BA Analysis
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BA finds the right size and shape
By Kevin Done, Aerospace Correspondent
Published: May 19 2006 18:30 | Last updated: May 19 2006 18:30
After racking up operating losses of £1.2bn on its European short-haul operations during eight successive years, British Airways has finally stopped the rot.
Willie Walsh, BA chief executive, said on Friday that the airline’s UK and European short-haul activites achieved a £7m operating profit in the year to March 31, back from the depths of an operating loss of £310m in the year to March 2000.
In the tough review of the group’s operations, known as Future Size and Shape, that was conducted in the wake of the 9/11 terrorist attacks, BA contemplated pulling out of short-haul operations in order to concentrate on its lucrative long-haul network out of Heathrow airport, for long the powerhouse of the group.
It pulled back from such drastic action, not least because of all the valuable feed traffic that the short-haul network delivers to Heathrow, but both Sir Rod Eddington, chief executive until last October, and subsequently his successor, Willie Walsh, have insisted that short-haul must be profitable in its own right, if it is to survive.
The business has been drastically restructured. Foreign loss-making subsidiaries in France and Germany were disposed of, the fleet was rationalised and simplified and aircraft utilisation has been improved by 15 per cent, as BA has tried to sweat the assets in imitation of its ruthless and fast-growing low-cost rivals.
BA’s own low cost subsidiary, Go, was sold. That move is still debated, but Sir Rod believed it was a distraction to the overwhelmingly important core task for BA management of tackling the inefficiencies and shortcomings of the existing short-haul operations.
Sir Rod and Mr Walsh have successively adopted many of the practices of the low cost carriers. It has increasingly exploited the ba.com website for cheaper sales and distribution, and most recently has implemented a radical shake-up of its short-haul air fares with one-way all-inclusive tickets starting at £29 in an effort to drive up traffic at off-peak hours wiith low entry fares to increase load factors.
By now BA is left with three short-haul activities, the separate Heathrow and Gatwick networks and finally the UK domestic regional operation, which still seems most under threat.
The operation out of the UK regions had already been rationalised into one subsidiary BA CitiExpress, but when this continued to make losses its offering was restructured and rebranded early this year into BA Connect.
In a last throw of the dice it has become a single-class operation with buy-on-board food, and operating chiefly out of Manchester, Birmingham, Edinburgh, Bristol and Southampton in an effort to compete with the mushrooming number of low cost carriers.
Where a decade ago BA had little competition in the regions, it now faces fierce pressure from the still rapid growth of the low-cost airlines led by Ryanair and EasyJet, and including Jet2 in Northern England, Flyglobespan in Scotland, BMIbaby and Flybe.
Mr Walsh, who brought with him to BA his reputation as a tough and relentless cost-cutter at Ireland’s Aer Lingus, made clear yesterday that the days of the BA Connect regional operation are numbered, unless it can be rapidly turned around in little more than 12 months.
Mr Walsh said it still lost £20m last year and it must be profitable next year or face closure. Its financial performance had been “poor and unacceptable...We do not see it as having strategic value to the group. It provides no strategic feed (to Heathrow). It must be profitable,” he said.
The fortunes of the Heathrow short-haul network are strengthening. It is profitable, it has a modern fleet of Airbus A320 family aircraft, and to many observers’ surprise it is again finding increasing demand for its premium business class cabin, which is driving up earnings. It has 87 aircraft on 43 routes with the emphasis on high daily frequencies to serve the needs of business travellers and provide feed to the long-haul network.
BA’s much smaller operation at Gatwick remains loss-making, but a two-year programme to improve earnings by £40m is under way. Mr Walsh seemed confident yesterday, it would return to profit, although it must fairly soon replace its ageing fleet of Boeing 737s.
The operations at Gatwick are still being shrunk, and in a further move, the Amicus trade union said yesterday that 120 engineering jobs were being cut at Gatwick. Surplus properties are being disposed of, as BA discards the legacy of its earlier abortive effort to turn the airport into a complementary transfer hub to Heathrow.
Like Heathrow, BA Gatwick operates 43 short-haul routes, but only with 33 aircraft. It is now being designed by BA for point-to-point travel with a much bigger share of leisure traffic, fewer daily frequencies and a wide spread of destinations. It has recently opened several new routes including Tirana, Reykjavik, Varna and Izmir.