British Airways is on course to save more than £1.2 billion ($1.9 billion) from its three-year Business Efficiency Programme; enough, one might think, to guarantee respectable profitability even in the hardest of times. Yet analysts expect BA to barely break even this year, while the UK flag carrier last week warned that "profit improvements worth several hundred million pounds" will be needed if it is to profit in the year from April.
BA is in part a victim of its own success. As the first European major to be privatised and embrace market realities, BA was first to deliver profitability matching - and later outstripping - that of the leanest US carriers. That performance, however, has come back to haunt the airline, raising expectations to the extent that its recent slump appears all the more disastrous. BA shareholders are used to raking in meaty dividends and will not tolerate poor returns for long before demanding that heads roll.
BA's response has been bold. Recognising that its financial performance has suffered most because of industry overcapacity in the key transatlantic market in the wake of the Asian collapse, the airline is cutting back its route network and moving to smaller aircraft. The aim is to restrict capacity and raise yields by concentrating squarely on business passengers - but the move represents a major gamble. BA's ploy hinges on sluggish capacity growth across the industry, particularly in the high season in 2002. Should BA call it wrong, however, either in terms of capacity growth or the global economic cycle, its new strategy will ultimately fail.
Before it can hope to see positive results filtering through, BA must ride out the more immediate crisis and satisfy its shareholders - hence the call for further "profit improvements". If the airline succeeds, it could emerge stronger than ever, again setting a datum for the industry. If it fails, the results will be catastrophic. Either way, the stakes are the highest imaginable.
Source: Flight International
