The Guvnor
6th Jan 2002, 15:07
[quote]British Focus: British Airways put to flight
BA is being forced to cull its route network and cut thousands of jobs. Dominic O’Connell reports on why it cannot compete with the booming low-cost airlines
OVER the next 10 days, hundreds of British motor-racing fans and corporate-junket organisers will be booking flights for the Monte Carlo Rally, the motor-sport season’s glamorous annual curtain raiser.
To fly from London to Nice they could take British Airways. A two-day, economy-class return trip to catch the rally’s start on January 17 would cost them £560 each. Or they could fly with Easyjet — for just £56. Easyjet does not fly from Heathrow, it has a limited choice of flight times, and of course there will be no free meal on board. But it is one-tenth the price.
Not only is Easyjet cheaper, but, unlike BA, it makes money. On a turnover of £357m in the year to the end of September, it made £40m. BA turns over £9 billion a year, and in the first half of this financial year made a profit of £45m.
But since then things have taken a drastic turn for the worse. Thanks to the devastating effect on its business of the September 11 terrorist attacks, BA is expected to report a loss of nearly £700m for the complete financial year. By its own admission it is losing roughly £2m a day.
This conundrum of high fares and big losses will weigh on the minds of BA’s directors when they file into the boardroom at the airline’s vast Waterside headquarters near Heathrow at the end of this month.
At their meeting they will be asked to decide whether the company should continue to compete with airlines such as Easyjet, or whether it should take the axe to its European and domestic route network. Their decision will be based on a review of the airline’s operations that has been under way for the past three months.
In typical BA speak, the review is a “future size and shape” study, not an emergency rescue plan. But it will hurt. Senior pilots at the airline say thousands of jobs could go from the airline’s core operations over the next five years.
The routes at risk include those from London to most secondary European cities; Lyons, Naples, Pisa, Bologna, Hamburg, Venice, Verona and Stuttgart. Nor are all long-haul routes sacrosanct: those destinations under review include flights to San Diego, as well as most of the airline’s South American network.
The big action will be at Gatwick. The airline has toyed with the idea of a complete withdrawal, but, according to insiders, is now looking at how it can maintain a presence there and make money alongside new entrants such as Easyjet. There will be a route cull, insiders say, but not a complete bloodbath.
Even so, the board meeting holds out the prospect of being one of the most momentous in the company’s history. The directors will decide whether to scrap services that have been part of BA’s business since it was set up 30 years ago. Doing so will be tantamount to an admission from BA that it is no longer Britain’s national carrier.
BA’S DESCENT from grace has been swift. Only a few years ago, it was all looking much rosier for the world’s favourite airline. Having quickly got its house in order after privatisation in 1987, it was the world’s most profitable airline in the early and mid-1990s. It grew in leaps and bounds, and at one stage Robert Ayling, then the airline’s chief executive, was confidently able to predict that profits would reach £1 billion a year by the year 2000.
But not much went right after Ayling’s bitter clash with cabin-crew unions in 1997. Those flight attendants who did not strike called in sick, reducing the airline to a skeleton schedule. The dispute was settled fairly quickly, but morale, a vital component in any customer-service business, was badly damaged.
After the strike, other problems seemed to snowball, and the airline went into decline.
The company’s flagship project, an alliance with American Airlines, was put on hold because competition regulators on both sides of the Atlantic wanted to impose strict conditions on the two companies. On other commercial issues, the airline vacillated; at one stage Heathrow was to have been a magnet for cheap transfer passengers for Europe — until the limitations of the London airport forced the abandonment of this ploy, and a concentration instead on point-to-point business traffic.
An attempt to turn Gatwick into a second Heathrow, with a full complement of short and long-haul services, proved abortive, and was unravelled by Ayling’s replacement, the cerebral Australian Rod Eddington.
Another of Ayling’s experiments, the low-cost airline Go, was also disposed of by Eddington, who was worried that BA’s multiplicity of brands was confusing its customers.
And throughout the 1990s, the airline was developing an unnoticed Achilles heel. Its powerful position on the North Atlantic looked at the time like a great strength. BA was able to charge high business-class fares across the Atlantic because it was partly protected from competition at Heathrow. Only four airlines — BA, Virgin, United Airlines and American Airlines — were allowed to fly to the US from Heathrow — and of these BA had the biggest market share.
What did it matter that the European network was losing hundreds of millions of pounds a year, if the North Atlantic operations were making billions? The North Atlantic came regularly to contribute 75% of BA’s annual pre-tax profits — and in some years more.
But that reliance on US routes has now been cruelly exposed. In the wake of September 11, North Atlantic travel, and in particular business-class travel, has fallen sharply and is only now starting to show the smallest signs of recovery. According to BA traffic figures released on Friday, the number of passengers travelling to the Americas so far this year is down 20.7%. Without the American powerhouse, BA managers have been forced to face up to the poor financial shape of the airline’s European operations — and they do not like what they see.
AGGRAVATING the poor performance of BA’s short-haul operations is the rapid rise of a new wave of maverick, low-cost airlines, led by Ryanair and Easyjet.
As illustrated by the example of Nice, the difference in the fares charged by BA and these airlines on the same routes can be staggering. So is the difference in the companies’ operating costs.
Although it does not split out the cost of its individual operations, analysts reckon that BA’s short-haul flights from Gatwick cost about 13p for every available “seat-kilometre”, the most common measure of airline activity. At Heathrow, the figure is more like 15p.
Ray Webster, Easyjet’s chief executive, says his company’s cost per seat-kilometre is just 4.5p. A recent internal study by the low-cost airline concluded that its operating costs were roughly half those of two other full-service British airlines, KLM UK and BMI British Midland, each of which is reckoned to have operating costs lower than BA. Each of Easyjet’s aircraft stays in the air for about 13 hours a day, while BA’s short-haul aircraft average about eight hours’ flying.
Easyjet can achieve these efficiencies, and make money charging low fares, because it has none of the complications and overheads that go with BA’s long-haul business.
“It’s a completely different style of operation,” says Webster. “The reason we can have this high utilisation of our aircraft is that we don’t have to worry about making connections. BA needs to make sure that it has aircraft coming in to feed its long-haul services — it is a proper network business. But we can arrange our schedules to make the best use of aircraft and flight crew a priority,” he says.
Experience in the American industry indicates that BA will have to look sharp if it is not to be driven off European routes by low-cost airlines. Southwest, the airline based in Dallas, Texas, which has been the model for both Ryanair and Easyjet, has gradually eaten into the dominance of the American giants and won almost every head-to-head battle against them. It is now America’s fourth-largest airline, carrying more than 70m passengers a year.
Webster, a keen student of the US airline industry, says the bad news for BA is that the entry of the low-cost airlines is merely the precursor of steadily growing competition in every other area of its operations.
“This kind of thing is going to carry on. For example, when we have open skies between the UK and US, or between Europe and the US, BA will eventually have to take on all sorts of competition on those routes which are so important to it. There is no end to it,” he says.
Chris Tarry, the highly rated aviation analyst at Commerzbank, says BA’s problems are representative of a wider restructuring across the industry. “What we are seeing is the segmentation of the industry into sectors that have the appropriate cost of operation for the type of revenues they can earn,” he says. BA faces “a very difficult task”, he says. “It’s not as if it is starting with a blank sheet of paper, which is the advantage that the low-cost carriers had.”
Executives at BA’s rivals say the main threat to the success of the airline’s strategic review is that it will not go far enough.
That view is shared in the City. One senior investment banker who advises several European airlines says that BA should grasp with both hands the chance afforded by the fallout from September 11.
“They will never have a better opportunity to trim the company’s cost base. My concern is that Eddington was hired to put a smile on people’s faces and is not the type of manager to slash and burn,” the banker said.
INSIDE the airline, Eddington is known for his consensual approach, one said to be markedly at odds with that of his predecessor, Ayling.
According to one former BA strategic planner, a consensual approach is not the ideal weapon when trying to tackle the airline’s most basic problem — its massive internal inertia and executive arrogance.
“Managers arrive at British Airways thinking they are going to turn things round — and then they find that despite their best efforts nothing much happens. The next step is that they become part of the problem themselves, part of the massive bureaucracy.”
The former BA strategic planner said that Ayling used to liken BA to a supertanker; turning the wheel on the bridge took a long time to change the company’s course.
The most worrying omen for those who fear that BA will fall back into its old habits was the sudden surge in its share price on Friday.
The company’s stock, which had slumped in the wake of September 11, jumped nearly 14% on the back of better-than- expected traffic figures from itself and KLM.
BA’s board may deduce that a recovery is just round the corner, and no drastic action needs to be taken. They may also be comforted by the likelihood that another piece of the airline’s jigsaw, the alliance with American, may shortly fall into place — probably about the time that the outcome of the strategic review is announced.
A green light to the American deal would see BA’s North American business regain much of its former lustre once business traffic returns.
What is more, the deal with American would probably boost to the share price enough to allow the company to proceed with a £1 billion rights issue to repair its balance sheet — and so take away any incentive to perform the drastic surgery that BA so desperately needs.<hr></blockquote>
BA is being forced to cull its route network and cut thousands of jobs. Dominic O’Connell reports on why it cannot compete with the booming low-cost airlines
OVER the next 10 days, hundreds of British motor-racing fans and corporate-junket organisers will be booking flights for the Monte Carlo Rally, the motor-sport season’s glamorous annual curtain raiser.
To fly from London to Nice they could take British Airways. A two-day, economy-class return trip to catch the rally’s start on January 17 would cost them £560 each. Or they could fly with Easyjet — for just £56. Easyjet does not fly from Heathrow, it has a limited choice of flight times, and of course there will be no free meal on board. But it is one-tenth the price.
Not only is Easyjet cheaper, but, unlike BA, it makes money. On a turnover of £357m in the year to the end of September, it made £40m. BA turns over £9 billion a year, and in the first half of this financial year made a profit of £45m.
But since then things have taken a drastic turn for the worse. Thanks to the devastating effect on its business of the September 11 terrorist attacks, BA is expected to report a loss of nearly £700m for the complete financial year. By its own admission it is losing roughly £2m a day.
This conundrum of high fares and big losses will weigh on the minds of BA’s directors when they file into the boardroom at the airline’s vast Waterside headquarters near Heathrow at the end of this month.
At their meeting they will be asked to decide whether the company should continue to compete with airlines such as Easyjet, or whether it should take the axe to its European and domestic route network. Their decision will be based on a review of the airline’s operations that has been under way for the past three months.
In typical BA speak, the review is a “future size and shape” study, not an emergency rescue plan. But it will hurt. Senior pilots at the airline say thousands of jobs could go from the airline’s core operations over the next five years.
The routes at risk include those from London to most secondary European cities; Lyons, Naples, Pisa, Bologna, Hamburg, Venice, Verona and Stuttgart. Nor are all long-haul routes sacrosanct: those destinations under review include flights to San Diego, as well as most of the airline’s South American network.
The big action will be at Gatwick. The airline has toyed with the idea of a complete withdrawal, but, according to insiders, is now looking at how it can maintain a presence there and make money alongside new entrants such as Easyjet. There will be a route cull, insiders say, but not a complete bloodbath.
Even so, the board meeting holds out the prospect of being one of the most momentous in the company’s history. The directors will decide whether to scrap services that have been part of BA’s business since it was set up 30 years ago. Doing so will be tantamount to an admission from BA that it is no longer Britain’s national carrier.
BA’S DESCENT from grace has been swift. Only a few years ago, it was all looking much rosier for the world’s favourite airline. Having quickly got its house in order after privatisation in 1987, it was the world’s most profitable airline in the early and mid-1990s. It grew in leaps and bounds, and at one stage Robert Ayling, then the airline’s chief executive, was confidently able to predict that profits would reach £1 billion a year by the year 2000.
But not much went right after Ayling’s bitter clash with cabin-crew unions in 1997. Those flight attendants who did not strike called in sick, reducing the airline to a skeleton schedule. The dispute was settled fairly quickly, but morale, a vital component in any customer-service business, was badly damaged.
After the strike, other problems seemed to snowball, and the airline went into decline.
The company’s flagship project, an alliance with American Airlines, was put on hold because competition regulators on both sides of the Atlantic wanted to impose strict conditions on the two companies. On other commercial issues, the airline vacillated; at one stage Heathrow was to have been a magnet for cheap transfer passengers for Europe — until the limitations of the London airport forced the abandonment of this ploy, and a concentration instead on point-to-point business traffic.
An attempt to turn Gatwick into a second Heathrow, with a full complement of short and long-haul services, proved abortive, and was unravelled by Ayling’s replacement, the cerebral Australian Rod Eddington.
Another of Ayling’s experiments, the low-cost airline Go, was also disposed of by Eddington, who was worried that BA’s multiplicity of brands was confusing its customers.
And throughout the 1990s, the airline was developing an unnoticed Achilles heel. Its powerful position on the North Atlantic looked at the time like a great strength. BA was able to charge high business-class fares across the Atlantic because it was partly protected from competition at Heathrow. Only four airlines — BA, Virgin, United Airlines and American Airlines — were allowed to fly to the US from Heathrow — and of these BA had the biggest market share.
What did it matter that the European network was losing hundreds of millions of pounds a year, if the North Atlantic operations were making billions? The North Atlantic came regularly to contribute 75% of BA’s annual pre-tax profits — and in some years more.
But that reliance on US routes has now been cruelly exposed. In the wake of September 11, North Atlantic travel, and in particular business-class travel, has fallen sharply and is only now starting to show the smallest signs of recovery. According to BA traffic figures released on Friday, the number of passengers travelling to the Americas so far this year is down 20.7%. Without the American powerhouse, BA managers have been forced to face up to the poor financial shape of the airline’s European operations — and they do not like what they see.
AGGRAVATING the poor performance of BA’s short-haul operations is the rapid rise of a new wave of maverick, low-cost airlines, led by Ryanair and Easyjet.
As illustrated by the example of Nice, the difference in the fares charged by BA and these airlines on the same routes can be staggering. So is the difference in the companies’ operating costs.
Although it does not split out the cost of its individual operations, analysts reckon that BA’s short-haul flights from Gatwick cost about 13p for every available “seat-kilometre”, the most common measure of airline activity. At Heathrow, the figure is more like 15p.
Ray Webster, Easyjet’s chief executive, says his company’s cost per seat-kilometre is just 4.5p. A recent internal study by the low-cost airline concluded that its operating costs were roughly half those of two other full-service British airlines, KLM UK and BMI British Midland, each of which is reckoned to have operating costs lower than BA. Each of Easyjet’s aircraft stays in the air for about 13 hours a day, while BA’s short-haul aircraft average about eight hours’ flying.
Easyjet can achieve these efficiencies, and make money charging low fares, because it has none of the complications and overheads that go with BA’s long-haul business.
“It’s a completely different style of operation,” says Webster. “The reason we can have this high utilisation of our aircraft is that we don’t have to worry about making connections. BA needs to make sure that it has aircraft coming in to feed its long-haul services — it is a proper network business. But we can arrange our schedules to make the best use of aircraft and flight crew a priority,” he says.
Experience in the American industry indicates that BA will have to look sharp if it is not to be driven off European routes by low-cost airlines. Southwest, the airline based in Dallas, Texas, which has been the model for both Ryanair and Easyjet, has gradually eaten into the dominance of the American giants and won almost every head-to-head battle against them. It is now America’s fourth-largest airline, carrying more than 70m passengers a year.
Webster, a keen student of the US airline industry, says the bad news for BA is that the entry of the low-cost airlines is merely the precursor of steadily growing competition in every other area of its operations.
“This kind of thing is going to carry on. For example, when we have open skies between the UK and US, or between Europe and the US, BA will eventually have to take on all sorts of competition on those routes which are so important to it. There is no end to it,” he says.
Chris Tarry, the highly rated aviation analyst at Commerzbank, says BA’s problems are representative of a wider restructuring across the industry. “What we are seeing is the segmentation of the industry into sectors that have the appropriate cost of operation for the type of revenues they can earn,” he says. BA faces “a very difficult task”, he says. “It’s not as if it is starting with a blank sheet of paper, which is the advantage that the low-cost carriers had.”
Executives at BA’s rivals say the main threat to the success of the airline’s strategic review is that it will not go far enough.
That view is shared in the City. One senior investment banker who advises several European airlines says that BA should grasp with both hands the chance afforded by the fallout from September 11.
“They will never have a better opportunity to trim the company’s cost base. My concern is that Eddington was hired to put a smile on people’s faces and is not the type of manager to slash and burn,” the banker said.
INSIDE the airline, Eddington is known for his consensual approach, one said to be markedly at odds with that of his predecessor, Ayling.
According to one former BA strategic planner, a consensual approach is not the ideal weapon when trying to tackle the airline’s most basic problem — its massive internal inertia and executive arrogance.
“Managers arrive at British Airways thinking they are going to turn things round — and then they find that despite their best efforts nothing much happens. The next step is that they become part of the problem themselves, part of the massive bureaucracy.”
The former BA strategic planner said that Ayling used to liken BA to a supertanker; turning the wheel on the bridge took a long time to change the company’s course.
The most worrying omen for those who fear that BA will fall back into its old habits was the sudden surge in its share price on Friday.
The company’s stock, which had slumped in the wake of September 11, jumped nearly 14% on the back of better-than- expected traffic figures from itself and KLM.
BA’s board may deduce that a recovery is just round the corner, and no drastic action needs to be taken. They may also be comforted by the likelihood that another piece of the airline’s jigsaw, the alliance with American, may shortly fall into place — probably about the time that the outcome of the strategic review is announced.
A green light to the American deal would see BA’s North American business regain much of its former lustre once business traffic returns.
What is more, the deal with American would probably boost to the share price enough to allow the company to proceed with a £1 billion rights issue to repair its balance sheet — and so take away any incentive to perform the drastic surgery that BA so desperately needs.<hr></blockquote>