Willie Walsh: fit for purpose at BA

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Just three weeks after officially taking over as chief executive of British Airways, Willie Walsh talks to Airline Business about why he took the job and the challenges he faces over the coming few years

On the day that Airline Business interviewed Willie Walsh in mid-October the countdown clock in the grand avenue that runs down the spine of the airline’s Waterside headquarters read 892. The next day it would read 891 and another day closer to a historic day for BA: the transfer of the carrier’s entire operations at its London Heathrow hub to the airy new Terminal 5.

The importance of the transformation when the clock finally counts down to zero in March 2008 cannot be underestimated for BA. “The prize is so big it really does pay for us to put a lot of time, effort and resources into it,” says Walsh, in his characteristically understated manner. It is a “once-in-a-lifetime opportunity”.

walsh“Terminal 5 will set us up for the next 20 years in terms of how we operate here,” says Walsh, who is sporting a badge and lanyard emblazoned with the phrase “Fit for Five”.

BA can be excused for being just a little obsessed with its transfer to this terminal, which is rapidly taking shape on the west side of the airport. For years, the airline has had a split personality at its home base: with most domestic and European short-haul flights operating from Terminal 1, and long-haul from Terminal 4. The best transfer option is the bus in what has been a deep flaw in BA’s efforts to build a connecting business at the airport. It has done so despite, and not because of, the infrastructure it has had to contend with.

Heathrow transfer
Pulling off a successful transfer to Terminal 5 will in itself be a major achievement for Walsh, but this polite Irishman, who sticks doggedly to his beliefs and values about how a business should be run, is far from single-minded about the challenge he faces at BA.

The move to Terminal 5 is almost Walsh’s “day job”. On top of that he will continue an unrelenting focus on the airline’s cost base and on its investment needs while keeping a weather eye on issues like industry consolidation, transatlantic open skies and the airline’s relationship with American Airlines.

Walsh officially took over as chief executive from Rod Eddington on 1 October after what must surely be one of the most measured successions at a major carrier in recent times. For over five months Walsh has worked alongside the Australian, learning the ropes, understanding the politics and meeting the team.

He was approached by a headhunter about the BA job in January after resigning from Aer Lingus late in 2004. “I literally had no plans when I tendered my resignation,” he says. His announcement came alongside the resignations of chief financial officer Brian Dunne and chief operating officer Seamus Kearney. The carrier’s executive trio discovered they all had been independently fostering doubts about how the government wanted the state-owned carrier to develop. “It literally was the three of us sitting down around a cup of coffee,” says Walsh. “I said I’m thinking of moving on, I’ve made up my mind I’m going to go.” As they talked it was soon clear they were all thinking along the same lines.
The three colleagues co-ordinated the announcement of their departure to the board. “We felt it was a cleaner thing to do, to announce in one go that we were going to go,” explains Walsh.

Having transformed Aer Lingus from a loss-making basket case into a profitable network carrier that could truly compete with low-cost carriers, all three were guaranteed to find good work elsewhere. “I was pretty confident that something would come up given what we’d achieved in Aer Lingus,” says Walsh.

For Walsh, 44, the BA job may have come earlier than expected in his career, but this assured and personable man is already at home in his new role. “I went into it with my eyes open,” he says of BA’s approach. Not surprisingly, he did have other offers of airline chief executive jobs on the table. But the BA job was the big one.

Buying into BA’s vision
“I was very conscious of what was happening with BA. I had met Rod and his team on a couple of occasions over the years,” says Walsh. The carriers are partners in oneworld. Walsh met BA chairman Martin Broughton to discuss the job. “We just clicked,” he says, stressing how important the relationship is between the chairman and the chief executive. “Within 30 minutes of meeting him I had made my mind up, it was the place I wanted to work.

walsh

“The important thing for me was looking at BA in 2001 and where BA is today,” he says, pointing out how far the airline has come since those dark days. “I looked at what the people in BA have done to face up to fundamental change in the industry. In many ways the changes are very similar to those at Aer Lingus. The pace and scale are very different, but what has been done is very close to what I would have done.

“There is great alignment here between my thinking and that of the team at BA. Critically, people were saying the job is not done yet. By any standards when you look at the balance sheet it has been a fantastic success. But the fact was that people were saying – that’s not enough.” No-one was standing back and applauding the achievements to date: “There was no complacency and no sense of celebration,” he says. “It was nice to meet people up for further change. It is very much forward looking…and a great place for me to start.”

Unlike Aer Lingus, which needed fixing, and quickly, the critical issues facing BA have all been clearly identified by the carrier. Top of the list is the Terminal 5 move. “It will transform the way we operate at Heathrow and the way we deliver customer service,” says Walsh. “Heathrow, to be frank, is an airport that struggles to cope with the capacity it has got today.” BA’s move to Terminal 5 will instigate a complete re-organisation of airline locations at the airport as well as a massive further round of investment from airport operator BAA.

“It is long overdue to get the opportunity to have all our activity in one terminal building,” says Walsh. The scale of the cost efficiencies BA will achieve will be more accurately quantified by February or March next year. What is becoming clear, says Walsh, is that the financial effect will be substantial. “We expect it to be more than the business case originally suggested,” he says.

Some of the greatest benefits come from operational improvements such as the impact of self-service check-in kiosks as well as a host of other technological gains. Then there is the opportunity of aligning staff working practices. At present, staff at Terminals 1 and 4 work under different systems and procedures in a structure that reflects the short- and long-haul nature of the operations at these terminals.

New working practices
“The beauty of Terminal 5 is that you can only have one system,” says Walsh. “We say let’s do this the Terminal 5 way, not the T1 or T4 way. We can go back to a blank sheet of paper and design the most efficient way of operating at Terminal 5.” He has continually been asked if job losses will be inevitable. “We don’t need to have any compulsory job losses,” he says. That is not to say the total workforce will remain at the same level, it almost certainly won’t, but with “significant natural attrition” the transition can be achieved with good planning.

“The issue of change in practices is always a sensitive one,” says Walsh, who oversaw a radical downsizing in the workforce at bloated Aer Lingus. “Terminal 5 provides us with a platform to address these changes in a structured way,” he says. It is also something that physically cannot be ignored: “You can see it from here at Waterside and from all around the airport.

“Everybody understands that we need to change, I have not heard a single person say we don’t need changes,” he says. “When you can provide people with logic for change it is a hell of a lot easier than talking in abstracts.”

There is nothing abstract about the consultations currently underway with BA’s staff and unions about the Terminal 5 move. “We are making progress,” says Walsh. “I am very pleased with the response from unions and representatives.

“We will move into Terminal 5 in March 2008 and probably get access to the building in October 2007,” he says “Those six months will be used to pressure test everything within the building – work practices, systems etc. Ideally we want to be testing the work practices in the Terminal 1 and 4 environment if we can during 2007.” This gives a natural deadline for the labour talks to be concluded. “By the end of 2006 we need to have everything wrapped up and agreed,” he says.

“It is a big task and there is a lot of change involved,” says Walsh. “It’s an important test for BA and one we’re absolutely determined to pass, and pass with honours.” BA knows how high the stakes are, and is not immune from industrial action at Heathrow as the wildcat strike of ground workers this summer showed.

Financial performance
BA’s September traffic figures, which showed 7.8% growth overall with premium traffic up by 11.6%, demonstrated that the carrier has recovered from the July bombings in London and the August strike, says Walsh.

The airline is still forecasting an operating profit margin of 5.5-6.5% in its current financial year, which ends in March. The target is for a 10% operating margin, but high fuel prices are a “significant headwind” to achieving this goal. “It is difficult to see in the current climate with fuel at $60 a barrel,” says Walsh. BA’s fuel bill will be £525 million higher this year compared with last. The carrier has hedged about 40% of next year’s fuel at $50 a barrel, but it is “very difficult” to call whether any more is needed at this stage.

At the strategic level, as another round of transatlantic open skies talks kick off, Walsh has once again flagged up BA’s long-term goal of greater co-operation with oneworld partner American Airlines. “If the opportunity presented itself when we could get a closer relationship, we would. But we don’t see it at the moment.” In the past, authorities on both sides of the Atlantic demanded too high a price for antitrust immunity to allow the carriers a tight commercial co-operation. “The price of that in terms of slots that we had to give up was just too high,” says Walsh.

BA’s hub focus is exclusively on developing Heathrow. London Gatwick has been downgraded from hub status to a significant origin and destination market and there appears no question of BA revisiting the idea of a hub on the European “mainland”.

The emphasis at Gatwick – where BA bases 32 Boeing 737s and 10 777s – is on making it profitable. “There is work to be done to make that a successful operation,” says Walsh. “We have got to be smart in the way we operate at Gatwick.” This means changing work practices, which is “work in progress”.

Fixing Gatwick will go a long way towards making BA’s short-haul business, which is reported in its accounts as including this airport as well as operations at Heathrow and elsewhere in the UK. “The challenge is to make sure all three contribute,” says Walsh. “We got close to breakeven in the last financial year, but that is not good enough.”

There is no banging of the table or boasting from Walsh as he expresses the hope that this year may be the breakthrough on short-haul profits management desires. You just know he means it, and will carry on until it is achieved. He is also conscious of doing what he preaches when it comes to spending money, and is happy to order sandwiches for lunch when an expansive spread is not appropriate.

But the old Honda Accord car, which became the symbol of his frugality during his cost-cutting days at Aer Lingus, has finally gone. He gave the vehicle, which had only done 40,000 miles, to his nephew for a 21st birthday present.

Of course, with his half-a-million-pound annual salary he can afford to drive something more up market. What he drives now is even a bit of a mystery to his own managers: a BMW has been spotted and there are BA’s own drivers too. But you get the feeling he’s not that bothered what he drives to get somewhere – it is the destination that matters.

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