Love him or hate him - and there are probably many more of the latter than the former - you can't help having a grudging admiration for British Airways' embattled CEO Willie Walsh. The combative Irishman celebrates, if that is the right word, his fifth anniversary in charge at the start of October - five years which have seen the airline go through more traumas and crises than ever seemed possible for one airline, let alone one CEO, to endure.
Yet BA and Walsh's prospects appear on the cusp of a remarkable transformation as a result of the long-awaited transatlantic alliance with American Airlines and the expected completion later this year of the merger with Iberia. Although the bitter dispute with the hard-core of disaffected cabin crew continues to rumble on as Buying Business Travel went to press, there seems little doubt that at present it is Walsh who has the upper hand, although any 'victory' would be a Pyrrhic one given the legacy of bad feeling that would remain.
Baby Bed Bumpers
But whatever the eventual settlement in this bitter dispute, there is already a feeling that Walsh and his colleagues are moving on. If the shareholders of both BA and Iberia finally approve the merger this autumn, then Walsh will give up his 'day job' as chief of the airline and take control as CEO of the new holding company being formed, called International Consolidated Airlines Group (ICAG, trading on the stock exchange as International Airlines Group). His replacement as BA chief executive is slated to be the airline's current chief financial officer Keith Williams.
The Iberia merger will create Europe's third biggest airline by revenue after Air France-KLM and Lufthansa, with some 419 aircraft flying to over 200 destinations. At present BA flies to 141 destinations with a fleet of 238. The merger of near-equals (BA will have a slightly bigger share of the merged group) is aimed at securing annual cost savings of about £350 million a year by 2015, in addition to the £60m a year BA says it is saving from reducing cabin crew numbers on its long-haul flights (the original cause of the industrial action).
But apart from the financial savings the merger will play to each airlines' strengths - BA on the North Atlantic, Iberia to Latin America - while also giving the opportunity to both airlines to develop services from their Heathrow and Madrid-Barajas hubs. Walsh, in his response to the government's block on a new runway at Heathrow, made clear that BA would probably be forced to expand via Madrid, which has four runways to Heathrow's two.
Yet assuming the merger is completed as planned - and the Iberia board is due to take a final decision by the end of this month (September) if BA proves it has its pension fund 'black hole' under control - it may not be the end of Walsh's ambitions. "We have created an entity capable of being scaled up," he told the prestigious Aviation Club in London recently.
"Our ambition is truly global." Walsh believes the holding company under his leadership (Iberia chairman and CEO Antonio Vazquez is to become non-executive chairman) can be used for other acquisitions or mergers. "ICAG is not about putting BA and Iberia together - it is about creating a platform to build a carrier of global scale," he says.
Potential targets are likely to include Qantas, who Walsh tried to 'bounce' into a deal in late 2008 at the same time as talking to Iberia, a move that suggested impatience at the slow pace of change he was able to achieve at the airline after taking over in 2005.
Since then, however, Walsh appears to have adopted a more patient game, not only with creating a new structure but also with his approach to dealing with the pension and industrial relations issues.
This is nowhere more clear than in the pursuit of a transatlantic alliance with Oneworld partner AA.
Way back in 1996, the then-BA chief Bob Ayling started the courtship of AA, which was keen on a deal, although his overtures were blocked by US regulators because of the dominance it would give the alliance on lucrative North Atlantic routes.
Ayling's successor as CEO, Sir Rod Eddington, tried to persuade the regulators in the difficult environment post 9/11 to approve the alliance but was again stalled. Yet the US go-ahead in 2008 for the Air France-Delta alliance across the Atlantic as part of a six-way tie-up of SkyTeam members encouraged Walsh to revive the project.
Despite the vigorous opposition of Sir Richard Branson, whose Virgin Atlantic airline stands to lose most from the BA-AA alliance out of Heathrow, the US (and EU) regulators gave the go-ahead in late July for the alliance to start this autumn. This will see BA and AA jointly set prices on US and European flights, schedule their services to avoid overlap and carry out joint distribution. The 'price' paid by the two carriers was a modest requirement to give up four pairs of take-off and landing slots at Heathrow.
But BA will see its dominance of these slots at the airport increase sharply as a result of incorporating AA's slots - from 41 per cent to an estimated 49 per cent. No wonder Branson calls it a "monster monopoly".
The anti-trust immunity for BA and AA granted by the US Transportation Department also covers Iberia, while there is an associated agreement allowing closer co-operation between Iberia and two other members of the Oneworld alliance - Finnair and Royal Jordanian Airlines.
The timing of the alliance starting this autumn could not have been better for BA. New York is the carrier's most important route and the revival in the financial sector after the collapse of Lehman Brothers two years ago has seen a strong bounce-back of its lucrative Premium traffic to the Big Apple and the US in general.
Given that, pre-crunch, the bulk of BA's top 10 corporate clients were all major City banks and other financial institutions, it is no surprise that the return of the good times for the banks (emphasised by their bumper profits in the first half of the year) has seen buoyant demand from bankers and other financiers. More importantly for BA, there has not only been a return to the Premium cabins but also a willingness to travel on more costly unrestricted tickets.
Walsh says that in the three months to the end of June, the airline's yield per seat was up 13.5 per cent, partly due to the revival in business travel and "a shift back to fully flexible fares in the Premium cabins".
Although the cabin crew strikes have clearly led to some brand damage, with Virgin, in particular, claiming to have picked up thousands of disgruntled business travellers with because of the strikes, BA is hoping to limit the long-term impact with a series of product and operational improvements. Its revamped First Class cabin, for example, is already installed on seven aircraft plying the New York route, with plans to roll it out across the entire long-haul fleet by the end of 2011.
BA's Heathrow home at Terminal 5 has also proved a success after a disastrous start in 2008, with the new facility now having seen more than 50 million passengers pass through and helping to improve the airline's record for both punctuality and baggage handling. BA, criticised for being slow in the past to embrace new technology, has recently launched new mobile phone apps for Executive Club members, including boarding passes on iPhones which can be scanned at check-in.
The focus on high-yielding corporate clients from the City and Canary Wharf has also been boosted by the dedicated Club World-only service from London City Airport to New York JFK, using smaller A318 aircraft with just 32 flat-bed seats.
After a slow start last year when the financial recovery was still in doubt, business demand for this service has increased steadily according to travel management companies, although Heathrow still scores highest in popularity for the greater frequency of flights BA offers there.
The City has reciprocated BA's attentions with an almost uniformly bullish stance about the airline's prospects, even though it made a £164m pre-tax loss in the end-June quarter (compared with a deficit of £148m a year ago) and has not paid a dividend on its shares since 2001.
Some two-thirds of the 20 stockbroker analysts who cover the shares rate the shares a buy or likely to outperform, with none rating them a sell.
The share price has also outperformed the main FTSE 100 index significantly this year in spite of the impact of the crew strikes and volcanic ash disruption, with a consensus of analysts setting a 280p price target over next 12 months against a high so far this year of 255p (existing BA shareholders will get a one-for-one exchange of their shares for the new International Airlines Group listed on the London exchange; Iberia shareholders will receive 1.0205 shares in a Madrid-listed stock).
The City, of course, can get it wrong and often does so spectacularly. But the doyens of the Square Mile like Walsh's tough stance against the Heathrow-based cabin crew, as they regard it as tackling a high-cost base and outdated working practices, a legacy of the pre-privatisation era of the 1970s. The fact that the airline also has a cash balance of £1.75 billion in the bank - up £35m in the end-June quarter from the balance at end-March - means they are unfazed by the losses over the past two difficult years.
The smart money also believes that the cost savings from both the Iberia and American deals will radically transform BA's cost base at a time when it should reap the benefits from a strong recovery in corporate travel. But the dispute with Heathrow cabin crew, however, takes on a greater significance when set against the high cost-based and entrenched unions at both Iberia and American which still need to be effectively tackled by both carriers.
While there seems a longer-term game plan involved than just a petty dispute over travel perks, BA is very keen to avoid any suggestion of 'union-bashing' - not least because the Unite union representing cabin crew also represents many other BA employees, along with Heathrow airport workers.
So what could go wrong with the BA revival? Walsh's character remains a key factor. His patience in dealing with complex issues is interpreted by some as stubbornness; his judgment is sometimes in question, as shown by the T5 opening fiasco; and the jury is still out over the purpose of BA's standalone OpenSkies airline which flies from Paris to Newark, New York as well as Washington.
There are also concerns among the airline's investors that BA chairman Martin Broughton appears to have lost interest', especially as he spent the summer trying to sell Liverpool FC to a foreign buyer after being parachuted in earlier this year as chairman of the club by the banks it owed money to.
Broughton, who was appointed BA chairman in 2004 and who is also heavily involved in Confederation of British Industry (CBI) matters, perhaps should have been more supportive in public of Walsh during the crew dispute. In the claustrophobic world of BA conspiracy theories this has led to suggestions he does not support Walsh's hard line, although this is vigorously denied by BA sources. A more plausible explanation is that Walsh simply likes being in control; attempts by the board after the botched T5 opening to appoint an experienced chief operating officer to support him were clinically deflected by Walsh.
Yet one of BA's greatest strengths - its impressive safety record - is also potentially its biggest weakness. As BP found to its cost in the Gulf of Mexico last summer, a relative small mechanical failure can have widespread repercussions for both the future of a major global company and personally for its CEO. The crash landing in January 2008 of a BA Boeing 777 arriving at Heathrow from Beijing showed just how the close the margin for error still is in aviation, although flying remains an extremely safe form of transport.
Taking risks, however, is something that former Aer Lingus pilot Walsh knows only too well, as his decision to personally fly in a BA test flight during the volcanic ash crisis earlier this year clearly displayed. But his bid to ensure BA remains one of the world's major carriers in a changing global industry is a gamble he thinks he can win.
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