KEVIN O'TOOLE AND MARK PILLING LONDON
BA's future size and shape exercise has outlined radical cuts across the European network and there is the promise of more change ahead as it squares up to low-cost competitors at London Gatwick.
British Airways encouraged its managers to think the unthinkable as they set about a fundamental review of the carrier's network and operations. When it was finally revealed in mid-February, the result of the eagerly awaited Future Size and Shape study was not quite radical surgery, but far more than a minor operation. And the principal patient has been BA's operations at London Gatwick.
The carrier has spent the best part of a decade trying to find a role for its second hub and to make money from its perennially unprofitable European operations into the bargain. Now, more than five years of growth will be reversed at a stroke, with a 60% cut in seat capacity and heavy cuts in destinations and staff. Yet the outcome could have been worse. The review also visited the possibility of withdrawing from Gatwick and from the bulk of European short-haul operations.
There had even been a late flurry of excitement around rumours that BA might once again be about to try its hand at running a low-cost operation. That was wide of the mark, although BA is planning to borrow some interesting lessons from the low-cost rivals now advancing on the airport. Fleets and aircraft configurations will be radically simplified, at Gatwick using only the Boeing 737 workhorse for the short-haul network and 777s on long-haul. The aim is to raise utilisation by 10%. A new simpler pricing structure is promised with a more straightforward approach to revenue management, not dissimilar to that used by easyJet. That will come in July.
In the meantime, BA chief executive Rod Eddington is at pains to stress that the basic strategy remains that laid down under his predecessor back in 1999, to create a more streamlined company, focussed on higher-yield business. There is also growing pressure to start showing profits again. "We started this review with one clear objective in mind - to turn this company around," says Eddington. "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 simple, leaner, more focused airline so we can thrive and prosper in an increasingly competitive market."
The headlines, as predicted, included another 5,800 job cuts, on top of the 7,200 announced in September. The target is to save £450 million ($635 million) within a year, and a total of £650 million by March 2004. By then, BA will employ 43,700 people, down from 56,700 before the crisis in August 2001.
Further capacity will be taken out of the system. Two Boeing 777s will go as the long-haul fleet slims by 14 aircraft by summer 2003, including expected departures of older widebodies. The short-haul fleet will lose 35 aircraft as types are redistributed between London and the regions. Gatwick's 16 Avro RJ100s will be transferred to bases at Manchester and Birmingham while ATR turboprops will be phased out as their leases expire.
Six long-haul and seven short-haul destinations out of London will also be axed with the coming summer schedule. And another five each will be axed in summer 2003. Overall that will leave BA showing a 21% cut in capacity against the original 1999 benchmark. In fact, the company had already committed itself to a double digit capacity cut across the network at that time and the later revision at the end of 2000 had posted up a 20% target.
Fundamental review
Although Gatwick is not alone in feeling the pain, the review there has been at its most fundamental. Effectively it seems to rule out any possibility of turning the airport into a genuine European hubbing operation. As Eddington points out, Gatwick's runway makes hubbing problematic. Through its KLM talks, BA had already explored the possibility of using Amsterdam Schiphol as an alternative venue for a European hub but even that was turned down. Instead, the focus appears to be back on London Heathrow, which despite its costs, has a wealth of possible connections.
The drawing down of its Gatwick operations comes just under 10 years since it began building them up after buying the failing Dan-Air in 1992 for £1. The strategy then was to move services, including some long-haul routes, out of Heathrow to free up space at the lucrative but congested premium hub. Even so, management agonised over the decision to split its London operations.
By the mid-1990s, BA was committed to building a major business presence at Gatwick, which had once been dominated by leisure. Until the brakes came on after the 1999 review, capacity growth at one point appeared to reach around 30% a year. The airport itself now makes it into the European top 10 with over 30 million passengers a year. And following the purchase of its franchise partner CityFlyer Express in late 1998, BA found itself commanding some 65% of slots at an airport which was fast filling up.
But the growth was not producing profits. In its 1999/2000 financial year BA lost £310 million on its European operations and another £170 million in 2000/1, with much of the loss at Gatwick. Eddington's arrival in May 2000 heralded an immediate rethink in strategy, with capacity cuts of 15% swiftly announced for summer 2001, and the first movement of routes back to Heathrow. In fact, by the end of 2000, BA was already talking about a 40% cut at the airport by 2003.
BA also announced it was merging its mainline Gatwick European Operations with CityFlyer in an effort to benefit from the latter's lower cost base.
As part of Future Size and Shape, BA will now transfer a further eight routes back to Heathrow this summer: Abuja, Bucharest, Buenos Aires, Kiev, Lagos, Mauritius, Riga and Zagreb. Long-haul routes at the airport will be cut to 15 by summer of 2003 from 41 in 2001.
By the time the cuts have been made, BA's capacity at Gatwick will be back where it was five years ago. However, BA may well be less enthusiastic about relinquishing slots, especially with the growing foothold that easyJet and Ryanair have taken at the airport. Instead the emphasis appears to be on a slicker, faster turnaround short-haul operation, including more off-peak flights.
Eddington recognises that BA must get a lot better at running short-haul operations, and matching the efforts of the low-cost operators. The new lower and more flexible fare structure to be launched in June is a nod to these carriers, which now compete on 62% of BA's short-haul routes. "We will compete profitably and intelligently alongside them by adopting what they do well - online bookings, high aircraft utilisation and pricing simplicity. We will mix it with what we do well - providing a great network with frequent flights from convenient airports, as well as delivering world class customer service," promises Eddington.
BA's new pricing structure will see its lowest fares available on the Internet, and with a £10 bonus over paper tickets. As part of a broad suite of measures designed to cut £100 million from its global sales bill, BA will also trim commissions to the UK travel trade. The fee for short-haul flexible tickets comes down from £11 to £5 and from £6 to £2.50 on restricted fares. The long-haul structure remains intact.
The world will have to wait until June to see how far BA goes in changing its pricing strategy, but perhaps here too it is time to start thinking the unthinkable.
| British Airways financial performance - Group | ||||||
| Year to March: |
| 1998 | 1999 | 2000 | 2001 | 2002* |
| Revenues | £m | 8,64 | 28,89 | 28,940 | 9,278 | n/a |
|
| change | 3.4% | 2.9% | 0.5% | 3.8% | -10.8% |
| Op result | £m | 504 | 442 | 84 | 380 | -65 |
|
| margin | 5.8% | 5.0% | 0.9% | 4.1% | -1.0% |
| Net result | £m | 447 | 206 | -10 | 128 | -99 |
| BA financial performance - European operations | |||||
| Revenues | £m | 3,214 | 3,409 | 3,400 | 3,388 |
|
| Change | 1.5% | 6.1% | -0.3% | -0.4% |
| Op result | £m | -127 | -166 | -310 | -172 |
|
| Margin | -4.0% | -4.9% | -9.1% | -5.1% |
| NOTE: 2002* = nine months to December 2001 only Op result = operating result before interest, taxes and special items. £1=$1.41 | |||||
| BA's Future Size and Shape | |
| Workforce cuts |
|
| Cabin services | 3,400 |
| Heathrow customer services | 800 |
| Gatwick customer services | 550 |
| Flight operations | 400 |
| Engineering | 1,500 |
| Cargo | 800 |
| World sales | 2,600 |
| Other areas | 2,950 |
| Total cuts | 13,000 |
|
|
|
| Workforce August 2001 | 56,700 |
| Workforce March 2003 | 43,700 |
| NOTE: Job cuts include the post-11 Sept cut of 7,200 jobs. | |
| Fleet size |
|
|
|
|
| Service |
| Summer season | ||
|
|
| 2001 | 2002 | 2003 |
| Long-haul | LGW | 32 | 16 | 11 |
|
| LHR | 94 | 98 | 101 |
| Total |
| 126 | 114 | 112 |
| Short-haul | LGW | 57 | 46 | 35 |
|
| LHR | 85 | 83 | 87 |
|
| Regions | 93 | 82 | 78 |
| Total | 235 | 211 | 200 |
|
| Total fleet | 361 | 325 | 312 |
|
|
|
|
|
|
|
| Destinations |
|
|
|
|
| Service |
| Summer season | ||
|
|
| 2001 | 2002 | 2003 |
| Long-haul | LGW | 41 | 19 | 15 |
|
| LHR+LGW | 82 | 76 | 71 |
| Short-haul | LGW | 54 | 42 | 34 |
|
| LHR+LGW | 74 | 67 | 62 |
|
| Regions | 51 | 48 | 48 |
| NOTE: LGW = London Gatwick LHR = London Heathrow Regions = UK regional bases including Manchester and Birmingham | ||||
Source: Airline Business
