Rod Eddington gave the final speech of his reign as chief executive of British Airways at the end of September to the Aviation Club of the UK. It ranges over topics from BA’s performance over the past five years, the state of aviation in North America and the emerging Chinese and Indian economies. The full text of his speech is reprinted here.
When I started out at British Airways five years ago, I gave my first major speech to the Aviation Club of the UK. The wheel has turned, and here we are. You don't look a day older, incidentally. This afternoon, the Aviation Club is the last major speech I'll make for British Airways.
That has a melancholy ring to it if you don't like endings. But I like new beginnings and old friends. The Aviation Club is where many of my British friends are.Looking around I see many of the guests here to be in what used to be called "their prime". It's that time of life when we know what has to be done – and we've got just enough energy left to do it.
Wisdom is supposed to be one of the consolations of age. We're all five years older. Are we five years wiser? We certainly know more than we did, we've been through some interesting times. Too interesting, for some. Swissair and Sabena have gone out of business, Alitalia's on the ropes and should be out of business. Four big American airlines are in Chapter 11. Lots of start-ups have fizzled out.
Foot and Mouth knocked British tourism sideways. That took £3 billion off the bottom line of the tourist industry in six months. 9/11 knocked the whole world sideways. The costs of that are incalculable. 9/11 also did something serious, and worrying, to the American mind. I'll return to that later in my speech.
Then we had a war in the Gulf. Now we've got record oil prices. Then there was SARS – and maybe there will be a flu pandemic. It's been a long, frantic ride for the aviation industry and I believe there is more turbulence ahead.
And more than that. We've had bombs in London again. That was a grievous shock; but may I say this: the British resilience that this city showed was recognised around the world. The power of culture asserted itself. If Britain can export a little of its national stoicism it'll be a great contribution to the international environment.
Personally, I don't think this kind of terrorism is going to alter the stream of history. There are very large economic forces driving change in the world and because they don't rely on inspiration or personal enthusiasms, they're very much more serious. The competitive challenges China poses to the west are fundamental. I'm going to say a few things about that later as well. I'm going to shake my chains at the gathering so, just out of good fellowship, I wanted to give you a little warning of it first.
The good news
But now the good news. In my speech five years ago, I said that the British don't do infrastructure. Well, we've got a new Terminal at Heathrow. We'd yet to sign the paper when we last spoke, but we've done it. It's there. It's the biggest building site in Europe. And it's going to be great. At last British Airways will be able to do what all other network carriers can do, operate out of one terminal. The Government has published a brave and necessary White Paper on aviation. A third runway is under discussion. I may be a grandfather by the time it is built – and my kids are still at primary school – but you know what, I think it's going to get built.
British Airways is in good shape. As good as it's been in a decade. As we know, airlines have been cash negative since the Wright Brothers but BA has some black on its balance sheet. Over the last five years we've paid off £4 billion of debt. We've taken 14,000 jobs out of the company and we did it without having to revert to compulsory redundancies. I emphasise that because in industrial relations, as in life, the means never justifies the end. The means is as important as the end. In some sense the means defines the end. You can lose jobs, but you can also lose the spirit of the company. There are some competitors out there with a very sullen workforce. BA is in good shape because our people understand this industry and believe in the customer – from our chairman to the newest member of our front line team.
The productivity gains we've made as a result of these workforce savings have been – I'm looking for the right word – terrific. And last year we made a billion dollars of operating profit. It's been quite a turnaround. How? Some small, some big things.
Website development
We fixed the website. When I joined the company you needed a degree in science to make a booking online. Except, I had a degree in science and I couldn't do it. Now two-thirds of all shorthaul bookings come through BA.com, and we haven't had a mass revolt by the travel agencies. We kept ahead of the curve, the world has followed. No small achievement. We simplified the business. Fewer aircraft types. Fewer computer systems. Fewer routes. We don't fly any more to Gdansk and Gothenburg. Love the Poles and the Swedes who live in those cities as I do, I wish them well and they're a great opportunity for any number of airlines, but it doesn't work for BA. I am flattered that IATA now has a global 'Simplifying the Business' programme. E-tickets. Self service kiosks. Radio frequency baggage tags.
All of this is close to our Customer Enabled BA. But I believe we have led the way.
I don't know who said it, but it's a saying that deserves some currency: Turnover for vanity, Profits for sanity, Cash for reality. Should I say something about out-sourcing? The Gate Gourmet dispute has been bad news for our customers and for our company. But it's not going to change the way airlines outsource. Is anyone going to take catering back in-house? I don't think so. We outsourced the first part of our catering business in 1982 – or, to be accurate, the Government of the day did. Out-sourcing has been fundamental to the airlines that have survived. And remember, BA does more things in house than most airlines.
Some no frills airlines are virtual airlines – and despite what a few commentators say, the consumer seems to focus on price and quality not on who provides the service.
The environment
The environmental record looks pretty good too. The noise footprint over Heathrow – reduced by over 80% since the 1970s – continues to shrink. Today's aircraft are 70% more fuel efficient than 40 years ago, cutting down carbon emissions. UK aviation is committed to a further 50% fuel saving and a further 80% reduction in oxides of nitrogen by 2020. Not many industries can say as much. And the safety record – that sacred text – is intact. The systems help. Eternal vigilance helps.
We now know that big, good airlines have got a future. That wasn't at all obvious five years ago. The terrific success of Easyjet, Ryanair and other no-frills flyers - it didn't seem to have any end in sight. As it turned out, the industry's absorbed their entry. The market's expanded. Clever new ways of doing business have made their way into the mainstream. Now we know that people are prepared to pay for the right mix of quality, service, safety and price. And we know for a certainty that the BA brand matters.
That mix of culture and performance has market power. When you hear the voice of a British Airways captain coming over the intercom I know passengers relax at an unusually deep level. The British Airways voice relaxes parts other airlines cannot reach. Training. Investment. Competition. Culture.
Out-performing America
The most extraordinary thing has happened to aviation in this part of the world. We're out-performing America. That's something I didn't see happening five years ago. Xavier Irala at Iberia, Jean-Cyril Spinetta at Air France and, best of all, Willie Walsh at Aer Lingus – they've worked wonders. The European Union has found itself to be on the side of the angels. Frankly, I didn't expect to be able to say that. I don't know how many of us expected that. Airlines have gone to the European Commission to rattle their begging bowls and they been sharply shown the door – well with the rather shaming exception of Alitalia.
But America – land of the free – is turning itself into the land of the free ride. In the last four years, the airlines have soaked up $15 to $20 billion of public subsidy and loan guarantees. They're operating in protected markets, they're hoovering up public funds and still they can't make a profit. They are dumping capacity on the North Atlantic, distorting competition and pricing for cash. They struggle to compete and, at some, the workforce has been demoralised. The more the government has tried to help, the worse things have become. But in what way does that surprise us? If fifty years of post-war economics has taught us anything, it's this: state subsidies preserve bad habits. We all know the answer: Let the market clear. America would do itself a favour by going back to long lost principles of real and honest competition. The lessons America has been imposing on Third World markets with an almost pitiless ferocity apply to America just as much.
Last year the world's airlines turned over $400 billion (turnover for vanity, remember). Globally, they lost $5 billion on that sum. Now, BA made a billion and some Asian airlines did well – but North American airlines lost $9 billion last year!
Too many airlines
I've got an exclamation mark after that. I've been saying it for years and I'm not going to pass up my last big opportunity to repeat it. The international industry is structurally unsound. There are too many airlines. There are too many flag carrying fleets making vanity flights round the world. It's a mare's nest of regulation and meaningless interference that has economic, social and environmental consequences. Profitable airlines invest in quieter, better, more fuel efficient, more environmentally-friendly planes. Profitable airlines invest in better products, better service, and respond to what the customer wants.
Profitable airlines deliver the infrastructure that governments want. The world doesn't need 300 airlines. Many haven't been called into the world by consumer demand. They exist because of political demand. We need easier rules on takeovers (that America blocks). We need genuinely Open Skies (which America blocks). Ladies and gentlemen, I find that offensive. I find it offensive because it isn't fair. And in case that sounds like a loser's lament, let me add this. It's offensive because it's stupid. Because it doesn't benefit anyone.
Because it encourages inefficiencies, rewards bad habits, drives out good money and replaces it with bad. And all of this explains why Alastair Darling is right to say that an EU/US deal, which keeps both these huge markets closed, is a bad deal. I am disappointed to leave before these negotiations are complete. But no deal is better than a bad deal.
Competition keeps companies honest. Competition increases the market size. We big carriers had to sweat to keep up with the low cost carriers. We adapted. We learnt from them. They had lessons to teach those who'd listen. The market has cleared. Things have come to a pretty pass when we have to tell America this.
Over-regulation
I've had my swipe at America. Let me have a swipe at an even more present danger to our industry, over-regulation. What else has happened during the last FIVE years? A bunch of European laws, and of British legislation, and American regulation, none of it designed to deliver better service, or greater efficiency, or value for money. No, designed for a quick round of applause in the bar or to protect political backsides. Denied Boarding Compensation claims during snowstorms and excessive demands for Advance Passenger Information.
Plastic knives and forks for a steak dinner. Five years ago, the European Commission published a Transport White Paper which gave more space and thought to Inland Waterways than to Aviation. They are reviewing the White Paper as I speak. I just hope they've got their priorities in better order this time. Let me get back to this country. I want Britain to be a world leader. I'm an Australian by birth. And while I grieve for the Ashes (enjoy them while you can), I can take comfort from the fact I'm British by descent, I'm proud of what Britain's given the world, and I want this country to stay at the top of the world in trade and political leadership.
More than that, I say it's important Britain takes that leadership position because the world needs British values of fair-mindedness and free trade. Those global values that are embedded in the British DNA. And I put it in these urgent terms because it's later than we think. It's always later than we think. Everytime we say aviation is a special case, that free trade rules don't apply to airlines, that foreign capital and know-how and bright ideas are dangerous, we condemn ourselves to another period of gloom.
Emerging economies
People talk about the emerging economies and how fast things are changing out there. India, for instance. Let me offer you one organising fact about India. India is outsourcing to China. Shall we pause a moment to get our heads around that? Let's not take too long. China will soon be out-sourcing to Vietnam. Quick question. What's the largest city in the world? Home to millions, more than Tokyo and most of us have never heard of it. Maybe it's not even a city, maybe it's a metropolitan agglomeration but there simply isn't time to get semantic about it. There are 36 million people living in Chung Qing, it's the world's biggest producer of cigarette lighters, ties, Italian brand name handbags and motorcycles. Not one Briton in a thousand could name it, let alone find it on a map.
Here's a line in a Chinese newspaper earlier this year that made me smile. It's a quote from the Chinese minister of finance. He's owning up to a failure of Beijing's economic policy. He said: "Our strategy to keep growth under eight per cent has only made preliminary progress." Growth was at just under nine per cent last year. Western politicians are catching up with this. They know the big figures about oil consumption and output. And they promise to equip the West to compete and preserve manufacturing jobs. Maybe they can, maybe they can't. But consider these small figures:
Using a computer to design a part and using an automatic machine tool to prototype that part would cost about £5,000 in high tech Cambridge but in China, and using the same state of the art machinery to the same spec and standard, would cost just £150.
Suspension rods that cost £60 in Coventry will be landed in Hong Kong from Southern China for £2.50. These are real examples. And yet, production costs in Guang Dong and Shenzhen have risen so much in the last five years that production is now starting to move to Vietnam. China will soon be out-sourcing. Let's not panic. The manufacturing cost of products is a small fraction of the finished price – and most of the costs of a product remain in the homeland market. Ninety per cent of the cost of a kettle is freight, rent, insurance, advertising and marketing. If free trade didn't work the world would have gone broke 200 years ago. Let China do what it's good at. Let the East exploit its advantages.
Free trade was invented here in a combination of Adam Smith and the Manchester interest. It's part of the culture.Because these people are going to be the biggest players in the world and they're going to enjoy that because they've seen one terrible thing about the way the West has won. The winners write the rules. Might is right. When we consider the likely trajectory of power over the next fifty or a hundred years – I don't think that's the best principle to be advocating.
In the shorter term, my feeling is: it's going to be all right. Britain is going to co-exist with low cost manufacturers in the same way that British Airways co-exists with low-cost carriers. We'll learn, we'll adapt, we'll keep our position. As long as we keep alert and alive and do the right thing intelligently I feel - in the words of all the best rock and roll songs - everything's going to be all right.
I'm going to leave you with an exhausting Chinese saying. It may change your life, if you're young enough. "When you've completed ninety nine miles of a hundred mile journey - you're half way there."
Time to invest
With that in mind let me applaud the building of Terminal Five, and the prospect of a third runway at Heathrow. But on our hundred mile journey we're certainly not ninety nine miles through. We've got a tough road ahead. The single most important thing we have to do is invest. In this world of ultra-competition, the only way to keep up is with more, new, better infrastructure, hard and soft. We need to put money into our people and the facilities they need to do great things.
We need to create, we need to invent, but above all we need to invest. We all know this. But we're coming to the end of the time of preparation; the planning has been essential, the time of delivery is upon us. Ladies and gentlemen, it's been a pleasure talking to you. Your collegial welcome and your friendship is something I'll always remember. A large part of my life has been given to aviation. I bow out from this scene, but I take all the hopes, fears and aspirations of the industry with me as companions. My support for this remarkable, crazy industry is unwavering.
Good luck to you all.
Source: Airline Business
