BA chief rides out turbulence; Darran Gardner quizzes embattled

CAPTAIN Calm is still showing little sign of being troubled by the turbulence buffeting British Airways.

Control, says the airline's chief executive Rod Eddington, is now all-important: "We are now much tougher about what we do and how we do it."

Shareholders and the City will certainly be pleased that BA, after being in a tail-spin for several years, has finally landed in the real world. But the biggest challenge is yet to come: taking off again into crowded and competitive skies.

Eddington, the Rhodes Scholar who returned to Britain to takeover from Bob Ayling as BA's boss over two years ago, is clearly very keen to stress that he is getting to grips with a business which this year reported record losses, saw its share price fall to an 11-year low, axed 23% of its workforce and was ejected from the esteemed FTSE 100.

Although the current aim is to cut annual costs by (pounds) 650 million in a bid to return to profitability and counter the effects of September 11 on an bloated business struggling in a competitive and increasingly low-cost sector, Eddington will countenance no suggestion that it is all too little, too late.

He points to structural changes, which took place before the New York attacks that have been responsible for a 15-20% decline in profitable transatlantic traffic, and argues that BA was not caught short by changing economic and industry conditions. For example, he says, the airline had already moved away from relying on hubs in favour of a point-to-point approach, and even under Ayling a (pounds) 1 billion cost-cutting programme was put in place back in 1997. Several thousand of jobs were cut at that time and BA began reducing its capacity by switching to smaller aircraft.

Nevertheless, even in the autumn of 2000, BA - seemingly oblivious to changing economic conditions in the US - began focusing its efforts on higher-margin business-class traffic (particularly in transatlantic routes), and reducing capacity in economy class. Despite the growth of low-cost airlines such as Ryanair and easyJet and their ability to steal customers, BA still refused to consider more competitive pricing, preferring its own take on what exactly "economy" should mean for its customers in the UK and Europe.

However BA likes to play it, implementing the current restructuring programme (called Future Size and Shape) was not just a strategic option - it was necessary for commercial survival. Faced with markets Eddington now describes as "soft" and more than (pounds) 6bn of debt, BA was eventually suffering losses of (pounds) 2m a day between October and December 2001. It had no choice but to slash costs and jobs.

The stark reality at the beginning of the year was that its European short-haul market was still loss-making, business custom was down, there was no visible recovery in transatlantic routes, the global economy was slow and a war in Iraq was a possibility. In May it reported year-end losses to March 2002 of (pounds) 200m. Its fourth-quarter figures may have showed some signs of improvement, but there was no disguising the fact that it had unveiled its biggest loss since privatisation in 1987.

Eddington says the airline is now addressing its cost base, as well as how it sells and distributes tickets. However, what he calls BA's "robust response" to the threat of Ryanair and easyJet merely involves belatedly apeing their cheaper online sales model. Fares on some routes have been reduced to ensure competitiveness, and Eddington happily admits that BA's internet approach is really about regaining market visibility among customers. A new (pounds) 15m advertising campaign will aid this process.

While it is now witnessing 5000 online bookings a day and aiming for 50% of its non-premium sales to be carried out online by 2004, it is considerably harder to achieve anything like the margins achieved by its low-cost UK rivals.

Revenue may be up on short-haul flights for the first time in a long time, but BA knows it can never transform itself into a low- frills carrier. Indeed, says Eddington, it has no desire to.

"In a sense this year is about the recovery of our business as a business entity - a process that will be driven by our customers and cost-cutting. But we are still a full-service carrier.

"We are changing lots of things simultaneously, some visible and some invisible. Change is hard and takes a long time, but it's something we are committed to delivering."

At the core of BA's problem is the fact that it remains a complex global business in an increasingly tough marketplace. It attempted to rationalise itself throughout the mid-to-late 1990s and it will continue to do so. But as a global airline, its cost base and its geographical scope count against it - especially when the industry is struggling with a downturn in traffic and a series of financial failures among both US and European carriers.

Since September 11 the US government has thrown $5bn at carriers, but despite frantic cost-cutting programmes, US Airways eventually filed for Chapter 11 bankruptcy protection and United Airlines remains on the brink. In Europe, Swissair and Sabena both collapsed earlier in 2001. BA, once the "world's favourite airline" before being overtaken by Germany's Lufthansa, doesn't want to meet the same fate in the years ahead.