In 1987, British Airways was privatised, and over the next decade turned from a loss-making nationalised company into “The World’s Favourite Airline” – a market-leading and very profitable plc. The strategy that transformed the company into a marketing-led and efficient operation was conceived and implemented by Lord King as Chairman, aided by Sir Colin (subsequently Lord) Marshall: two tough businessmen who confronted staff inefficiencies and so improved service effectiveness that BA was rated international business travellers’ favourite airline for several years in the 1990’s.
Lord King having retired, Lord Marshall became Chairman and was succeeded as Chief Executive by Bob Ayling, a long-time BA manager.
Ayling set in train a strategy to turn BA into a “global” airline – transcending the “flag-carrier” status (the role of a nation’s leading airline) it shared with Air France, Lufthansa, Swissair, Alitalia, Iberia – into an airline with no “national home” operating throughout the world. The dropping of the overtly “British” heritage and associations was reflected in a changed brand strategy. Away went aeroplane liveries featuring the Union flag, to be replaced by tailfins bearing themed designs from around the world. This was to address the “global traveller” a savvy (mainly business) customer whose criteria for purchase were service levels, range of destinations, promptness – not price.
But the re-branding became a debacle. Customers, staff, alliance partners, shareholders and retailers (travel agents) all liked the British heritage and imagery and rebelled against the turn to an anonymous, characterless new style.
Ayling also focused on cost-reduction programmes which antagonised and demotivated BA’s staff – and customers noticed the deterioration in behaviour of staff whose commitment to customer service suddenly plummeted.
The upshot was that Ayling was ousted in a boardroom coup in March 2000. During his reign, a loss of 244m in the year to March 31 2000 – the first since privatisation – was recorded and the group’s market value had fallen by half.
A New Face.
In May 2000, Rod Eddington joined BA as Chief Executive. He was previously Managing Directory of Cathay Pacific and Executive Chairman of Ansett, an Australian airline.
Eddington’s immediate actions were designed to restore profitability to BA’s operations – and to restore the Union Flag to BA’s planes! He set about reducing the fleet, moving to smaller aircraft, cutting clearly unprofitable routes. He also targeted “high-yield” customers, the traditional mainstay segment for BA. Matching supply with demand was the overall concern, to restore positive cash flow.
Strategically, BA’s longtime search for a merger partner was resumed. A link with American Airlines, the first choice partner, was out of the question after US regulatory authorities squashed the idea. A proposed merger with KLM, the Dutch flag carrier, was discussed in some depth, but that foundered on doubts over the long-term financial benefits, and arguments over the relative shares each airline would have in the merged company.
Meanwhile, the airline industry was undergoing a seismic shift with the rise of low-cost “no frills” airlines. Ryanair and easyJet had, at first, demonstrated the existence of a new market for cheap airline travel which had not been tapped by traditional airlines. But then they began to expand and to compete for passengers that normally would have gone to BA – even business class customers couldn’t see the reason “to pay £100 for breakfast” (the difference in price between BA and easyJet between London and Edinburgh.)
BA’s response (under Bob Ayling) was to form GO as a direct response to the no-frills competitor. Operating out of Stansted airport, GO was operated
entirely separately from BA, so none of the high-cost culture was inherited. Launched in the face of vociferous opposition from easyJet, GO nevertheless established itself in the market – though at what cost, no-one could guess.
Rod Eddington soon decided that his focus on premium customers made GO’s operations inconsistent with that of BA as a whole. GO was sold in May 2001 for £100m to 3i, a UK venture capital and private equity group.
GO was subsequently sold on to easy Jet for 375m.
However, the driving of aggressive strategies from budget airlines is still forcing flag-carriers to re-assess their business models.
For the year ended March 2001, Eddington’s steps had yielded a quadrupling of operating profits. Market share on key routes had been lost as cuts in fleet and routes bit, but BA believed it had lost customers who paid deeply-discounted fares. BA continued its vigorous pursuit of high-yield passengers.
So, all seemed to be going well. The brand was being restored, financial performance was improving and the only real problem was lack of progress on forming a partnership with a US carrier, prevented by the regulators. Then came September 11th, and the airline market fell apart. The consequences were swift – passenger numbers fell 28%, US airports were closed for a week, Swissair, Sabena, US Airlines and nearly, Aer Lingus, went bust. Alitalia lost 570m, Lufthansa 400m. Altogether the industry lost 7bn and shed 120,000 jobs – 13,000 at BA – and passenger numbers are still running at 13% below normal on transatlantic routes.
In contrast, passenger numbers and financial results at low-cost carriers – easyJet and Ryanair – were rising impressively.
Then came Sars, the Iraq war and the continuing sluggishness of the world economy, all deeply damaging to passenger numbers.
Strategy at BA was thrown into disarray.
With the travel market is still subject to “global economic and political uncertainty”, BA has repeated its forecasts for lower revenues. However, the “fundamentals of this business are stronger than they have been for four or five years” John Rishton, Finance Director, says BA is generating cash, and is conserving that cash. (FT and D.Tel. 6.11.02).
The operational imperatives to cope with the turbulent environment are expressed in BA’s “Future Size and Shape” initiative which is intended to:
– Achieve significant cost reductions. Originally targeted at 650m, the cost savings are now expected to save an annualised £1.1bn over 3 years (FT 19.3.03). Simplified operations and minimal overheads is the aim.
– Cut capacity, to match supply of aircraft and flights to the reduced demand.
– Cut staffing levels. A further 3,000 job cuts planned for March 2004 have been brought forward to September 2003.
– Change BA’s business model. Aware that no-frills competition is not going to go away, but that BA possesses a positive service heritage, BA wants to create an offering that combines the best bits of BA and the no-frills model. Martin George, BA’s director of marketing and commercial development, explains “our customers like the BA product – convenient airports, high frequency, good level of service – but want it at the right price, and that’s what we’ll give them. It’s about changing our business model to allow us to compete profitably” (Management Today, September 2000).
– Rationalise BA’s internal UK and short-haul business – CitiExpress has been formed from the activities of subsidiaries Brymon, BRAL, Manx and BA Regional. To stem heavy losses on this short-haul network, some rationalisation has been done – it has pulled out of Cardiff and Leeds-Bradford airports, and will cut its current fleet from 82 to 50 all-jet planes by end-2005. However, it is expanding operations from Manchester, and from London City airport to Paris and Frankfurt. (FT 18.12.02).
It is recognised that BA started to take the bitter medicine of cost cuts and restructuring earlier and in bigger doses than rivals in Europe and North America, and that Rod Eddington has pushed through changes that were long overdue. But is this enough? – can BA wrest back the short haul market from easyJet and Ryanair, while maintaining its position in the longhaul market…………………
In July 2003, just at the start of the busy holiday season, BA was hit by an unofficial strike by Heathrow check-in and sales staff who were objecting to a hasty introduction of a swipe-card automatic clocking system. 500 flights were cancelled, affecting 100,000 passengers. The damage to BA’s service reputation was enormous.
Both management and union leaders were taken by surprise, and it brought to a head the existence of restrictive practices going back 40 or 50 years which both sides have to confront.
Results for the year ending 31st March 2003 showed a pretax profit of 135 on turnover down 7.8% to £7.69bn, up from a loss of 335 in the year to March 2002. The results included a charge of 84m for the planned ending of Concorde flights in October, and a fourth-quarter loss (January to March) of 200m. These positive results were entirely down to cost reduction. No dividend was paid – a consequence of the need to conserve cash. Operating margin at 3.8% is way below Eddington’s target of 10%. (D.Tel, 20.5.03, FT, 21.5.03).
In the first quarter of the 2003-04 year, a pretax loss of £45m was incurred – the effect of the Heathrow strike was put at 30-40m.
The business environment.
However, Rod Eddington sees the furure business environment as very hard to read, but expects it to get tougher. 2003-04 was meant, according to analysts, to be BA’s year of recovery, but it is not now expected to happen. (DTel, 11.2.03)
A critical development is the start of talks between the EU and the USA to dismantle the web of regulations that have controlled the development of international aviation since the mid-1940’s.
Eddington, as chairman of the Association of European Airlines, insists that truly global airlines are impossible in the current regulatory environment. “If it were left to the market, international airlines would undoubtedly follow in the footsteps of other industries and would seek the benefits of scale and scope that are currently denied them. A truly global airline…..would be free to operate wherever its customers demanded, free to grow organically or through acquisition and free to charge whatever the market would bear.”
These talks are likely to be very long. However, it potentially offers the opportunity for an opening of the two biggest airline markets and lead to substantial consolidation of participants. (FT, 29.9.03).
The takeover of KLM, the Dutch flag carrier, by Air France, may be the precursor to the consolidation expected. BA sees no threat from what is now Europe’s largest airline. D.Tel, 1.01.03).