British Air: Not Cricket

In his 50-year career in British business, John L. King was known for being publicly charming and privately cunning. Sir Colin Marshall had a reputation as a shrewd survivor of executive-suite battles. The two men came together in 1983 to run British Airways PLC, the privatized flag carrier that had grown shamefully fat and unprofitable. As the detail man who oversaw layoffs and restructurings, Marshall helped whip an obese, second-rate carrier into the world's most profitable airline.

But the airline's reputation and possibly Marshall's future may be in danger. After a yearlong war of words, BA on Jan. 11 admitted in court to waging a dirty tricks campaign against a much smaller rival, Richard Branson's Virgin Atlantic Airways Ltd. (table). The details of the campaign, including computer break-ins and lying to passengers, have shocked investors, longtime customers, employees, and the company's directors. Some board members, say sources, are demanding an investigation into Marshall's role in the scandal. And they may seek to check his power by imposing a nonexecutive chairman over him after King, 75, retires in July. King will retain the title of life president, but he had been prepared to relinquish the chairman's mantle to Marshall, who is 59.

The questions come at a particularly sticky point for BA. The carrier is in the midst of a campaign for global growth. But in recent months, it has suffered from a string of miscalculations and reversals that could be exacerbated by further scandal. It had to withdraw a $750 million bid for 44% of USAir after it became clear the U. S. would not approve the deal. BA is preparing a new bid, but the scandal can only hamper its efforts and supply U. S. carriers with further ammunition to rail against a BA incursion. Government officials on three other continents where BA is negotiating to buy all or parts of airlines could also decide BA is not the kind of competitor they want to invite in.

BAD BLOOD. Meanwhile, British Airways' profits are under pressure. Following disappointing traffic figures, analysts in early January cut BA's earnings estimates for the year ending Mar. 31. BA's stock is down 10% since the beginning of the year, to 42 1/8. There could be more legal woes, too, demanding further investment of time and money. Branson may bring another action. And Scotland Yard is investigating a series of break-ins that Branson alleges were committed by BA security staff.

The dispute between the two carriers goes back several years. With 8 planes to its rival's 230, Virgin might seem little more than a minor nuisance to the huge BA. But Branson's cocky style--combined with real inroads that Virgin made into BA's transatlantic business--hit a nerve with Lord King. After the British government forced BA to give up some Tokyo routes to Virgin, for example, Branson dressed like a pirate for a kabuki-like play and pretended to steal a BA plane at Heathrow Airport to inaugurate his Tokyo service.

According to court documents, the irksome rivalry drove BA to tap into Virgin's computer for passenger and flight information that it used to poach passengers. Affidavits also detail break-ins at the homes of Virgin employees and efforts to dig up dirt on Branson and get it into the media. Branson complained publicly about a dirty tricks campaign while it was happening. But when British Airways labeled his allegations in a company newsletter as "unjustified, mischievous, and motivated by a desire to secure publicity," Branson sued for libel.

Officially, BA considers the case closed now that it has apologized to Branson and agreed to pay $2.5 million in damages and legal fees to end the libel suit. And technically, BA admits only to impugning Virgin's and Branson's reputations, without admitting to specifics. It remains unclear who at BA sanctioned the campaign.

But rather than let the matter drop, some institutional shareholders are pressing on with further questions. One manager of a large British pension fund says he is seeking a meeting with BA officials "to get to the bottom of this. We want to know just how involved they were." And industry experts say BA may have lost credibility with regulatory officials who have long protected it at home from competitors seeking licenses, routes, and airport slots, hoping such favoritism would boost the flag carrier in its globe-trotting endeavors.

POWERFUL CRITIC. At BA's next board meeting on Feb. 5, at least two outside directors will demand a full investigation, according to a source close to the board. "The board is angry and embarrassed" and wants to know if the campaign was sanctioned by King and Marshall or whether the anti-Virgin activities took place without their knowledge, the source says. "Either way, Lord King and Sir Colin have some explaining to do."

One of the two directors considered most likely to lead the charge is Sir Michael Davies, a nonexecutive director of two small British companies, Calor Group PLC, an oil and gas marketing company, and Perkins Foods PLC, a food processing company. Prior to the Virgin troubles, Marshall informed the board that he would seek the title of chairman, in addition to CEO, when King steps down. But other board members support Davies, 58, as a non-executive chairman to oversee Marshall--a precaution against lodging too much authority under one person that has become popular among British companies.

Another potential critic on the board is Sir Michael R. Angus, a titan of British industry, who was Unilever Group's chairman until last May and now is chairman of brewer Whitbread PLC. He is also president of the Confederation of British Industry, the official voice of British big business. Angus is said to be working with Davies to launch an investigation. He is especially interested in the version of events presented by public-relations consultant Brian Basham, who was retained by BA for the alleged purpose of planting negative news stories about Branson. BA's statement blames Basham and other unnamed employees for the anti-Virgin activities. But Basham claims that all his actions were authorized by BA's board. The consultant was not a defendant in the legal action.

Davies and Angus both declined to comment. Basham was in Africa and could not be reached for comment, and his lawyer did not respond to phone calls. And BA is declining to respond to press questions about who knew of the various secret operations. BA spokesmen will only repeat that the board was not "party to any concerted campaign." Instead, an investigation "revealed incidents involving our employees which we accept were regrettable." BA says it is taking action to ensure that such incidents do not occur again.

It's too early to tell how passengers will react to recent events. Branson is publicly urging travelers to shun the airline. One long-time BA customer, business professor Michael R. Hodges, says: "It seems to me BA, always singing the virtues of competition, was using unscrupulous behavior to put out of business a rival, and a much smaller one at that."

Much of the expected fallout is probably beyond BA's reach. Branson soon will decide whether to take further legal action. One option: an antitrust lawsuit in the U. S., where some of BA's dirty tricks took place. Branson could also file anti-competitive charges in the European Community court.

SUSPICIOUS DEATHS. But BA may feel some of the earliest repercussions right at home. Its purchase of financially strapped Dan-Air Services Ltd., a London-based charter service, soon will come up for review by EC competition authorities. Legal documents filed with Britain's high court allege that some of the BA dirty tricks activities also were aimed at Dan-Air and another defunct carrier, Air Europe Ltd. "Four small airlines have gone under in the last decade," says Hugh Wellborn, a 20-year BA employee and now an industry consultant who has advised Virgin in the past. "Now everyone is wondering: Was their demise hastened along by British Airways with practices similar to those aimed at Virgin?"

What a change. Just a few months ago, BA was sitting on top of the world with $400 million in annual profits and ambitious plans to merge operations with USAir. Now it looks as though BA's woes are just beginning as investors and board members demand the full story. Lord King could end a brilliant career with a question mark over his head. And Marshall, his protege, will have to convince a lot of people he deserves to have the top job.

      BA is paying $2.5 million to settle a libel suit by Virgin Atlantic owner 
      Richard Branson. BA admits it engaged in a broader campaign against Virgin, but 
      won't comment on specific actions that allegedly included:
      COMPUTER BREAK-INS BA staff tapped into Virgin's computers to get names and 
      numbers of Virgin passengers
      PASSENGER POACHING BA "hunters" phoned or met Virgin passengers, falsely 
      claimed their flights were delayed or overbooked, and offered inducements to 
      fly with BA
      OPERATION COVENT GARDEN Chairman Lord King's personal security officer 
      orchestrated break-ins of homes and cars of Virgin staff and journalists; 
      Scotland Yard is investigating the break-ins
      OPERATION BARBARA BA's code name for work by a London public-relations 
      consultant hired to dig up dirt on Branson and plant negative news stories 
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