BA Stuck In Autopilot

BA Stuck In Autopilot

News, Sunday, March 10th, 2019

An article from The Daily Telegraph 9/3/19

BA Stuck In Autopilot

Getting Oscar winner Olivia Colman, probably the world’s most sought-after actor, to appear in a TV advert won’t come cheaply. But if British Airways wants to convince the public that “we love you Britain, you make us who we are”, she’s probably the best person for the job.

In the airline’s first big advertising campaign for some time, no expense was spared. Pricey public relations gurus from Ogilvy were hired. They then roped in A-listers such as Gary Oldman, boxer Anthony Joshua and pop star Paloma Faith.

For an airline that’s made a name for itself as something of a penny-pincher of late, one can only wonder what the advert’s final bill looked like.

The reason? BA is 100 years old. Sticklers for detail will point out that BA actually only came into existence in 1974 through the merger of British Overseas Airways Corporation (BOAC) and British European Airways. The important reference date, BA insists, is Aug 25 1919, when the world’s first international service by predecessor Aircraft Transport and Travel Limited flew from London to Paris. Things look a lot different nowadays. BA is part of a group of five airlines operating under the umbrella of International Airlines Group (IAG), a FTSE 100 giant boasting a stock market valuation of more than £11bn. BA represents roughly two thirds of IAG earnings, with the remainder spread across Iberia, Aer Lingus, Vueling and Level.

“But BA has two personalities,” one senior insider says. “The City side and the reality.”

With a string of airline failures fresh in the memory, IAG boss Willie Walsh continues to impress many in the Square Mile with bumper returns. At the end of last month IAG handed investors, the biggest of which is Qatar’s sovereign wealth fund, a €700m (£600m) special dividend. This came on top of a €615m ordinary payout, and hot on the heels of last year’s €500m share buy-back programme.

“A steady deliverer,” Barclays analyst Rishika Savjani remarked in response to annual operating profit of €3.7bn. “Consistent” and “confidence” were the other words bandied about by the broker community.

The majority of BA’s profits are made on transatlantic routes, Iain Smith, a director at aviation consultancy RDC, explains. And within these routes, business customers are BA’s golden goose. A director at a rival airline says there is a reason for this: “Many businesses are too lazy to go elsewhere.”

Economy trips across the pond are a big money-spinner too. Norwegian, with its long-haul low-cost model, has been a constant thorn in BA’s side here. The Scandinavian airline has grown rapidly and has usurped BA as the biggest overseas carrier in some east coast airports.

Walsh’s answer? Buy a big stake in its competitor, make a couple of takeover attempts and then dump the stock in early 2019. Norwegian put a brave face on things.

But staff were gutted when IAG walked away from the heavily-indebted carrier, insiders say.

Brexit fears persist among the investor community. Walsh has been consistently bullish that IAG will not breach the EU’s ownership rules and recently capped non-European shareholders. Brexit, IAG’s boss concedes “is likely to damage consumer confidence” but leaving without a deal “will have no significant long-term impact,” Walsh recently wrote in the company’s annual report.

If investors and analysts are broadly happy, the same cannot be said for BA’s staff.

Alex Cruz, the man Walsh hired to run BA in 2016, admitted that employees and customers had become “disenchanted” when he first started. But he has subsequently insisted that BA is “slowly” moving in the right direction.

Pilot forums and cabin crew message boards beg to differ; they are awash with frustration about the chairman and chief executive.

“Abrupt” and “brash” is how a former employee describes staff perception of Cruz. Those at BA claim appearances can be deceptive and Cruz often wins staff over when he meets them in person.

“Our regular staff surveys show our people are proud to work for such an iconic brand,” BA insists. Industrial unrest is further complicated by another dynamic; there is a huge divide between the pay packets of pre-privatisation staff and the newer cabin crew. Fresh recruits can expect to start at the lower end of £20,000-£30,000. But they could be working alongside older counterparts that are taking home nearer £80,000.

“BA staff are very emotional people,” one insider says. The problem Cruz faces is that the naysayers tend to make the most noise and steal the headlines.

Following its annual results, BA’s white and blue collar unions took the unprecedented decision of clubbing together to vent their anger. It is high time that those “who make the company a success share in it”, pilots union BALPA said in a joint statement with Unite and GMB.

Striking a distinctly Corbynite tone, the trio said: “BA must end its austerity approach to pay negotiations, reconnect with its employees and deliver a pay deal that properly reflects its record-breaking profits… The negotiations are now at a critical stage if an industrial dispute is to be avoided,” Staff unrest has not gone unnoticed in the City. Andrew Lobbenberg, an HSBC analyst, warns that with “record profitability of British Airways and substantial shareholder returns, we see significant risk of industrial unrest”. In part, Cruz’s cost-cutting is driven by IAG’s group structure. He might be chief executive and chairman of BA but Willie Walsh runs the show and his job is to deliver increased profits. Do that and he’ll be allocated more capital to invest in the business next year.

“More care and attention” is required to get the staff on side, one senior industry veteran says. BA’s situation is compared to that of Marks & Spencer or Waitrose, companies that, despite facing other difficulties, work hard to enfranchise staff.

“It is a very British thing to cost-cut, but sometimes spending more improves the profits and cash generated,” the veteran adds.

Like disgruntled staff, disappointed customers can also be noisy detractors. Empowered by social media, a spotlight is easily shone on failures. Cruz has weathered his fair share of IT disasters. In May 2017, a power outage took down the airline’s systems and disrupted the journeys of 75,000 customers. Last year hundreds of thousands of BA’s Executive Club members had their personal details hacked.

Then there is the culling of free food on short-haul flights, which caused uproar when it was introduced two years ago. It is “what people want” and “doesn’t save the airline any money”, those at BA insist. A quick online search provides plenty of ammunition to the contrary.

Seats have been packed into long-haul cabins, consumer experts say. The fleet, which includes an ancient collection of jets, has been criticised for looking shabby.

Business customers now say first class is more comparable to the business offering from BA’s Middle East rivals. Emirates, Qatar and Etihad, backed by titanic sovereign balance sheets, are continually pushing the boundaries of luxury travel. BA, which pioneered flatbed seats and once justifiably marketed itself as “The World’s Favourite Airline” has plummeted down the airline rankings.

Short-haul operations face a different threat. A plethora of European low-cost airlines provide cheaper alternatives with experts pointing to only a negligible difference in service.

BA says £6.5bn has been set aside to invest in new aircraft – 18 new Boeing 777s will replace its tired fleet. New dining, on-board Wi-Fi and better lounges are being promised. Slowly but surely, the airline reckons “customers are also giving us the thumbs up”. Despite its detractors, British Airways remains a global airline powerhouse, and some experts even admit that it’s still Europe’s best carrier.

So is BA so out of favour that the airline needs to open its latest advert by begging: “Dear Britain, we love you”? Not in the City, at least for the moment, but for the staff and customers, it has its work cut out.

BA’s latest adaptation comprises a strategy that continues to divide opinion. It is a reaction to low-cost airlines and cost-cutting. It is also a response to the need to maximise profit for shareholders in a fiercely competitive market.

And perhaps, while still one of the world’s top airlines, this is why BA will most definitely have its work cut out to return to the top of the pile.