Digital Transformation » Systems & Software » THE FINANCIAL DIRECTOR INTERVIEW – How a European airline found its wings over America.

Probably more people have seen Richard Clapson’s face than that of any other British finance director. He’s appeared in posters in tube stations and advertisements in newspapers, alongside his boss, chairman and chief executive Franco Mancassola. Together, the pair advertise the low-fares European airline, Debonair.

A typical advert sees Mancassola (universally known as Franco) in ebullient pose beside a very distressed Clapson. “When Richard my financial director winces,” runs one headline, “I know I’ve got my prices just about right.” Alongside is a list of airfares: Madrid from #69 (one-way); Munich, #69; Rome, #89.

Clapson says that the adverts were mostly Mancassola’s idea: “I’m always complaining about not getting enough money from the passengers so he thought it would be a good idea to incorporate that into the advertising.”

It also, he jokes, saved on expensive modelling fees.

The adverts are clearly designed to appeal to the frequent business traveller, as are the seats in the aircraft. The “pitch” – the distance from one seat to the next – is a leg-stretching 33 inches. On other low-fare airlines, it’s a knee-banging 29 inches. “We say, ‘Comfort is not a class privilege’.

It’s a slogan we have,” Clapson points out.

Of course, this also means that the British Aerospace 146 airliners used by Debonair have to make do with fewer seats – 96 rather than the 112 that “cattle-class” airlines would squeeze in. At the moment, that doesn’t present a problem for the new start-up, with load factors currently running at around 45%. But the prospectus reveals that such a seating configuration eliminates the need for a third flight attendant, saving up to #1m a year.

It soon becomes apparent that Clapson is really quite good at saving money in this fashion. “It doesn’t have to be an expensive operation to offer a degree of comfort and a degree of professionalism,” he says. “There is no more cost involved in that. We put our cabin staff in a proper uniform.

That conveys a good professional image.”

Clapson is referring – in somewhat disparaging terms – to the blinding orange sweatshirts worn by the crew of fellow cost-cutter and Luton Airport neighbour, easyJet. And yet, the fares that the two airlines offer appear to be very similar.

“The key to low fares is low cost,” he says. “It’s attention to detail.

It’s everything you look at.” Debonair’s offices are more pre-fab than fabulous. The signs stuck on the doors for the crewroom or sales and marketing, for example, are simple sheets of A4 run off a laser printer. There is no pension scheme, and the company doesn’t carry “key man” insurance policies.

There are no company cars. Clapson’s own car was described by one person who expected more luxury of an airline finance director as “a crappy old Volvo”.

The PCs on Clapson’s desk and everyone else’s aren’t badged by Compaq or IBM, but by Tiny. “We discovered Tiny Computers down in Redhill in Surrey make a perfectly good PC product – it just doesn’t have the brand name. And their products were half the price or less compared with the competition,” he says.

It should go without saying – but doesn’t – that one area where Debonair doesn’t compromise is safety. But even in Debonair’s choice of aircraft, maintenance costs can be saved, Clapson argues.

The BAe-146 is a remarkably quiet, four-engined aircraft, well-suited to the regional and city-centre airports throughout Europe whose runways aren’t two miles long. With a little internal logic, the layman might think that, from a cost point of view, four engines have twice as many things that can go wrong than two engines (but of course, the aircraft has an excellent safety and reliability record).

But Clapson explains that, if there is an engine failure on a twin-engined aircraft – such as an easyJet Boeing 737 or even a transatlantic Boeing 767 – at an airport away from the home maintenance base, then you either have to have maintenance support at that airport, or ferry out a new engine.

A “four holer” can fly back to base (empty, of course) on three engines.

“It cuts down on the cost of spares and support,” Clapson says.

He adds: “They are also very customer-friendly because passengers walk out and see four jet engines: it gives them a little extra comfort. It does me, too.” We’re pretty sure that’s a joke, but Clapson isn’t exactly steeped in the airline industry. His background is “the rag trade”, as he puts it. He was at Debbie Moore’s Pineapple Dance Studios and Philip Green’s Amber Day, the holding company for retail group What Everyone Wants. So how steep is the learning curve for a retail industry FD joining a fledgling airline?

“The jargon is, for an accountant, the only real barrier. Once you can understand what the engineers are telling you then you have cracked most of the problems,” he says.

“I think the advantage I’ve had of coming into the industry fresh is that I can question anything, and ask, Why? Why are we doing this? Very often the answer is quite illuminating. They start asking themselves, ‘Why are we doing it this way?'”

For example, because everything in the front line in the aviation business costs so much money – “There is an extra nought on the end of everything” – it’s easy to get into the habit of spending money on the best of everything, without question. “It’s all about cash control, which I always put first.

You’re either born to be mean, or not. It comes naturally! And also you have to be persistent and not allow yourself to be bullied. You’ve got to fight your own corner. That’s the way you keep the costs down. Don’t get hoodwinked.” Those Tiny computers are a case in point.

There is more to the way Clapson manages costs than merely being “mean and miserable”, however. Two themes run through his strategy: outsource as much as possible, and gear costs to volumes.

“When we go into a new airport, we always try to have contracts which, for example, link costs to the number of passengers we carry rather than merely the fact that we landed an aircraft,” he explains. “If we carry fewer passengers we have lower costs. That is a very successful way of controlling costs.”

Debonair has its own team of line engineers for routine maintenance, but heavy maintenance is carried out by Jersey European Airways, which also flies BAe-146s and is based in Exeter. They are paid an hourly rate.

Major engine overhauls, such as the 5,000 hour check, are handled by Allied Signal, which is paid according to how many hours the engines have flown.

Structuring costs in this way means “there are no surprises”, Clapson explains, but it does limit the upside potential if the airline turns out to be more successful than anticipated. “There is always that risk,” he admits. “But you know you are never going to have any nasty surprises.

That’s the thing we try to avoid. We know we’re not going to have a nice surprise. It’s a bit like currency management. You just want to know what your risk is.”

One reason for outsourcing – aside from the greater flexibility to gear costs to volumes – is European employment law, Clapson says: “An airline in our position wouldn’t want to start getting into formal employment in Europe. Thank heavens we (in Britain) haven’t got the social chapter yet – the social security costs of employment in most European countries is frightening. Much better to outsource in those countries and let someone else have those problems.”

But Clapson won’t outsource the cockpit or cabin crew. The pilots (average salary, #34,217, according to the company’s prospectus) and flight attendants (average salary, #10,261) are all employees of Debonair. “We wanted the crew – who are our public face – to be part of the company. We didn’t want them to be detached. We wanted them to feel part of the organisation; very ‘customer care’.”

When Debonair first took to the skies, however, it was almost a “virtual airline”. It had a fleet of aircraft leased from US Airways (which had been keeping them in mothballs in the Mojave desert), and it had the pilots, but it didn’t have either an EU operating licence or an Airline Operators Certificate. Instead, it operated under the ATOL rules that govern anybody who sells airline tickets. In effect, Debonair was a glorified travel agency. Its aircraft were operated by British World Airways, a fifty-year-old business formerly known as British Air Ferries. BWA did all the crewing and rostering, the training, and supervised the maintenance of the aircraft – in short, managing the technical operation of the airline for the first 15 months until October last year when Debonair got full CAA approval.

One of the requirements for the EU operating licence is that the airline should be majority owned and controlled by Europeans. But in 1993 when Clapson and Mancassola were trying to raise funds for their bright idea, UK and continental European investors were reluctant to back them. “The pain of recession was still with us,” he recalls. “The memories of failures fresh in people’s minds. Then we arrived and knocked on the door and said, ‘We’ve come to raise finance to start a scheduled airline.’ We got some rather strange responses.

“We almost assembled sufficient funds on two occasions, but it was a case of collecting together promises of parcels of money, but we never quite managed to be able to get sufficient to be able to actually begin.”

America beckoned – and a stroke of luck helped get the idea off the ground, just as Mancassola and Clapson were thinking of giving up. They were introduced to a Phoenix, Arizona, brokerage called Paradise Valley Securities. “I can remember the phone call at 11 o’clock one night, when the idea was floated. That’s really where it began. It was a coincidence that the people at Paradise had also thought that it would be a good opportunity for a start-up airline.”

They had seen the impact of aviation industry deregulation in the US, and reckoned that there could be similar opportunities as European skies also opened up. They had also been involved in raising funds for Reno Air and ValueJet.

But having American equity investors in control would deny Debonair the right to its European operating certificate. The solution was to structure the fund-raiser as a non-voting convertible, with conversion terms that would bar US backers from switching their debt for equity unless there were enough European investors.

“They showed great faith in us,” Clapson says of the Americans, from whom the company eventually raised #10m in three tranches. “Effectively they were lending us the money. No interest for three, four years, with an opportunity to convert that loan stock into shares one day, but only when we were able to issue shares to Europeans. They showed great faith.”

That day came in July last year when Debonair floated on Easdaq, the European screen-based stockmarket headquartered in Brussels. The company raised #25m from European investors, with the biggest backing coming from Germany.

Easdaq was an interesting choice for Debonair. For one thing, the exchange was even newer than the airline itself. While flight operations began in June 1996, Easdaq didn’t open up shop until November that year. It was something of a gamble to take a brand new airline onto a brand new stockmarket – Debonair was only the 13th company to list on it – “but we thought that it had good potential,” Clapson explains. “We thought that if Europe really is going to build itself into more of a community, then Easdaq offers an opportunity to trade across national boundaries.”

More to the point, Easdaq helped reinforce Debonair’s European image.

“We pitch ourselves as a European airline, not as a British airline flying to Europe,” Clapson says. “Our route structure is to provide a European service, so that the Germans, Spaniards and Italians hopefully don’t feel too much as though they are flying a British airline. Pan-European is a hackneyed phrase, but that’s what we’re trying to convey – and I think that works pretty well. Germany is now our second largest market for sales.

“We didn’t have a three-year trading history so the London Stock Exchange was automatically ruled out. We looked at the Aim market and felt that it would identify us too much with the UK. We looked at the smaller markets in Paris, for example, but didn’t want to be seen as a French airline.”

Debonair was the first British airline to fly under the so-called Cabotage rules, which allow an airline from one country to fly scheduled services between two airports in another country. For example, Debonair flies between Dusseldorf Express and Munich, and by the end of March should be operating between half a dozen Italian cities. It used to fly between Barcelona and Madrid, but closed that route within a few months as it failed to prove profitable.

But Clapson is well aware that, while there may be a Single European Market, it isn’t right to treat Europe as a single marketplace. While easyJet only deals with direct sales – its phone number is plastered on the side of its aircraft – Debonair does direct sales and deals through travel agents. At the time of interviewing, it was also thought that British Airways’ new venture, Go, was also going to go down the telesales route.

“We are not convinced that Europe is ready for that,” Clapson says.

“We still think travel agents have a role to play, especially in countries such as Italy. The idea of giving your credit card number over the telephone to a stranger in Italy is almost unacceptable. They are many years behind us in credit card transactions.

“You’ve got to be aware of that. To start up an operation in Italy that’s only direct sales would be an absolute disaster. We have a small reservation centre in Rome, but they only do a tiny proportion of our business.”

Debonair should be a company that will benefit from the introduction of the single European currency, and it is. “We welcome it wholeheartedly,” he says. “It will save money not having to deal with all the different currency bank accounts that we have. When our staff go off on foreign trips, they take bundles of deutschemarks, lire or pesetas. That will be a cost that can be eliminated.”

There he goes, thinking about costs again. “It’s all about attention to detail,” are his parting words.