British Airways is planning to axe 25% of its short-haul routes within Europe as part of a radical approach to a growing crisis centring on declining yields. The UK flag carrier saw pre-tax profits plunge more than 61% to £225 million ($360 million) for its financial year to 31 March - and though much of that decline is attributable to fallout from the East Asian crisis, BA admits that the slump is not solely to blame for its stuttering performance.
The downward trend in yields is an ever-present problem for airlines worldwide, but BA's has been especially steep, largely because of the carrier's commitment to taking premium class passengers at premium prices. When the transfer of spare Asian capacity led to over-capacity in the transatlantic market, BA was inevitably hard-hit as business travellers took advantage of cheaper fares offered by its rivals.
BA half-heartedly responded by cutting some fares, but the airline sees its long-term salvation in the overhaul of its business-class product to combat the perception that it no longer represents value for money, while addressing "structural" concerns in a way that should help to boost yields.
BA's decision to cut 20 of its 80 European routes was disclosed by chief executive Bob Ayling, just after the airline revealed its drop in profits. He added that the slots freed up through the move would be used to increase frequencies on the routes that BA is retaining, so the carrier is effectively concentrating more of its resources on services which are most profitable.
In a further structural move, BA confirmed it will switch to smaller aircraft for many of its European services, a strategy that will increase the proportion of business- to economy-class passengers on its flights, thus increasing yields. The switch will see BA withdraw some of its London Heathrow-based 200-seat Boeing 757s, and replace them with Boeing 737s or Airbus A320-family aircraft (Flight International, 12-18 May).
The carrier has instituted a similar policy for its long-haul fleet, with its 380-seat Boeing 747 Classics to be replaced by 270-seat 777s, of which BA has 23 in service and 22 due for delivery, some of which were ordered instead of 400-seat 747-400s. BA has cancelled its nine orders for the latter type, and will cap its -400 fleet at 57 aircraft.
As part of the same yield-focused initiative, BA sources suggest the carrier may also farm out further services to franchise operators. Some of the routes BA may discard include those which are popular with passengers feeding on to other short-haul services, rather on to high-yield, long-haul services out of its Heathrow and Gatwick hubs. Losses on European operations rose last year to £166 million from £127 million.
"We want to serve the UK as best we can, but at the end of the day we also want to be profitable," says one source at the airline. "What we don't want is short-haul-to-short-haul transfer traffic. We'd rather try and offer those services point-to-point or not at all."
BA's radical route and fleet plans will parallel the £200 million introduction of beds for business passengers in what amounts to a relaunch of its Club World branding. The aim is to restore the branding's popularity and hence BA's position as a premium international carrier, allowing it to regain control of its pricing structure, although there are questions being raised internally on how long the carrier can maintain its premium business class fares.
"What they are trying to do is reproduce the success they had in 1986-7 when Club World was launched," says analyst Chris Tarry of Commerzbank. "If you can make yourself the airline of first choice you can then begin to control availability of your product and start to cut out price discounting."
There are, nevertheless, inherent dangers to BA's strategy. The airline could have opted to reduce frequencies in Europe and operate larger aircraft, but having pledged itself to the alternative approach it must make sure it gets the frequencies right. In the long-haul market, the purposeful surrender of low yield market share also carries risks, but so long as traffic is shed only from the back of its aircraft, BA's yields can only improve.
The strategy of capacity reduction is tied closely to BA's problems at Heathrow, which is already groaning under the weight of traffic. While the carrier may have opted to reduce dependence on transfer traffic under other circumstances, the Heathrow problem has certainly forced the issue.
BA's moves contrast markedly with those announced by its biggest European rival, Lufthansa. It is planning a sharp increase in capacity and seeking market share, having claimed that it lagged behind other airlines in increasing capacity over the last few years.
The UK carrier's turnover rose 3.2% to £8.92 billion last year, but available tonne kilometres (ATK) increased by 12.1%. It says: "The general economic slowdown, coupled with relatively weak demand in the premium passenger market and industry-wide price discounting, produced an operating profit of £442 million."
The most worrying trend was the slump in yields. For the year overall yield per ATK was down 8.2%. That slipped further in the last quarter to 10.5%.
Source: Flight International