British Airways’s blues

But amongst that, BA’s Australian services remain a bright spot, BA CEO Willie Walsh’s cost cutting efforts are beginning to show dividends, then there is the promise to the planned merger with Spain’s Iberia which is on track to conclude late this year, and the revenue sharing arrangement with American Airlines and Iberia, and there are growing signs of economic recovery.

Still, BA’s £531m (A$920m) loss before tax for the year ended March 31 was the airline’s biggest since it was privatised, and was up substantially on the £401 million loss the previous year. Revenue was down £1bn (A$1. 73bn) to £7. 99bn (A$13. 8bn) for the year, while passenger numbers fell by nearly four per cent. Walsh took some comfort in the result, with BA able to cut costs significantly as well (indeed Walsh made his name as the cost cutting CEO of his native Ireland’s Aer Lingus).

“Despite a £1 billion drop in revenue during the year, our determined efforts on cost control mean that costs have reduced at a comparable level and our operating loss is virtually the same as in the previous year,” Walsh said in announcing the results. “To be in the midst of the biggest economic downturn in 60 years and produce the same operating figure as last year shows the hard work that has been put into steering our business through the recession. ” In all, BA’s costs were down by £1bn (A$1. 73bn), with £597m (A$1. 04bn) of that coming from reduced fuel costs, and £390m (A$676m) from non-fuel cost cutting, thanks to, said Walsh, “the introduction of permanent structural change in the way that we work allied with capacity reductions and cuts in external spend. ” It is that “permanent structural change” that has seen BA’s management clash with its flight attendants, with painful and expensive results thus far. The dispute with the Unite union which represents the bulk of BA’s cabin crew began last year with aplan to reduce the number of flight attendants on long haul flights, and after a series of legal battles saw a first round of strikes last seven days in March cost the airline an estimated £45m (A$79m). While the airline and the union have been able to agree to a number of operational changes (which, plus hiring new flight attendants on less generous conditions could save BA £160m/A$277m a year for 10 years), a fresh round of strike action in late May and early June racked the airline again, this time largely over BA withholding staff travel benefits to flight attendants who had previously gone on strike.

The striking flight attendants mainly disrupted operations from BA’s Heathrow hubs, plus flights from London Gatwick and London City. BA planned to operate 70 per cent of its Heathrow long haul flights during Unite’s May 30 to June 3 strike, then 80 per cent of its ex Heathrow long haul flights during the June 5-8 strike, including all its Sydney services and flights to Johannesburg and Cape Town for the soccer World Cup. Wet leasing up to eight aircraft meant BA was able to minimise its ex Heathrow short haul schedule as well, operating about 50 per cent of flights in the first strike period, to about 60 per cent in the second.

“British Airways’s flight program is complex, involving the combination of rosters for 13,000 cabin crew, more than 3000 pilots and 230 aircraft operating schedules,” explained a BA statement. “More than 8000 flight and cabin crew have to be in the right place at the right time, either on aircraft, at airports or in crew hotels in more than 140 cities in more than 70 countries, every day. ” Thus far Walsh, who succeeded Australian Sir Rod Eddington as CEO of BA in September 2005, hasn’t taken a backward step in confronting the Unite union and the 12,000 or so striking flight attendants, evidently reasoning that short term pain will yield long term gains.

“Returning the business to profitability requires permanent change across the company and it’s disappointing that our cabin crew union fails to recognise that,” Walsh said. “Structural change has been achieved in many parts of the business and our engineers and pilots have voted for permanent change. ” How much that latest short term pain will cost BA was unclear at presstime, particularly if Unite votes for further strike action, but, coming on top of the eruption of Iceland’s Eyjafjallajökull volcano spewing ash clouds that shut down much of Europe’s airspace for several days in mid April, BA’s current financial year could hardly have got off to a worse start. BA has estimated that the volcanic ash disruption cost it in the order of £180 million, with the airline’s traffic plummeting 24. 5 per cent in April compared to the same month in 2009.

“It disrupted the network 100 per cent,” recounted Nicole Backo, BA’s Sydney based regional commercial manager. “It was bigger than September 11 for us. ” Locally that meant all hands on deck for BA’s 27 strong Sydney based commercial team, manning phones or dealing with passengers facephototo-face at Sydney Airport, providing status updates and rescheduling bookings.

“The customer feedback has been fantastic about how it was handled,” Backo said.

“I worked out at the airport for a number of days and people were just grateful that they were able to have options. ” BA has a long history in Australia, and on April 13 celebrated the 75th anniversary of the first joint service between London and Australia by precursor Imperial Airways and Qantas Empire Airways. Today BA operates twice daily services from London Heathrow to Sydney and return, with BA9/10 operated by Boeing 747-400s via Bangkok, and BA15/16 operated by Boeing 777-200s via Singapore.

While in traffic terms the Sydney flights are a small part of BA’s network, financially they are disproportionately important to BA’s bottom line, with yields as much as three times higher than for other markets, thanks in part to the recent strength of the Australian dollar against the pound.

That revenue generation potential was also a key reason why BA continued to operate its Australia flights during the flight attendant strikes, but, said Backo, the main consideration is “how much longer it would take to start up an operation (again) if you were not to come down here. It has a greater impact on passengers. ” Backo, an Australian who replaced Sam Heine as BA’s senior executive in Australia in January, says BA’s Australia-UK flights have been performing strongly of late, volcanos aside, particularly with Australian leisure travellers flying to the UK enjoying the advantageous exchange rate and BA promotional fares for the 75th anniversary since the first Imperial Airways service.

“We have seen that the corporates are coming back as well, but it’s definitely leisure traffic that is [currently] doing very well. ” At the other end of the aircraft, Backo says BA is looking forward to introducing its new first class product to the Australian market sometime in the next two years, although possibly as soon as by the end of this year. For now with first class on its Australian services, BA does “do some tactical promotions where you can buy a business class and upgrade into first in one direction for the price of a business class fare,” said Backo. “So we do tend to tactically support it at the moment, but there is still a demand for first class. There are customers here that want that exclusivity and will pay for that service and that extra special touch that is first. ” Still, while BA’s leisure traffic is proving resilient of late and there are signs of life in the premium cabins, over the years its presence in Australia has contracted. In 2009 it carried just 1. 4 per cent of international passengers to and from Australia, compared to 5. 0 per cent a decade earlier, illustrating the competitiveness of the Australia-UK market, with ongoing strong competition from Asian airlines and the emergence of Gulf carriers such as Emirates and Etihad, and BA’s dropping of flights to all Australian cities bar Sydney.

“It is about what’s going to be profitable and at this stage with the competition that’s down here, Sydney remains the key focus of where we’ll fly, where we’re getting the return on the service,” Backo said of BA’s Australia flights.

Instead, BA is able to serve other Australian ports through its Joint Service Agreement – or JSA – with Qantas, which sees the two airlines codeshare, coordinate schedules and pool revenue on each others’ Australia-UK flights. BA and Qantas celebrated 15 years of the JSA in mid June, and the ACCC (Australian Competition and Consumer Commission) recently approved a further five year extension of the agreement from 2010. BA and Qantas also codeshare on a number of Qantas’s Australian and New Zealand services, and Qantas on BA services throughout the UK and Europe from Heathrow.

Interestingly, the Qantas-BA JSA is also proving the model for BA’s planned cooperation with American Airlines and Iberia on trans-Atlantic services. The airlines recently received US Department of Transportation conditional approval for the joint business venture, which would share revenues and coordinate networks and schedules, although BA would have to forego four daily Heathrow slots for competitors to use on trans-Atlantic flights.

The carriers say gaining US DoT anti-trust immunity would allow them (like Qantas, all oneworld members) to compete more effectively with the Star and Skyteam alliances, which already have anti-trust immunity for their trans-Atlantic services.

That trans-Atlantic joint business is part of the same push towards airline industry consolidation that saw BA discuss a possible merger with Qantas, and is now seeing it go ahead with a merger with Iberia. The International Airlines Group formed from the merger would be owned 55 per cent by BA and 45 per cent by Iberia, and would be Europe’s second biggest airline by sharemarket value behind Lufthansa. In all, BA estimates the Iberia merger – where both BA and Iberia would continue to operate as separate brands – will deliver annual operational savings of £400m (A$693m) by its fifth year.

Those savings and other savings across the business, a resolution of the cabin crew dispute, the return of economic growth and premium passengers, a restructuring of the pension deficit and the looming delivery of new aircraft types in the 777‑300ER, 787 and A380, should all help BA turn the corner from what has been a turbulent time of late. Willie Walsh and his airline’s 12,000 striking cabin crew will certainly hope so.