British Air Sure Isn't Coasting

A radical plan could make it an even more formidable competitor

On Sept. 18, some 300 senior managers from British Airways PLC assembled for a crucial powwow at the Ramada Hotel just off the busy runways of London's Heathrow Airport. Although BA led the world's airlines in profits last year, the message they heard from CEO Robert Ayling was anything but complacent. "We must do better because our competitors have caught up, and we are slipping back to the middle of the pack," he warned. Then Ayling dropped a bombshell: BA will be asking for 5,000 volunteers to leave the company over the next 18 months.

Britain's $12 billion carrier has for several years been Europe's pacesetter. But Ayling, a 50-year-old lawyer and former government negotiator who took over from Colin Marshall this year, sees threatening skies ahead from deregulation, lower fares, and new upstart competitors. He has put BA's whole operation under review and wants radical changes. It's the kind of scenario that promises labor strife. It also will increase the pressure on other European carriers still struggling to dismantle costly outmoded structures and work rules before deregulation next year.

JITTERS. Setting a goal of $1.5 billion in "efficiencies" over the next three years, Ayling wants to create a stripped-down profit machine focused on delivering top-grade service on global routes. Maintenance and overhaul have already been hived off as a separate business. Other big employers, including cargo and baggage handling and some accounting, could be subcontracted out. It is important to make such changes "while you are in the lead," says Ayling.

BA is also pioneering the art of awarding its less profitable routes to smaller airlines to operate as BA franchises. The smaller carriers get to use BA colors on their planes and BA uniforms for crews, while paying BA a fee. In the latest such arrangement, BA will soon turn its service to Damascus, Beirut, and Amman over to British Mediterranean Airways. In another deal, local carriers Loganair and Manx Airlines Europe fly Scottish routes under the British Air Express banner. "The days when we could operate 747s to Hong Kong and [still] fly to Benbecula, Scotland, are over," says Ayling.

Press speculation before the speech had made BA employees jittery, and Ayling's announcement will not reassure them. "They are trying to set up a two-tier wage structure. People who come on board will be on lower pay scales," says Chris Partridge, a senior analyst at London-based consultants Avmark International Ltd.

Ayling contends that his message is positive because BA will eventually build back to the present level of 55,000 employees. But the workforce will change a lot with language and customer service skills stressed. Even Ayling doesn't rule out some labor unrest, especially since the airline cannot use steep losses as an excuse for action. BA's profits in 1996 will probably reach $1 billion, up from $907 million in 1995. Even some of Ayling's managers, who liked his speech, seemed shocked by the projected job losses. "They may have to think about that," one said. "Such issues will have to be handled very sensitively."

If Ayling pulls off his radical plan, the result could also be a major threat to the Continent's big carriers. The airline's position as Europe's most aggressive international carrier has already upped the pressure on Lufthansa, Air France, SAS, Alitalia, and Swissair. "BA looks like they are going to outsource everything but their core operations," worries Alitalia's new CEO, Domenico Cempella. Last June, the Alitalia chief put in place his own ambitious four-year plan to slash almost $1 billion in operating costs. "Now, we may have to go even further," says Cempella.

A leaner BA would also be better positioned to withstand the price wars that are erupting in Europe. And it could pursue with greater vigor its strategy of invading the French and German markets with subsidiary airlines that funnel new customers to its high-margin international flights.

This is not what the Germans and French need. Lufthansa has made big strides in cutting costs, and it's following BA's lead in franchising, but it wants to cut another $1 billion in expenses by 2001. Its profits have suffered this year, and it's also feeling pressure from Air France, which has relied on state funding to stay aloft. Air France is slowly turning itself around, boosting productivity 30% in the past three years. But it is still running huge losses and has shown little ability to match BA's current levels of efficiency.

Yet BA feels pressure, too. The best U.S. carriers have European ambitions and are whittling away at costs. Ayling hopes one of them, American Airlines Inc., will be a partner. Delta Air Lines Inc. and United Airlines Inc. have Euro-partners already.

ENDLESS HACKING? BA's costs are also higher than one might think, given the major restructuring that occurred after the 1987 privatization. One industry observer says BA remains less efficient in some areas than such local competitors as Virgin Atlantic Airways Ltd. and British Midland Airways Ltd. Considering BA's dominant position at booming Heathrow Airport in London, it should be even more profitable than it is, this source says. The airline is concerned about costs, which rose 7.2% last year--even though that was outpaced by revenue, which was up 8.2%. "It is increasingly difficult for BA to tinker at the edges with its cost-cutting," says Guy Kekwick, an analyst at Lehman Brothers in London.

Some rivals wonder, though, if endlessly hacking away at the airline is the best way to squeeze out more costs. Pieter Bouw, president and chief executive of very profitable KLM Royal Dutch Airlines, points out that his company set up a separate corporate structure for catering, but decided not to spin off maintenance and baggage handling. It makes more sense, he says, to keep these vital functions as close as possible to the core airline.

KLM's stance may well be prudent, but BA seems determined to try something radical that will force executives to ask existential questions about their businesses. "Do airlines need to own half the businesses they own? No," says Kekwick. Bertrand d'Yvoire, president of Consultair in Paris, goes further, contending that an airline's real business is the management of the reservation and traffic systems. Everything else, even flying the planes, he says, could be outsourced. If Ayling ever goes that far, maybe it will be time for a name change. How about Virtual British Airways?

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