaving the alternative of 80 million BA shares still open.[143]

Faced with the prospect of its takeover target being snatched away from under its nose by SAS, British Airways initially began resorting to bullying tactics. In this it had the implicit backing of Lord Tebbit, then a prominent cabinet member of Britain's ruling Conservative Party, who publicly referred to SAS as "Viking raiders".[145][155]

BA was using a mix of rational and emotive arguments to convince both the regulators and the shareholders of the British Caledonian Group that its revised offer was in their best, long-term interest.

At the time, SAS used to pursue a high-fares-high-yield strategy in its Danish, Norwegian and Swedish home markets. BA argued that the SAS bid for BCal would lead to higher fares and thus would not benefit British consumers. In addition, BA also argued that BCal's takeover by SAS, in which the governments of Denmark, Norway and Sweden jointly held a 50% stake[nb 8] at that time, effectively represented a back-door nationalisation of a significant part of Britain's privatised air transport industry and contrasted this with its own, recent privatisation.[156] In this context, BA highlighted that two of these governments represented countries — Norway and Sweden — that were not even members of the European Economic Community (EEC) at that time and therefore were not bound by moves to liberalise its member states' air transport markets. BA furthermore argued that this would call into question BCal's international traffic rights as most bilateral air services agreements contained a clause demanding airlines to be substantially owned and controlled by interests based in the countries they represented, and went on to argue that this could force the British Government to make concessions to its overseas counterparts that were not in the interest of the British air transport industry to preserve BCal's UK flag carrier status.[156] BA moreover backed up its arguments with the threat that it would immediately apply to the CAA to have all of BCal's licences to operate scheduled air services revoked. BA based these threats on a clause in the 1982 Civil Aviation Act, which states that any airline claiming UK flag carrier status must be substantially owned and controlled by individuals who are UK nationals or entities whose headquarters are located in the UK.

In the event, the British Caledonian Group's controlling shareholder 3i decided to accept BA's final £250 million offer which it presented on 21 December 1987 with the proviso that it needed to be accepted or rejected that day.[157] As the uncertainty surrounding BCal's future led to a further, significant deterioration of its financial position[nb 9] and BA's final bid trumped SAS, the fiduciary responsibilities of the British Caledonian Group's board towards their shareholders meant that the only option left was to recommend the acceptance of the BA bid. 3i and the other shareholders decided to sell their stakes in British Caledonian Group plc to British Airways relinquishing control of BCal.[51][157]

Following BA's successful takeover of BCal, SAS had a giant hoarding erected at the entrance to Heathrow's central area featuring an advertisement that ended with BCal's famous 1980s marketing slogan we never forget you have a choice.[105][158]

The referral of BA's original bid to take over the entire British Caledonian Group to the MMC had resulted in the imposition of several conditions before the proposed deal was allowed to go ahead. These included BA releasing a minimum of 5,000 annual slots BCal had held at Gatwick[nb 10] to competitors and requiring it to surrender to the CAA several of BCal's licences to operate scheduled services from Gatwick on a number of important, short-haul feeder routes.[77][141][159] Although BA had been permitted to re-apply for these licences, the CAA decided to re-allocate all of them to rival airlines.[160]

BA also needed to withdraw the objections to Air Europe's application to the CAA for licences to launch new scheduled services on several short-haul routes BCal already used to serve from Gatwick.[nb 11][120][141][161]

Furthermore, both companies' combined turnover exceeded the minimum threshold that automatically triggers the referral of a proposed merger between two or more companies that conduct a significant part or all of their business in EU member states to the European competition authorities in Brussels. Therefore, the Competition Directorate of the European Commission (EC) needed to clear BA's takeover of BCal as well.

In addition to the conditions imposed by the MMC, BA agreed further concessions with the EC's Competition Directorate to prevent BA from abusing its dominant position at both of London's main airports. These included limiting BA's presence at Gatwick to a maximum of 25% of all available slots, relinquishing BCal's unused route licences and to not oppose Air Europe's designation as an additional UK flag carrier on Gatwick—Rome. BA also had to give a legally binding undertaking that it would not seek to increase its share of Gatwick slots above 25% through any additional acquisitions of other airlines and/or their slots until 1992.[162] These measures were primarily intended as safeguards for other airlines that required access to a sufficient number of attractive slots at Gatwick to launch viable scheduled services in competition with BA. Otherwise, BA's dominant position at both of London's main airports would have made it virtually impossible for the much smaller independents to replace and enhance capacity lost as a result of BCal's takeover, especially on routes where BCal had competed with BA and which accounted for more than half of its net revenue earned from scheduled services.[160][163]

Air UK was awarded the licences for BCal's former London—Scotland trunk routes from Gatwick to Glasgow and Edinburgh. Dan-Air obtained the licences for the old BCal routes from Gatwick to Manchester and Aberdeen[nb 12] as well as from Gatwick to Paris Charles de Gaulle and Nice. The licence for BCal's Gatwick—Brussels route was transferred to Air Europe. The CAA also granted Air Europe permission to increase the frequency on its existing route between Gatwick and Paris Charles de Gaulle,[164] where it had already competed with BCal, so that it could match Dan-Air's frequency. Both Air Europe and Connectair were successful in their applications for BCal's unused European route licences.[165]

BA continued serving the routes until the new licence holders were ready to assume operations at the start of the 1988/89 winter timetable period.

BCal ceased to exist as a legal entity at 00.01 hrs. on 14 April 1988.

Cal Air International,[nb 13] the former British Caledonian Charter operation,[25][166] and British Caledonian Flight Training were not included in BA's acquisition of the British Caledonian Group.[166]

British Airtours, BA's wholly owned, Gatwick-based charter subsidiary, was rebranded Caledonian Airways. The aircraft were repainted in a variation of BA livery with BCal's lion rampant on the aircraft fins and cabin crew members taking to wearing the tartan.[167]

BA replaced the former BCal short-haul fleet of 13 BAC One-Eleven 500s with 14 Boeing 737-200 Advanced.[nb 14][168]

The One-Elevens were transferred to BA's regional bases in Birmingham and Manchester.

The five second-hand 747s BA had inherited from BCal were replaced with its own 747-100/200s.[nb 15]

In addition, BA stationed three Lockheed L-1011 Tristar widebodied aircraft at Gatwick, which were used to operate the former BCal West African coastal schedule as well as a number of new routes to North Africa and the Middle East that had been transferred to Gatwick from Heathrow.[168]

The only former BCal aircraft BA kept for its Gatwick operation were eight McDonnell Douglas DC-10-30s that had formed BA's erstwhile competitor's core long-haul fleet.

BA transferred the former BCal routes to Tokyo and Saudi Arabia to Heathrow. To compensate for this loss and to utilise its full slot allocation at Gatwick, BA moved its routes to Amman, Bermuda, Cairo, Khartoum, Larnaca, Luxor and Nassau to Gatwick, and routed a new Manchester—London—Islamabad service via Gatwick instead of Heathrow.[nb 16][169][170]

BA transferred all of its international operations from Gatwick — including those it had inherited from BCal — to the then brand-new North Terminal,[nb 17] which opened in March 1988.

Delivery of the A320s BCal had ordered in 1983 began arriving at BA's new Gatwick base during the spring of 1988. These aircraft had been painted in BA's contemporary Landor Associates designed livery. BA operated its first commercial A320 service between London Gatwick and Geneva before transferring the entire A320 fleet to its main base at Heathrow later that year.

Notes

Citations

Bibliography

• Thomson, Sir Adam; High Risk: The Politics of the Air, 1990, Sidgwick and Jackson, London.