British Airways Sure Isn't Coasting

A radical plan could make the airline even more formidable

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 in some respects 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 flagship 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 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.

IN THE LEAD. 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 awarding its less profitable routes to smaller airlines to operate as franchises. The smaller carriers get to use BA colors on their planes and crew uniforms, while paying BA a fee. In the latest arrangement, BA will soon turn its service to Damascus, Beirut, and Amman over to British Mediterranean Airways.

Press speculation before the speech had made BA employees jittery, and Ayling's announcement will not reassure them. Ayling contends his message is positive because BA will eventually build back to the present 55,000 level as it hires more workers with language and customer service skills. He doesn't rule out some labor unrest, though, especially since the airline cannot use 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."

WHITTLING AWAY. 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 introduced his own four-year program to slash almost $1 billion in operating costs. "Now, we may have to go even further," says Cempella.

Yet BA feels pressure, too. The best U.S. carriers have European ambitions, and they 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. BA's costs are also higher than one might think. One industry observer says British Airways remains less efficient in some areas than such local competitors as Virgin Atlantic Airways Ltd. and British Midland. Considering BA's dominant position at booming Heathrow Airport in London, it should be even more profitable than it is, this source says.

Ayling's solution is to try something radical that will force the industry to reinvent itself. Bertrand d'Yvoire, president of Consultair in Paris, contends that an airline's real business is managing reservation and traffic systems. 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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