Air Europe
Air Europe was a wholly privately owned, independent British airline, established in 1978 under the working title Inter European Airways. It adopted the Air Europe name the following year. Its head office was in Reigate, Surrey, then in Crawley, West Sussex.
Its main operating base was at London Gatwick Airport where it commenced commercial airline operations in May 1979 with three brand-new Boeing 737-200 Advanced jet aircraft.
Air Europe was the brainchild of Errol Cossey and Martin O'Regan, two former Dan-Air executives, and Harry Goodman, who had founded Intasun Leisure during the early 1970s. Goodman became the airline's main private financial backer, and in so doing expanded his role as chairman of the International Leisure Group '', the parent company of both companies.
Air Europe was the main supplier of charter seats to Intasun Leisure, which grew during the 1980s to become the UK's second-largest package tour operator.
Air Europe expanded during the 1980s with a major scheduled presence on short-haul European trunk routes taking off and landing at London Gatwick.
Towards the end of the decade it became the first non-state incepted airline to become pan-European, setting up subsidiaries elsewhere in Europe and acquiring two small airlines to form the nucleus of a new Air Europe Express regional airline subsidiary. The acquired slots at Gatwick enabled it to increase frequencies as well as launch new scheduled routes. By the end of the decade it had become Gatwick's largest resident airline operator.
Air Europe's success came to an end from late 1989 onwards, when the cost of borrowing rose and financial problems beset its parent company. ILG and its UK-based subsidiaries – including Air Europe – went bankrupt on 8 March 1991.
History
Background to formation
Since its beginning in the 1950s, the UK package tour industry has been characterised by its cyclic trade.The first two periods of major growth had occurred during the mid-1960s and early 70s, respectively. These were followed by a period of major contraction during the mid-70s, mainly as a result of the 1973 oil crisis. This, in turn, was followed by renewed expansion during the second half of the 1970s.
The industry's spurt of growth in the late 70s was accompanied by a growing shortage of whole-plane charter seats, which was further exacerbated by Laker Airways' decision to curb its short- to medium-haul charter activities, as a result of that airline's increasing focus on its long-haul, transatlantic Skytrain scheduled no frills services, as well as by British Caledonian's decision to withdraw completely from the market.
Therefore, a regional niche market opportunity arose specialising in short-haul.
Radical departure from established practices in the charter airline industry
During his time as Dan-Air's associate director in charge of the airline's operations, Errol Cossey oversaw the successful introduction of new jet aircraft types into Dan-Air's fleet, beginning with the de Havilland Comet series 4 in 1966 and continuing with the BAC One-Eleven 400 series in 1969, the Boeing 707-320 "Intercontinental" in 1971, the Boeing 727-100 in 1973 as well as the BAC One-Eleven 500 in 1975. He assumed control over the charter fleet, numbering 28 aircraft during the mid-1970s. At that time, Intasun contracted a growing share of its business to Dan-Air. Intasun, like Dan-Air at that time, was shunned by doubtful writers as 'no frills'. It was mainly competing on price with the other tour operators, notably market leader Thomson Holidays.A factor behind Air Europe's undercutting of prices while continuing to expand profitably was that it first waited for all the other operators to place their business with Dan-Air and only then placed its contracts, fitting in with whenever aircraft and crews were available. This meant that a lot of Intasun's business involved mid-week and night flying. This, in turn, was a win-win for both operator and airline. It enabled Intasun to charter aircraft at substantially lower rates than its competitors, who had to pay a premium for chartering planes at weekend peak times and it permitted Dan-Air to increase its fleet's utilisation, thereby boosting the company's overall profitability. However, the high fuel consumption of Dan-Air's "mix'n match" fleet – especially the Comets, which at that time made up the bulk of its charter fleet – against the backdrop of steeply rising jet fuel prices in the aftermath of the 1973 oil crisis made it more and more difficult to offer Intasun the rates at which it was prepared to contract its business to Dan-Air.
Errol Cossey became convinced that he could offer Intasun these rates without difficulty, and do a lot more business with it, if Dan-Air had more modern aircraft with a substantially lower fuel-burn and overall lower direct operating costs in its fleet. He was also aware that Britannia Airways, Thomson Holidays' sister airline and Dan-Air's main rival in the charter market, had already begun building up a fleet of brand-new Boeing 737-200 jet planes, which had lower operating costs and a better operational performance than the older, second-hand jets operated by Dan-Air.
Therefore, Errol Cossey, Martin O'Regan, the group finance director of Dan-Air parent Davies and Newman, and Alan Snudden, Dan-Air's managing director, tried to convince Fred Newman, Davies and Newman's majority shareholder as well as Dan-Air's long-serving chairman, that operating a brand-new fleet of Boeing 737-200 Advanced series jet aircraft – at the time the very latest, state-of-the-art aircraft – was the only way to secure Dan-Air's long-term future as a major player in the charter airline industry. Their argument to Fred Newman was that operating the latest series 200 Advanced model of the 737 would not only give Dan-Air far better cost figures than any of the existing aircraft types in its fleet but would also allow it to leap-frog Britannia, which initially operated only the basic 200 model of the 737. That model lacked important enhancements, such as a short-field capability enabling operations at airfields whose runways were too short for the basic 737-200 model.
After failed attempts to convince Fred Newman of their plan's merits, Errol Cossey, Martin O'Regan and Alan Snudden decided to leave Dan-Air.
Cossey presented the plan forged with O'Regan and Snudden. Goodman agreed to support it as an equity holder. This was the point at which Air Europe was incorporated
The fact that the charter airline industry—Dan-Air in particular—were shunned by some travel companies meant broad appeal was needed at the outset, especially in terms of on-board service, including the in-flight catering. Standards were set to rival the leading scheduled service airlines, with an aim of establishing a new benchmark for the industry and for charter airlines in particular; this would enable the new airline to fly longer seasons as travel companies were expected to cancel their contracts with rival airlines—an increase in aircraft utilisation that would translate into higher profits.
One of the ways in which the new airline was planning to set a standard for high-quality in-flight service was by completely revamping the seat-back catering practised by most contemporary charter airlines. At the time, this consisted of serving spam salad on all flights out and sandwiches back. This seemed to be a low-cost way of minimal catering on inclusive tours but was labour-intensive especially when taking into account that these meals needed to be prepared freshly several hours before departure. Caterers were charging for fresh preparation and seasonal produce. However, the salad leaves tended to wilt and the sandwiches acquired quickly staled due to the dry atmosphere inside an aircraft cabin. As a result, many passengers disliked the food. Thus Air Europe resolved to serve proper, restaurant-style meals including at least three courses – a starter, a hot main course and a dessert — on all flights, time permitting. This saw bulk-purchase of deep-frozen ingredients only to take advantage of lower rates. Eschewing inbound local catering, the frozen food could stay in the aircraft's holds, which would generally not be filled to capacity. Other than operating only brand-new aircraft from the very beginning, this was a second unique selling point.
Improving profitability in a very competitive marketplace characterised by low profit margins and excess capacity were not the only reasons for exclusively using brand-new equipment – generous capital allowances for new equipment reduced tax liability, thereby increasing the enterprise value.
Legal affiliation to a tour operator gave indirect access to customers' deposits for use as working capital. This was of particular importance to reduce market barriers – the first plane had not yet arrived but it could meet up-front expenses. Also many suppliers would have to be paid in February – the dead season – before the summer flying programme commenced in April.
To attract higher-margin business from upmarket tour operators Air Europe was chosen from a short-list, which aimed to distance Air Europe from Intasun.
Long-term strategic planning instead of opportunistic growth
Cossey and O'Regan consciously rejected a second-hand fleet, variable food and ephemeral expansion: from the late 1940s until the early 1960s a short-termist approach was typical for new independent airlines, being critical of the undercutting, opportunistic risks taken by Dan-Air, an airline that became highly diversified – many of its sectors never turned a profit. This weakness overwhelmed its management with activities that were seeing a negative return on investment. Dan-Air justified a diversification strategy by its low marginal cost as aircraft and crews were already available. For many years for Dan-Air each aircraft type represented a "cost centre line" that was financially accountable for itself.A typical example of Dan-Air's opportunistic diversification into activities was its long-term commitment to start a comprehensive network of regional scheduled services linking secondary airports across Europe, many of which operated on a seasonal basis only. This took up massive resources – financial and managerial. It never became a financial success.
Cossey and O'Regan therefore honed in on low-risk activities, specifically few but core activities.
Their long-term strategic plan was to penetrate the market for:
- Short-/medium-haul charter flights.
- Long-haul charter flights.
- Scheduled services serving markets where half of the available capacity could be profitably filled with Intasun customers.
- Air Europe branded airlines in other European countries.
- Favourable finance leases of new aircraft allowing it to take on more debt against their fixed residual dollar valuations.