Summary
The business model of yesteryear is something that won’t be coming back – unions have to support management efforts to retune British Airways’ corporate strategy in order to survive. Confrontation will yield very little in the long term.
Analysis
Despite being the dominant player at London Heathrow, British Airways has been bleeding money all over the place. You’d be forgiven if you thought that 42% of slots at Heathrow somehow equalled profits, however, British Airways CEO Willie Walsh is certainly being proactive and is under no illusions about its abject performance this year.
Where 2008 was marred by the inadequacies of the calamitous opening of Terminal 5, this year is tumultuous because of the failure of unions to grasp the notion that cost cutting now means survival for tomorrow.
On the face of it, 1000 voluntary redundancies does not seem like a big figure and unions want to stave off job reduction across the board. But if strike action ensues, then Walsh will be more likely to enacting potential wide, wholesale headcount cuts across the business and not just from the front line customer service area currently identified.
Where will that leave the unions then if Walsh pursues this regime?
British Airways has already squandered over a decade worth of talks with other airlines for a possible merger, its talks with Iberia are heading nowhere, fast, and the oneworld alliance languishes by all accounts behind that of the Star Alliance and Skyteam Alliance. With a potential ruling due at the end of this month on its anti-trust immunity application (#3!) with Iberia and American Airlines, British Airways is not in any position to placate unions for the sake of labour peace.
The bigger picture is paramount. With a new raft of online charges for seating commencing today (sure to confuse and infuriate passengers) as well as new baggage rules, British Airways has an identity crises to deal with. It’s not a low cost carrier, nor will it be able to disguise its cost base to try and challenge them on that score, nor is its high-yield dependent business model now relevant to the airline sector that is still in “transition” mode as the industry undertakes a major paradigm shift.
The unions have to understand that there was a reason BALPA and British Airways came to an agreement over pilots and their contracts – they’re doing what they can to avert a crippling financial predicament that no-one could have foresaw.
British Airways’ traffic figures for September 2009 underscore how bad things are (not that the preceding twelve months were any better) – a blood curdling 17% drop in traffic to key regions like Asia on top of almost an 8% decline in group-wide premium passenger yields YoY.
If the unions are to convene for, as expected, emergency talks – what they should be talking about is how to help, not stifle British Airways’ recovery.
For all the rant and rancour by some quarters (yes, that means you Virgin Atlantic) about British Airways’ hold at Heathrow, quite frankly they could have 75% of slots and still not make any money.
This is all about business modelling and nowhere more so is this a hot topic than in this sector - particularly because British Airways is not alone in realising that its reliance on high fares is now undermining its efforts to reinvent just how it does business in the future.
One-off fees for seating or paying for meals on short haul flights may yield some small benefit in the short term, the longer term strategy must employ maximising slot allocation through capacity targeted fleet deployment across the network to lower the dependency on high fares and offset increases in low yield traffic that will never bring about profitability.
Once British Airways makes unions see sense, the path ahead will be a much clearer one. Do the unions have British Airways’ best interests at heart?
Quite frankly, no.
If they did, any emergency meeting would have happened weeks ago to thrash out a deal to help the airline on the road to recovery.
All they’ve done so far is sign their own death warrant.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
