New CEO, same old company?

Could Willie Walsh, new CEO of British Airways, have ever expected taking over the company’s helm at such a troubling time? A full in-tray certainly welcomes him to the role, reports Richard Brass

August began so well for British Airways. The company announced an impressive rise in profits for the first quarter, staff and equipment were primed and ready for the summer travelling rush, and the chief executive, Sir Rod Eddington, was looking forward to a nice quiet few weeks of handing over to his successor before heading home to Australia to enjoy the fruits of a job well done.

By the end of the month the picture wasn’t quite so rosy. A strike by ground crew at the height of the holiday period had stranded more than 100,000 passengers, some for more than four days, wrecking holidays, causing scenes of squalor and chaos at Heathrow, and costing the company an estimated £40m.

The third such strike in three successive summers, the crisis may well have left chief executive-designate Willie Walsh wondering quite what he was about to walk into. It also blew a big hole in BA’s reputation for reliability and stoked observers’ concerns that there could be serious trouble ahead for the world’s favourite airline.

For Eddington, who handed over to Walsh at the end of last month, the strike and its consequences have cast an unwelcome shadow over the last days of a generally successful tenure. When he took over in controversial circumstances from Bob Ayling in 2000, the airline had just registered its first loss since it was privatised 13 years before. The crash of Concorde that same year, the 9/11 attacks a year later, the outbreak of the SARS virus and the rise and rise of low-cost carriers left BA facing serious problems.

Eddington’s response was a drastic round of cost-cutting. He axed more than 13,000 jobs and overhauled the route network, putting the company back in the black, cutting debt and increasing passenger numbers. In his last full year in charge, despite rising fuel costs being added to the other pressures in the market, BA produced its best performance since 1997, with the highest operating profit of any airline in the world. The final first-quarter figures that Eddington presented proudly as his swansong at the beginning of August showed a profit of £124m, compared with £75m a year before.

His successor has an even stronger reputation as an axeman. In less than four years as chief executive of the Irish carrier Aer Lingus, Willie Walsh cut costs by 30%, partly by getting rid of a third of the airline’s staff, a policy that provoked a stand-off with unions culminating in a three-day lock-out. “A reasonable man gets nowhere in negotiations,” he once said, and this hard-headed approach and track record of cost-cutting, which saved Aer Lingus from joining Sabena and Swissair in the aviation graveyard, convinced BA’s board that he was the man to fill Eddington’s shoes.

It is Walsh’s hard-headedness, rather than his cost-cutting skill, that is likely to be in demand as he gets his feet under the table in his new job. His predecessor may have had no qualms about getting to grips with costs, but he failed to face up to a deeper-seated problem that could weigh very heavily on BA in an era of lean, mean, nimble competitors, and which was at the heart of the conflict that burst into the public eye in August.

Keith McMullan of the airline consultancy Aviation Economics describes the problem precisely: “Heathrow is probably the last remaining bastion of union power in the country,” he says. The 70,000-strong workforce at BA’s home airport is heavily unionised, representing the biggest concentration of members of the Transport & General Workers Union, as well as being the site of ongoing inter-union rivalries. Working practices at Heathrow are regarded by many observers as similar to those that prevailed throughout British industry before the Thatcher Government’s labour-market reforms of the 1980s.

“Getting on for 20 years after privatisation, Heathrow still has many features of a state company,” says McMullan. “Eddington has left an airline in fairly good shape, one which is again taking up a leadership position among the major European carriers. But they have to make their next moves to tackle efficiencies extremely carefully, because we’ve seen what just a couple of days’ industrial action can do. The dilemma for them is that if they don’t tackle these issues they’re loading up serious problems for the future.”

Nick van den Brul, European airline analyst at Exane BNP Paribas, believes Eddington’s failure to address the issue of the workplace culture at Heathrow was a serious flaw in his reign. “As the latest strike showed, there’s a very big problem with the check-in staff and ground staff in general in terms of working procedures,” he says. “This has been going on now for two years and it hasn’t been resolved.

“Relationships with the unions, in particular the TGWU, haven’t changed much. They’ve just been pushed to one side and haven’t been addressed head-on. Now it’s coming to a head, and Willie Walsh is going to have to deal with it.”

The fact that there have been three strikes in successive summers with minimal long-term damage indicates that, as things stand, BA can cope with the turbulence. The strikes have cost a lot of money and many customers may have temporary lost faith in the company, but the consensus among observers is that the airline’s reputation for reliability is strong enough to rule out any long term effect on the customer base. The calculation seems to be that the cost of the odd wildcat strike is preferable to the likely cost of a wholesale attack on working practices at Heathrow.

But that’s under normal circumstances. Right now, however, BA’s operations are on the verge of the biggest change they have undergone for decades, as the entire many-headed BA complex at Heathrow prepares to move into the new £4.2bn Terminal 5. The kind of working practices that are taken into the new terminal could very easily determine the future of the company.

Streamlined

Due to be opened in March 2008, Terminal 5 will centralise all of BA’s activities under one roof, allowing it to overcome the huge inefficiencies of operating from split terminals, and will incorporate state-of-the-art technology and processes, providing functions and facilities available in no other terminal on earth. The move will provide BA with a one-off opportunity to establish new, highly efficient working practices, cut costs further and create a far more streamlined operation.

But if simply running the existing operation has provoked wildcat strikes every summer for the last three, the shift to a whole new regime at Terminal 5 scarcely bears thinking about. Or, at least, it didn’t to Eddington. “Transferring to Terminal 5 is going to be hugely difficult,” says van den Brul. “The problem is that the ground staff have, in the past, had certain privileges in terms of flexibility. Terminal 5 will make it virtually impossible to work on the old-style personally flexible basis because it’s going to be fully automated, security’s going to be even tighter than it is now and you’re going to have to deal with electronic log-ins, which are equivalent to smart cards.” Attempts to introduce swipe-in cards triggered one of the Heathrow strikes two years ago.

“It’s a massive exercise in transformation of the personnel from the old ways to a new system. It’s like scaling a mountain, and Eddington hasn’t done it but has left it to his successor.”

So if Willie Walsh thinks he can show up at BA and just start swinging his axe around, he’s in for a shock. The problem is a more deep-seated, long term and complicated one than simple cost savings. If he gets it right, the sky could well be the limit for BA, but, if he gets it wrong, the effect on the company in the increasingly difficult world of aviation could be devastating.

“Terminal 5 could be a huge leap forward,” says van den Brul. “But if it’s not negotiated very carefully, delicately and openly, and with a great deal of sympathy, it could be a huge disaster.”

Richard Brass is a freelance columnist and feature writer.