Kevin O'Toole/LONDON

THE announcement of a new wave of restructuring at British Airways should have come as little surprise. In May, chief executive Bob Ayling followed the group's world-beating 1995 profits announcement with a stark warning that BA needed to make another £1 billion ($1.5 billion) in savings.

Talk of how this was to be achieved was left tantalisingly vague, but there was never much doubt that plans were indeed in train. Rumours have abounded, including a timely newspaper leak just days before the official release suggesting that up to 10,000 jobs would be shed in a swinging round of cuts.

In the event, such scares have been somewhat wide of the mark. The restructuring, when it was announced, suggested a more modest 5,000 redundancies and with the plan to achieve that voluntarily over the next 18 months.

Even then, the airline has made it clear that this is not so much a contraction as a redeployment of the workforce. The aim is to keep the overall number at around the 50,000 mark, but to shift the emphasis towards customer service and higher-skilled jobs, while paring back in ancillary areas such as handling. Productivity gains will arrive as traffic increases and work practices altered.

There is equally little surprise in BA's hints that it is looking at outsourcing of support services, including the possibility of finding an outside investor for BA Engineering. In common with much of the rest of western industry, the US airlines and increasingly their European counterparts have been taking a long hard look at what they consider to be core activities. Rumours surrounding BA's intentions have been circulating for months if not years.

Since taking over as chief executive, Ayling has set out his stall as a reformer, with a personal mission to introduce new management philosophies at BA and oust old orthodoxies. A sweeping boardroom shake-up has already taken place and new initiatives, launched to change attitudes among employees. Now a highly public cost-saving target, to prepare BA "for the new millennium," has been added to the list.

There are nevertheless some hard reasons for BA to look for its £1 billion savings. Although the airline has been leading the world with its levels of profitability, that in part stems from the fact that BA went into the last recession in better shape than most of its European rivals, having made cuts hard and fast as the first signs of downturn began in 1990. BA has also therefore been in a better position to take advantage of the upturn over the past couple of years. A glance across the workforce figures for Europe's major airline groups (see table) shows that BA numbers have actually been on the way up, while others continue to tackle over-manning.

As Ayling has been quick to point out, competitors are catching up. Lack of any standard measures makes it notoriously difficult, to make direct performance comparisons, between European national carriers, but on a crude productivity measure of available tonne kilometres per employee, it appears that BA is among the leaders, but by no means out of touch with its nearest competitors, Lufthansa and KLM.

Admittedly, the measure is only a rough guide to underlining performance, not least because of the difficulty in separating out BA's own figures for its core airline operations from the rest of the group. Lufthansa, by comparison, has now split the group into a series of stand-alone businesses covering engineering, cargo and services. That leaves the core airline concentrating almost exclusively on scheduled passenger traffic.

Despite the inconsistencies, there remains a clearly visible divide between the pack of largely privatised northern European carriers and their Mediterranean competitors, struggling with restructuring after the latest round of state aid.

The likes of Iberia and Olympic Airways are beginning to see improvements in financial performance as restructuring measures begin to show through, but are still years behind the leaders. Alitalia, almost grounded by the size of its debt burden and high costs, has the scale of operations to be a top-tier contender, but has only just embarked upon what still threatens to be a contentious programme of restructuring and job cuts.

Air France is closest to completing its transformation, helped by the massive injection of state aid. The three-year restructuring plan, is well on schedule and due to be completed, early in 1997, although the airline has yet to conclude the highly controversial task of setting up a new low-cost European operation.

More immediate is the prospect of a renewed wave of restructuring among the top performers, Lufthansa in particular. The German group has already dragged itself up from one of the region's laggards, to become a formidable competitor, standing alongside BA as Europe's next most profitable group.

The day after BA had unveiled its £1 billion savings target, Lufthansa followed suit with a pledge to renew its attack on costs. Chairman Jurgen Weber set a target to wipe DM1 billion ($670 million) from the group's annual expenses bill by 2001 (an improvement of around 20-25%), stressing in no uncertain terms that every part of the business would come under scrutiny. The aim is to take passenger unit costs down to DM0.15 (¢10) per available seat kilometre (ASK).

Swissair's president-elect Phillippe Brugisser has also set out an ambitious target to slim down the airline's traditionally high unit costs by some 20% to around SFr0.09 (¢7) per ASK. To date Swissair's cost-cutting efforts have been steady but unspectacular.

Brugisser has promised to put a little more steel behind the effort, already putting his weight behind the highly controversial decision to cut back international flights out of Geneva and has set about reviewing every part of the operations.

A similar tough line has been brought in at Sabena, following Swissair's effective take-over of the Belgian carrier and its appointment of a new chief executive. The target is to get back to break-even by 1998, in a process likely to produce around 1,270 job losses.

KLM has as yet to reveal any firm plans for the next phase of its restructuring, talking instead of "continuous" improvement. The Dutch airline has a track record of tight cost control, however, and is coming under pressure to reassure financial markets that it can rein in expenses further.

In part these restructuring programmes, like BA's own effort, are being driven by the old problem of the need to keep pace with the continuing fall of yields. Although buoyant demand has helped fares to stay relatively steady over the past year or so, the underlying trend remains downward.

Germany and its surrounding markets already show evidence of a dip in demand this year and the more foresighted economists are anxiously watching the USA for signs of faltering, which could bring a more widespread depression some time over the next couple of years.

On top of these pressures, the region's national carriers face the prospect of increased competition within Europe as the impact of liberalisation begins to take hold. Perhaps more importantly, is the competition opening up on the transatlantic market in the wake of a string of alliances, complete with anti-trust immunity and open skies agreements.

That competition looks as though it will reshape the European market along US lines, focusing on a handful of major hubs, each dominated by a major airline grouping. The Lufthansa/SAS/ United alliance has already staked its claim to Frankfurt as one of those centres.

BA is poised to create another at London Heathrow when the alliance with American Airlines and the necessary UK-US open-skies deal are eventually put in place. KLM/ Northwest and Swissair/Sabena/ Austrian/Delta are also in the running, with Air France yet to declare its hand.

These groups will be competing to channel intercontinental passengers into their hubs from throughout the European market. In short, the region is shaping up for a battle royal out of which only the fittest will survive.

For BA, the stakes are especially high. Until now, US access to Heathrow has been strictly limited. This relatively privileged position at what is arguably the world's most lucrative and busiest international airport, has been the envy of its competitors.

While open skies may bring new opportunities from the American tie-up it will also release the pent-up demand from new US carriers to get into Heathrow. Continental and TWA immediately filed for Heathrow services, while the Lufthansa-United axis already has a useful bundle of slots available at the airport.

American chairman Bob Crandall admits that competition is likely to be cut throat. He adds that unlike other European hubs, Heathrow is one of the few airports in Europe busy enough to make it worthwhile for new entrants to challenge an incumbent.

BA also points out that with only 38% of slots at the airport, it is less dominant than Lufthansa at Frankfurt Airport or KLM at Amsterdam Schiphol.

BA's challenge is to continue to dominate at Heathrow against US competitors with system-wide seat costs as low as ¢5-6 per ASK, while fighting throughout Europe for feeder traffic to fill its intercontinental flights.

Like all the best board room games, the risks are high and the uncertainties abound, but at present, the best insurance that BA can take out for its future is to have the lowest costs and offer the best service in town.

Source: Flight International