Cheap flight war hots up

Debonair says its share price is being manipulated ahead of the launch of BA's rival discount carrier

BRITISH AIRWAYS' plans to launch its own low-cost airline this spring has started a war between the national flag carrier and smaller discount carriers, which fear obliteration should BA's project take off.

The first victim of BA's Go Air unit could be the fledgling carrier Debonair. Shares in the Luton-based cut-price airline have plunged 25 per cent over the past two weeks after the company announced that losses accelerated to pounds 5.2m in the third quarter, from a pounds 4.4m loss a year earlier.

Meanwhile, Debonair is publicly protesting that its share price is being manipulated by unnamed short sellers. But Andrew Light, an aviation analyst at Salomon Smith Barney, points out that the UK low-cost airline market is already saturated, and that will be intensified by Go Air's entrance. Steady growth in the aviation market of between 5 and 7 per cent over the past five years seems set to slow now, thereby making the environment even more difficult for small carriers.

"That means up until now you had to be stupid not to earn money. If the growth rate goes down, the smaller airlines which operate on a narrow financial basis - many of them don't even own their own planes - will certainly go under," said one Brussels-based aviation expert.

But Debonair is not the only airline wishing that BA's new airline Go would just go away. Ryanair and easyJet are also getting increasingly worried as the airline's start-up date, slated sometime for the next three months, approaches.

Last week easyJet filed a writ in the High Court seeking an injunction to stop BA cross-subsidising Go. easyjet believes that BA's diversification into budget flights is illegal under EU competition law. It has also accused BA of copying from easyJet's business plan which, it says, BA saw during its failed attempt to buy easyJet last year.

BA says Go will create more competition in the market and has vowed to fight the easyJet writ blow-by-blow.

Franco Mancassola, chief executive of Debonair, sees things differently, describing Go as a "hit squad".

"BA has already said it will sustain three years of losses for Go, which it can afford to do. They can fly rock-bottom fares to eliminate competition," said Mr Mancassola.

Debonair has taken its protests directly to Brussels, asking the competition authorities there to investigate. European Commission officials say privately, however, that it is unlikely there will be any grounds for Brussels anti- trust action.

"It's not a competition problem. There is no reason why anyone can prevent a large company from launching a smaller company and financing it," said a senior EU official. "You can't on the one hand say you are in favour of competition and then complain if more competition appears."

Debonair shares were launched in June 1996 as one of a wave of new discount airlines aiming to capitalise on deregulation in Europe's aviation market. The shares have performed dismally, falling more than 50 per cent over that period.

The company says the drop is inexplicable. "We've had some very poor earnings in the losses that we've incurred so far, but these are to be expected in what is a start-up position," said Richard Clapson, Debonair's finance director. "The behaviour of the share price of late causes us to ask questions."

The company last week requested an investigation into whether "outside influences", such as traders wishing to make

a quick buck by selling shares they don't own to push down the price, caused the stock's latest slump. Easdaq confirmed it was carrying out a "routine investigation" into the share price movement.

Some investors, however, remain optimistic about the prospects for the new airlines. Euroamerican Securities, which holds about 12 per cent of Debonair, sees room for growth in the European low-cost airline business. The US, with roughly the same population as Europe, has more than 200 discount airlines, he said, and European low-cost carriers are well-positioned for an inevitable drop in air fares.

What he didn't say was that in the US, 98 per cent of new entrants on the market go out of business within five years. "The big airlines have everything - gates, slots, planes, licences and money. Its like a 10-year- old kid being thrown in the ring with Mike Tyson," said Debonair's Mr Mancassola.

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