Willie Walsh came into British Airways with all guns blazing, tackling the pension deficit, cutting costs and kicking the carrier into shape ahead of its move in March to London Heathrow's Terminal 5
The imminent opening of London Heathrow's Terminal 5 is a big deal for British Airways, and chief executive Willie Walsh is its biggest advocate. As he leads Airline Business through the cavernous glass and steel structure, Walsh is keen to hear our impressions of BA's new home, which opens its doors to the public on 27 March.
Terminal 5 will bring in a massive improvement for BA and its customers, in stark contrast to Heathrow's older terminals, which Walsh himself describes as "almost oppressive". And after enduring months of torrid headlines related to congestion and lost baggage at its largest base, BA is looking forward to turning a new page in its history.
"From a British Airways point of view, T5 is a fantastic opportunity," says Walsh, speaking in the opulent surroundings of one of Terminal 5's first-class lounges. "I've described it as a once-in-a-lifetime opportunity. For the first time in about 40 years we'll get to bring most of our operation - unfortunately not all - under one roof. From a customer point of view, it's just so much better than anything we have at Heathrow. The airport today is trying to cope with 67 million passengers in terminals that were built for 45 million."
Terminal 5 has capacity for 30 million passengers a year, and it really is a tribute to modern architecture. But will this be sufficient for Heathrow to repair its damaged reputation? And more importantly for BA, is it going to be sufficient to win back some of the premium transfer traffic that has been lost to competing hubs such as Amsterdam Schiphol and Dubai? "T5 will definitely help, but it's not enough," concedes Walsh. "In terms of premium transfers, T5 is a definite opportunity for us. When I say it's not enough, the big problem at Heathrow is runway capacity.
"Heathrow is unique in airport terms in that the runways are almost completely full - they are 99% full right throughout the operating day. I think if you look at the major European hubs they all have at least 20% excess capacity, so they might be full at peak times but there is excess capacity in the off-peak. There is no off-peak at Heathrow and that's a problem that needs to be addressed."
Live fast, retire young
Willie Walsh has packed a lot into his 46 years but is determined to stick to his teenage ambition of retiring at the age of 55. "I have always said to myself, going back a long, long time, that I would like to retire when I was 55," he says. "That was mainly because I started when I was 17 so I thought that was a long enough time to be at work." But is this still his intention, given that his planned retirement age is closer than it was when he set the goal? "It hasn't changed," he insists. "I remember saying this to somebody a number of years ago and they said 'you'll get close to 55 and then you'll change it to 60, and then you'll change it to 65.'" It's hard to imagine this energetic chief executive, who admits that "people who know me would probably describe me as a workaholic", throwing in the towel and putting his feet up for a quiet life in just nine years' time.
Now that it has its shiny new terminal, BA will be fighting tooth and nail for the construction of a third runway at Heathrow and for the existing runways to switch to mixed-mode operation as an interim measure. It will likely prove an uphill struggle against mounting and vociferous opposition, but nevertheless Walsh is confident that BA will have its way. "I am optimistic," he says. "I think people are starting to see how important Heathrow is in economic terms to the UK. I'm satisfied that we will be able to address the environmental hurdles that have been set for expansion at Heathrow." Walsh is positive about the future of Heathrow and despite the obvious handicaps to BA's growth at its main base, he is confident the new terminal will enable it to win back that all-important premium transfer traffic, and win it back quickly. "I think we'll see it from day one because what we've seen from the restrictions on hand baggage at Heathrow is that this transfer traffic is mobile. We know we lost premium transfer traffic to other European hubs when the UK introduced the one bag restriction. That was a major irritation to customers, but since that restriction has been removed we've seen premium transfer traffic come back to Heathrow."
However, he resigns himself to the fact that some of the short-haul premium traffic that was lost as a result of the hand baggage restrictions may never be regained. "It's true that demand for premium on short-haul has been in decline for many years and we've seen that decline continue in 2007," he admits. "I think short-haul premium traffic was definitely impacted in an adverse way by restrictions on hand baggage in the UK, so we've seen a move to the train for places like Paris, Brussels and Amsterdam, largely driven by what has become known as the Heathrow hassle factor. To be honest I see that probably as a permanent shift - I think some of that traffic will come back but I think a lot of it has shifted permanently to the train."
But rather than reduce capacity on these routes, BA hopes to take advantage of the exit of other players like bmi to keep in place its two-class short-haul operations: "I think the BA operation will remain pretty much as it is because others are taking capacity out. I still believe there is sufficient demand at both Heathrow and Gatwick to continue to justify offering a two-class service." This will be kept under review, "particularly at Gatwick where the demand is less than exists at Heathrow", although BA is encouraged by a recent upsurge in demand for "premium leisure" services from its second biggest base.
BA's plan going forward is to focus on long-haul expansion at Heathrow, but Walsh is keen to point out that London Gatwick and London City remain an important part of the carrier's strategy. "We will look to increase flying at all three of those airports. Heathrow clearly is our main hub and there are restrictions on growth at Heathrow because the airport is full, but we have been successful in acquiring slots from other carriers and we'll continue to look to acquire slots to facilitate our expansion," he says.
BA spelled out its London City ambitions in early February when it unveiled plans to launch all-premium Airbus A318 operations from the downtown airport to New York in 2009. The surprise move will see the carrier configure two A318s with 32 lie-flat beds to cash in on strong transatlantic premium traffic. The new operation will serve either New York JFK or Newark, depending on slot availability. While the new A318 service will be operated by BA mainline, the carrier's other London City services are operated by subsidiary BA CityFlyer, which holds 14.2% of the slots at London City and will this year add flights to Amsterdam, Barcelona, Nice and Warsaw.
As for its other two London bases, each of the widebodies BA has ordered under the first phase of its fleet renewal programme will go into Heathrow. But that does not mean Gatwick will be omitted from the long-haul expansion strategy: "We will look to grow our long-haul operations at Gatwick. It may be that aircraft we had looked to replace at Heathrow, we might move them to Gatwick in the short-term because all our aircraft are still relatively young. We were looking to accelerate the replacement but there are opportunities for us to grow our long-haul business at Gatwick and that's one of the things we will be looking at." Walsh lists China and India as being obvious growth markets for BA from Heathrow. He also sees growth opportunities in the Middle East and South America.
North America also ranks highly on BA's agenda, as evidenced by its strong lobbying for the continued development of the European Union-US Open Skies agreement, and the recent announcement that it plans in June to launch a subsidiary named after the landmark deal to operate services to the USA from mainland Europe.
The Open Skies agreement and its need for further progression during second stage negotiations, which are scheduled to begin in May, is clearly an issue close to Walsh's heart. Leaning forward in his chair with a look that means business, he says in a no-nonsense manner: "The parties have agreed to second stage negotiations and have targeted 2010 as the date to achieve significant progress, and we will hold these politicians to account. We will continue to remind them of the commitment they made and the consumer benefits they trumpeted but have not yet delivered." The main bones of contention are cabotage rights and restrictions on ownership and control of US airlines, which the USA has refused to relax.
Europe has a degree of bargaining power in that individual EU member states have the right to withdraw the benefits that were agreed on in the first phase of the agreement, if it is decided that insufficient progress has been made during second stage talks. However, Walsh says that while this gives the EU "a bit of a stick", it is "probably not as big a stick as they could have had". But he remains optimistic and believes that what he is seeking can and will be achieved: "I'm confident and I think anybody who shares our view of a fully deregulated, liberalised regulatory environment should be confident because it's a fantastic opportunity."
BA plans to take full advantage of the opportunity afforded it by the first stage of Open Skies to serve the USA from points outside the UK with the launch of its OpenSkies subsidiary this summer. The airline will draw Boeing 757s from BA's existing fleet to initially operate three-class, 82-seat flights from Paris and Brussels to New York. Walsh envisions the carrier operating six aircraft by 2009, and says that beyond Paris and Brussels, European cities under consideration include Amsterdam, Frankfurt, Madrid and Milan. Aside from New York, BA is also thinking of using the new carrier to serve Boston and possibly Washington.
But much like Open Skies the agreement, OpenSkies the airline is not without controversy. BA's pilots union has balloted members for strike action over the decision to staff the new subsidiary with pilots from outside BA and to exclude those pilots from being integrated into the existing seniority list. Walsh is adamant, though, that OpenSkies is "not in competition with BA", and that it can "only be positive" for the carrier. "I think people within BA who see this OpenSkies airline as being the competition need to open their eyes," he says. "The competition is not coming from within. The competition is coming from Delta, Continental, US Airways, Northwest, American Airlines, United, Air France - these are all airlines that are expanding their operations at Heathrow. That's the competition, that's where people should be focused. They should be focused externally, not internally."
One area of external focus where BA has not been overly vocal of late is that of consolidation with carriers outside the UK. Unlike Air France-KLM, which has been playing the lead role on the European airline consolidation stage, BA has barely made so much as a cameo appearance. Has the carrier been too cautious, reluctant even, in its approach to European consolidation? "I think that's a fair assessment," concedes Walsh. "I think we probably looked too deeply at the issues and I don't think we fully appreciated the opportunities for revenue synergies in the way that Air France-KLM has clearly managed.
"In the past we probably were too cautious - not that that was wrong, it probably avoided a lot of mistakes that we could have made - but I think going forward we will be a bit more open in the way we view things." BA's recent bidding war with Air France-KLM for the acquisition of Belgian regional operator VLM was an example of this "more aggressive" new stance. In the end though it lost out to Air France-KLM, saying it was not prepared to pay over the odds for VLM.
But BA will now look at consolidation differently, having seen the benefits enjoyed by its French-Dutch counterpart: "I wouldn't say that means we're going to be reckless, we're not, but I think we recognise that the Air France-KLM consolidation has been more successful than we would have imagined. You've got to look at what your competitors have done, and how they've been successful, and how they've achieved results, and say: can we learn from that? And I think we've learned from what these carriers have done."
A BA takeover of another European carrier could be on the cards, says Walsh, but only if it can achieve something transformational. "There may be opportunities for us - the opportunity with Iberia we felt was attractive," he notes, referring to BA's dalliance with the idea of bidding for the Spanish carrier as part of a consortium with TPG Capital. BA eventually reverted to its past cautiousness and withdrew its interest in Iberia. Given that such a merger could have helped BA fulfil its objective of increasing its presence in South America, this withdrawal of interest gives rise to the theory that perhaps BA is biding its time in the hope that a bigger, more global consolidation opportunity presents itself. One suggestion is to revive deeper partnership talks with oneworld alliance partner American, if and when US ownership restrictions are relaxed.
Walsh smiles at this suggestion, but gives the kind of response a politician gives when you just want them to say yes or no: "If the ownership restrictions were removed I don't think it would just be British Airways looking at consolidation. I think you would see a move from both sides of the Atlantic to consolidate and I think that would be a really significant step forward. It's something I would like to see happen. The opportunity should exist and then let the market decide whether it should be availed of."
Since becoming chief executive of BA in 2005, Walsh has been charged with building upon the carrier's Future Size and Shape cost-cutting and right-sizing programme, which he inherited from his predecessor Rod Eddington, and taking it to the next level. Addressing BA's swollen pension deficit was a big part of that task, and Walsh rolled up his sleeves and got down to business on achieving this goal in his first week as chief executive.
"I'm pleased that we've been able to resolve our pension deficit - I think that was probably the biggest issue we faced," he says. "I started as CEO on 1 October and we started a campaign to tackle that pension deficit on 3 October, so it was my first Monday on the job." It took 16 months to secure union approval to reduce the deficit, which Walsh describes as "a millstone around our neck", but it was crucial to BA's future. "If I look back on my time as CEO I think that's the thing I'd probably be most proud of because it really was a critical issue to resolve, and getting it resolved freed us to start looking at fleet replacement and fleet expansion," he says.
Despite rising fuel costs and the crises BA has faced of late, the carrier posted a strong set of nine-month results for the period ended 31 December, solidifying its position as one of the world's most profitable airlines. It saw its operating profit rise 28.5% to £734 million ($1.45 billion), producing an operating margin of 11.1%. Walsh is pleased with the progress made on cost reduction, and continues to believe that achieving a 10% operating margin for the full fiscal year ending 31 March is an "appropriate goal for BA", despite the difficult trading environment. "Everything we're doing is geared towards achieving the target we've set for 10%," he says. But the carrier has made clear that this will require a record fourth quarter.
Since he started, Walsh's job has been all about getting BA into shape so that it is in a position to grab growth opportunities. Consolidating its operations into the true transfer hub it finally has in Terminal 5, against the backdrop of increasingly jittery global financial markets and intense compeition, is a huge milestone on the road to achieving that position. Then the challenge will be to take the next big step forward on the global stage.
Luck of the Irish
Willie Walsh did not set out to be the chief executive of a major airline when he joined Aer Lingus as a cadet pilot at the age of 17. The baby-faced 46-year-old seems surprised to find himself where he is today, and puts his success down to luck rather than a well-planned career path. "I'd be lying if I said I'd had any ambition to move beyond being a pilot," says Walsh, who first became an airline chief executive at the age of 36 when he moved to Spain to run former Aer Lingus subsidiary Futura. He took the helm at Aer Lingus at the age of 39 and moved over to British Airways at 43. "Every day, probably going back to Futura in 1998, I've looked in the mirror and said: how did I get here?" he admits. "But I feel really lucky that I've had the opportunity. I've always worked on the basis that when an opportunity presents itself you grab it, and I think the reason I'm CEO of BA today is because I've grabbed every opportunity that's presented itself as I've gone through my career." Despite the obvious size difference between BA and Aer Lingus, he says the work pressures are the same: "The issues we're addressing at British Airways today are very similar to the issues I was addressing at Aer Lingus."
Walsh has never mapped out his career, and when asked what's next, his candid response is: "I've no idea. To be perfectly honest I've never sat down to plan my career and I'm not going to start doing it now. I don't look beyond what I'm doing, I never did. My contract with British Airways is a 12 month rolling contract. I love what I'm doing and I'm not looking beyond what I'm doing at all."
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