FLUG REVUE September 2002: British Airways restructures

BA FORCED TO ADOPT ECONOMY DRIVE

By Sebastian Steinke

Chief Executive Rod Eddington spelt out the new strategy as follows: "We will remain true to our heritage of being a full service network carrier committed to customer service excellence and world class products. But we must transform British Airways into a simpler, leaner, more focused airline so we can thrive and prosper in an increasingly competitive market.”

Boeing 777 of British Airways

Boeing 777

With its new "Future Size and Shape” plans announced in mid-February, BA unveiled a new strategy with a possible signalling effect on other scheduled carriers as well. The long-established UK airline was confronted relatively early on with competition from the new low-cost operators like easyJet and Ryanair. Then when the economy slumped following 11 September, demand for its bread-and-butter north Atlantic routes dropped back particularly sharply. The net effect of this was that the airline finished the year ending 31 May 2002 with a loss of Euro 336 million. This was the first time since privatisation 15 years ago that BA has made a loss, having ended the previous business year with a Euro 252 million profit.

In fact 11 September only exacerbated a trend of declining sales that had already set in in the first three quarters of 2001. In an emergency programme initiated on 20 September 2001, capacity was therefore cut by 9.6% in the short term and costs were slashed by as much as 12.1%, five months before Chief Executive Rod Eddington unveiled the new strategy outlined above in the middle of February.

The new plans are centred around a drastic programme of internal economy measures aimed at achieving annualised cost savings of Euro 1.1 billion by the spring of 2004, with the aim of then achieving a 10% operating margin and returning the airline to profitability.

By October 2002 the number of destinations served is to be reduced by 9%, 27 aircraft are to be taken out of service or sold and 43% less capacity is to be offered at London Gatwick. The major part of BA's remaining longhaul services is being transferred from Gatwick to its "stronghold hub” of London Heathrow. Slots not currently used at overcrowded Heathrow BA is to be allowed to retain, having been granted special permission from the government.

The size of the workforce is also to be slimmed down. The London Waterside head office alone is to lose one-third of its staff. 23% of the 56,700 personnel employed in August 2001 – a total of 13,000 jobs – are to be made redundant by March 2003. Staff joining the airline in the future will be excluded from the lavish company pension scheme.

In parallel to these internal cost reductions and capacity adjustments, BA has also begun to lower its ticket prices and to introduce sliding tariffs that depend on demand, with significantly less stringent qualifying rules in the European market, as the low-cost airlines are clearly viewed by BA as competitors.

Direct flights to destinations in Europe constitute BA's second major pillar after international connections that pass through the London hub. Then there are the regional feeder services operated by subsidiaries or local franchisees. Probably from no other major scheduled carrier does one hear so clearly the message that lessons can actually be learned from the no-frills airlines, for example on how to organise successful internet sales operations.

BA had even founded its own low-cost subsidiary, Go. This has grown into a successful enterprise, but has already been sold as it is out of line with BA's high-quality core product. For the same reason the airline has decided to dispose of its German subsidiary, Deutsche BA, which likewise appears to be thriving following the recent introduction of a new low-price concept, and to sell it as soon as possible to its flourishing no-frills rival, easyJet (see also FLUG REVUE 7/2002).

The new BA corporate strategy is explicitly aimed at delivering a quality product with full service, well connected primary airports and high flight frequencies with good off-peak services. Here British Airways is concentrating on the full fare paying segment of frequently flying business travellers and is increasingly expanding its range of products to provide an unusual range of price and comfort categories.

If the Economy Class at the back of the aircraft, which goes by the name of "World Traveller”, seems pretty conventional, the "World Traveller Plus” section which occupies a few rows in front of it is quite different from the product offered by BA's mainland European rival Lufthansa: since these days many business travellers are only allowed to book tourist class for economy reasons, BA is also offering economising full fare paying passengers some additional rows with wider seats towards the rear. However, the meals provided come from the normal repertoire of Economy Class cuisine.

The Business Class "proper” then begins in front of another cabin partition. This is the clientèle that BA is primarily targeting. These not exactly cheap tickets then lead into a separate "Club” section, whose walls are decorated with framed photographs. On European routes this is a normal business class, that goes by the name of "Club Europe”. However, on longhaul routes, for example in the "Club World” section of a new Boeing 777-200ER, the seating is made up of striking and unconventional pairs of reclining seats, in which two persons in adjacent seats face each other. At first sight this "design wonder” with its fanlike folding dividing screens appears to be a cross between a pair of bathtubs and two prams parked next to each other. But on closer examination, the curious seating turns out to be extremely comfortable, flat and relatively undisturbed 1.83m long berths with a variety of adjustment possibilities, including additional foot compartment, screen and telephone.

However, passengers in window seats are facing backwards, i.e. they are looking towards the back of the aircraft. But, having taken off from Heathrow airport on a transatlantic flight, as one sips a glass of champagne and nibbles a chocolate made by the Queen's appointed chocolate makers on the occasion of her golden jubilee while Windsor Castle floats by below, one does not need to be a royalist to appreciate the unusual cabin configuration. There are even separate safety instructions for backward-facing passengers to follow in the event of an emergency landing: remain sitting in an upright position and do not lower the upper body into the brace position like the other passengers.

Apparently BA initially had problems with the backward-facing seats, as the computer reservation systems were unable to distinguish the direction of gaze preferred by passengers. Seat orientation can now be gauged from the seat number. Then the question arose as to whether passengers would also use (and pay for) the reclining seats on day flights. But as competitors like Cathay Pacific and Singapore Airlines now also offer reclining seats in the Business Class, this worry has proved unfounded.

Finally, even more comfort is offered in the First Class at the front of the aircraft. Here the seats are flat, extendable, individual reclining seats up to 1.98 m long, which even incorporate a small visitor's seat. If this is not enough choice, then one can go one level higher still: on the Concorde service between London and New York (only once daily instead of the former twice daily) and in the summer months on the Barbados route, there may not be as much space, but speed in the BA flagship rises to an exclusive Mach 2. After the Concorde tragedy in Paris, the Concorde fleet is currently undergoing a refurbishment programme that entails lavish new cabin fittings.

On the other hand BA's unique high-grade product has a reputation for being expensive. This is not actually the case, so Dieter Kandel, Commercial Manager at BA for Austria, Germany and Switzerland, explained in an interview with FLUG REVUE. In the past the low-cost airlines made out that their tickets were automatically better value. But in fact there were already some extremely inexpensive special tariffs at BA.

To improve utilisation on BA jets used frequently by business travellers, especially outside of peak periods, the British airline began this spring to drastically lower prices on European point-to-point connections from the United Kingdom in stages and by up to 80%. The basic idea is that minimum requirements such as the obligation to stay over for a Saturday night and cut-off dates for advance bookings will to a large extent be dropped, while different tariffs can be combined with each other. This means that flights with lower utilisation are deliberately and also in the short-term filled up by discounted ticket sales. Instead of flying with empty seats, BA would prefer to have more seats occupied even if the passengers filling them are paying less for their tickets.

Tickets are offered in three categories (at present only from England): fully flexible full-fare tickets which can be rescheduled and on which a refund is possible in the event of cancellation, followed by semi-flexible tickets which permit rescheduling but no refund can be obtained, and finally the cheapest category which is neither refundable nor movable and has to be booked at least two days in advance. The fares that have been in operation since the middle of July for flights from the United Kingdom to Germany, Austria and Switzerland begin, for example, at £99 (Euro 166) for a return fare to Frankfurt. Not only is this service operated from Heathrow to Rhine-Main, but the normal on-board service is offered.

In England the cheapest fares are offered from the website www.ba.com. But BA manager Kandel explains that he is not planning to introduce purely internet sales operations in Germany at a later time: between 95 and 97% of his sales are made through travel agents, and this is expected to remain the case. But if a customer makes a booking during working hours from his computer, thus cutting out the costs of reservation systems and travel agents otherwise borne by BA, then this cost advantage can be given back to the customer in the form of lower ticket prices. Unlike the low-cost airlines, however, BA is not planning to categorically exclude conventional sales channels.

The traffic trend in Germany, a market of almost 3 million departing passengers per year, is viewed by Kandel with mixed feelings: Hamburg, Berlin and Munich are running relatively well, but there is room for improvement at Frankfurt, Düsseldorf and Cologne. However, BA is able to respond flexibly to fluctuations in demand by switching to alternative aircraft, for example using the smaller Airbus A319 or A320 on the route to Frankfurt instead of a Boeing 757 or 767. There is definitely no likelihood of any German destination being dropped.

During the years when Germany was divided and Berlin was controlled by the Allied powers, BA enjoyed a privileged position in the German market, operating many domestic routes to Berlin. This Kandel views as a thing of the past. As soon as dba, the remodelled Deutsche BA, is finally sold, Germany will finally become "a country just like any other” as far as British Airways is concerned.

From FLUG REVUE 9/2002, page 22

Last updated 9 August 2002

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