In July it was announced that former British Airways chairman and CEO, Lord Colin Marshall, had sadly died. It was under Lord Marshall’s leadership that BA or “bloody awful”, as it was dubbed by its detractors, succeeded in changing direction, becoming a customer focused business and beginning a period of improved financial results. In more recent times, the airline has faced a turbulent business backdrop with challenges ranging from the 9/11 attacks, the global financial crisis, increased low-cost competition, and strikes by its own cabin crew.
But while challenges still exist, there are a number of factors that suggest BA can face the future with a renewed optimism and a sense of opportunity. So what is on the short to medium-term horizon for the company? 2012 has not only been the year in which the national flag carrier played a major role in bringing many thousands of travellers to and from the Olympics (which were hosted in its home city of London and for which it was a major sponsor) but also marked the conclusion of its parent company International Airline Group’s (IAG) deal to buy long-standing competitor – British Midland International (bmi).
The acquisition of bmi certainly provides significant medium- and long-term opportunities. The real prize for BA is the additional slots which it gains, adding an additional eight percentage points of slot capacity at Heathrow to give it around 50% of the airport’s total (51% for IAG). IAG CEO, Willie Walsh, says he is delighted with the acquisition, particularly considering the low price obtained, given the losses bmi was incurring. “We would have paid more three or four years ago and we wanted to buy it,” he said.
There remain a number of short-term challenges as BA seeks to integrate the airline with its own business. “We were never going to get everything absolutely correct as speed was important, given the scale of turnaround needed,” BA CEO, Keith Williams, told his staff recently. “The guys have done a good job; it’s much more complex than it seems on the outside,” according to IAG.
The overriding priority, he says, is to use these slots to significantly add to BA’s long-haul portfolio, particularly rapidly growing Asian markets and China in particular. Walsh smiles in bemusement at the number of questions he’s had about why new long-haul routes are not being introduced more quickly, the simple answer being that bmi’s fleet of A320 family aircraft don’t have the range.
This means that the initial focus is on improvements to the short-haul network. BA codes have already been added to bmi flights and from the winter schedule additional services will be added to routes between Scotland and London, an important market for providing feed to both long- and short-haul services. In addition, several dots long absent from the BA map are being reintroduced. These include Belfast City, Dublin and Leeds Bradford, (operated by bmi in its own right until a few years ago). The latter will provide additional feed opportunities from the north of England, complementing BA’s existing presence in Manchester and Newcastle. Similarly, European destinations, including Rotterdam and Zagreb, make a return to the network.
Coming back to long-haul services, the addition of bmi’s larger A321s has allowed an initial reorganisation of aircraft deployment. This has freed up Boeing 767 capacity, in turn releasing space on the 777 fleet, which will allow BA to return to the Korean market with the reintroduction of London – Seoul services during the upcoming winter schedule. When it comes to China, BA has a lot of ground to make up, currently serving just three destinations – Beijing, Shanghai and Hong Kong – lagging behind its rivals Air France/KLM and Lufthansa.
From next year, there will be an opportunity to start catching up and to move into a phase of long-haul expansion as BA takes delivery of the first of the 12 A380s and 24 787 Dreamliners which it has on order. These are expected to arrive during the period of the summer 2013 schedule.
The A380 is seen primarily as a replacement aircraft for a number of its longest serving B747s, and “it will do some of the big trunk routes,” explains Williams. Its additional seating capacity will allow services to be consolidated on some routes by reducing frequency and so free up slots for new market developments, while the 787 also offers new opportunities. “The 787s will give us more flexibility to serve markets that we haven’t served before,” Williams adds. As well as providing new network opportunities, both aircraft will significantly improve fuel efficiency and offer better environmental credentials.
The airline is also taking additional 777-300s, an aircraft with which it is very pleased, and has options for more. This will provide a margin of flexibility in its fleet planning before making further commitments, as it waits to learn more about Boeing’s plans for a next generation 777. It doesn’t rule out looking again at the new B747-8 model at some point in the future either.
Whilst there are real new opportunities, there are still inevitable challenges to face. The uncertainty about the future of American Airlines, a fellow oneworld member and North Atlantic partner, which is currently in Chapter 11 bankruptcy. Merger protagonists are circling and one vocal proponent is US Airways. Recently it was reported that IAG is interested in taking its own stake in the US carrier, and Walsh says the two companies are “culturally quite different” but is relaxed about the impact of a merger with a competitor. “Industry consolidation is inevitable,” he says, highlighting the difference in industry leadership today, with a focus on costs and profitability.
The economic climate continues to provide its own difficulties. “Today you’ve got a combination of slowing economic growth and a high oil price. There’s a lot of work going on in managing capacity for downturns and on how best to recover from events,” says Williams.
Iberia, BA’s merger partner under the IAG banner, is hurting financially. The weak Spanish economy, the Government’s decision to double airport charges at its Madrid hub and its own imperative to cut costs and improve efficiency are all having an impact. BA has been able to share its own lessons from restructuring; this experience has been shared in the establishment of low-cost, short-haul subsidiary, Iberia Express.
Closer to home, Heathrow remains core to British Airways’ strategy, but lack of decisions on additional runway capacity there mean that London City and Gatwick have important roles to play in maintaining BA’s market position. Williams likens this to a “three legged stool” – it allows BA to deliver a broad and diverse offer to different segments of the London market.
London City fulfils a niche, meeting the needs of important premium customers, notably from the financial sector, much of which is located close to the airport. As well as expanding its short-haul network with a recently renewed fleet of Embraer 170s and 190s, a double daily New York is operated by A318s with only 32 business class seats. This service has proved very popular despite its need for a westbound fuel stop in Shannon. Necessity is turned into a virtue with the provision of pre-customs/immigration clearance, facilitating a hassle-free arrival at New York JFK.
Business only services have had a high incidence of failure but BA is possibly better placed than others to make this work. It flies from the right airport for the core market segment; it has the product credibility and operational back-up of a major carrier and can benefit from the ‘halo effect’ of offering such a service as it did previously with Concorde. In other words, there may be intangible financial benefits beyond the direct economics of the route itself.
It is perhaps at Gatwick that BA is wrestling with its biggest test. The operation is primarily short-haul and under pressure from intense low-cost competition, notably easyJet. “There is a relevancy for legacy carriers in the short-haul market,” says Williams, but there is no doubt that this is a very tough nut to crack for BA.
It has to tackle the question of fleet replacement for its fleet of Gatwick-based 737-400s. These are beginning to show their age. BA has to be confident of long-term profitability of its Gatwick services in order to take such a decision. It has reshaped its Gatwick network and taken a more aggressive approach to pricing. Costs are being reduced by significant outsourcing of a number of support functions at the airport.
Perhaps the challenges of Gatwick sum up the overall outlook for BA. Only by refusing to rest on its laurels, and by remaining focused both on evolving customer needs and how to deliver these profitability, can it succeed in exploiting the opportunities available to it.
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