British Airways' measures to ensure its future could be its last lifeline as it tackles twin threats of industry slowdown and low-cost airlines

British Airways was among the first of Europe's flag carriers to recognise the potential damage, and opportunities, that the no-frills airline market offered. Towards the end of the last decade, under the guidance of Bob Ayling, BA decided to make premium passengers the focus of mainline operations, while Go was created as a standalone business to gain a foothold in the low-cost sector.

The trouble is, the "divide and rule" strategy adopted four years ago to tackle the changing market conditions has not stopped BA becoming a loser on both fronts, following the collapse of its cash cow - transatlantic business traffic - after the US terrorist attacks last September. BA has probably just grasped its last lifeline, but there are serious doubts that it has used this opportunity to go far enough. Will it have another chance?

In the mid-to-late 1990s, with growth at its main hub at London Heathrow stalled due to the delayed Terminal 5, and little likelihood of early approval for its transatlantic alliance with American Airlines, Ayling recognised that drastic action was needed. He talked of turning BA into a "virtual airline", outsourcing services and setting a target of £1 billion ($1.4 billion) in cost savings.

While union opposition and the threat of strike action held back Ayling's vision, he was still able to initiate a plan to reduce capacity by 10% over four years. Targeting the growing high yield business sector seemed to be the perfect solution - BA would carry fewer, but more lucrative passengers and leave Go to mop up the no-frills sector.

That was all very well, but this highly public strategy alienated the low-price travellers to such an extent that Ayling's successor, Rod Eddington, has acknowledged the urgent need to dispell the misconception that BA is only a high-price airline.

One of the first decisions that Eddington took when he arrived at BA two years ago was to put Go on sale. "It was simple, I either had to sell Go or sell BA," he says, convinced that you cannot successfully operate a full service and low-cost airline within the same group.

Although BA netted a useful £100 million from Go's management buy-out last summer, some observers suggest that the sudden shift in the airline market following the terrorist attacks might have left BA rueing that decision. But had Go not already been sold there would have been the temptation to bundle BA's loss-making London Gatwick operations into Go as a quick answer to all its problems. This would have solved nothing and added another chapter of woe to the Gatwick saga.

BA will completely re-organise its Gatwick operations, slash capacity and adopt the more user-friendly face of the low cost carriers for bookings. While realistically this was probably the best that could be expected, given BA's difficult position, many believe the only true way to end the airline's 14 years of losses at the southern UK airport would be to pull out entirely.

BA gained its first major foothold at the airport (as a scheduled airline) through the take-over of British Caledonian in 1988, and has bungled earlier opportunities to sort out the hub's high costs. The golden opportunity came in 1992 when it acquired Dan-Air, but instead of using the low cost base that the airline offered, it was effectively merged with the remainder of the Gatwick business. A similar opportunity was lost with the purchase of regional airline CityFlyer Express two years ago, while efforts to lower costs of marginal long haul routes were dashed when BA management could not reach agreement with pilot unions over the Airline Management joint venture with Flying Colours.

Only time will tell if Eddington has set the airline on course for a strong recovery, but the stated 10% profit margin will prove a hard target to attain. Earlier rounds of staff cuts last year did nothing to tackle the post-11 September crisis, being more a belated effort to bring head count down in line with the Ayling capacity reduction strategy.

Only now has BA begun to tackle properly the industry slowdown and the impact of the low cost airlines. The real future size and shape of its short-haul network will not be clear until the impact of the new strategy at Gatwick and the regions can be assessed.

Many questions remain. While the long-haul business will bounce back, it is far from certain the old high-yield fares will come with it. The battering rams of Europe and the USA are set on a path of destruction at the gates of BA's fortress Heathrow hub, providing another headache for the "world's favourite airline".

Source: Flight International