Rod Eddington has set about turning British Airways into a much leaner and simpler business capable of holding its own against low-cost competitors
"I've always taken the low-fares carriers very seriously. We've got to learn from them unashamedly," says Rod Eddington. As the chief executive of British Airways, now bearing the full brunt of Europe's low-cost onslaught, he has every reason to treat the threat in earnest. But the lesson that he most wants to see BA learn is not about achieving the same cost base, but rather how to borrow from the simplicity of the low-cost model. The work has already begun.
Most visibly, and urgently, BA has set about tackling its confused and chronically unprofitable European network, with a wholesale short-haul reorganisation and a new online pricing initiative which mirrors that of low-cost rivals. Yet Eddington argues that cutting out complexity goes much deeper. "Our whole business is far too complicated, and it makes it difficult for our people to deliver," he says.
Warming to his subject, he goes to dig out a copy of the latest internal newspaper where he has just penned an article on the very topic. Among other examples, he cites the project to slash the BA supplier base from 8,000 to 2,000 and then to concentrate on building relationships with the top 150. BA too is changing the way it maintains its aircraft as part of a broader effort to raise utilisation - Eddington was clearly amazed by how much work was still being done during the day. Another target is the Executive Club, where there are an astonishing 23,000 rules in 23 languages and three IT suppliers.
In another sign of change, BA is currently in the process of outsourcing large tracts of its inhouse IT to the Amadeus global distribution system, even abandoning the BABS booking system upon which so much love and money has been lavished over the years.
Predecessor's legacy
Eddington is not the first to attempt to change the culture at BA. His ill-starred predecessor, Bob Ayling, had himself set out to attack the company's bureaucratic management structure and bloated cost base. BA's ultra-modern open-plan headquarters at Waterside, Heathrow, complete with metal walkways and internal courtyards, stands as a legacy to his vision of a slick "virtual" airline for the 21st Century. In the end, Ayling failed. Early on he antagonised the workforce and, after a paralysing delay, the board finally withdrew its support in early 2000.
Eddington eventually arrived in May 2000, fresh from a similar challenge at Ansett Australia. After only two years, his strategy is still a work in progress, but he did start out with some natural advantages. He arrived as something of an unknown quantity chosen from outside the BA establishment, which had lost the support of the staff and which some in the company had come to loathe outright.
A pragmatic western Australian, Eddington's open, informal style could hardly have come in greater personal contrast to the man he replaced. Ayling never shook off his label as a distant and even disdainful figure, nor his label as a lawyer despite all his years in aviation. At heart, Eddington is an airline man and an enthusiastic team player, who wants to take the people with him.
It is the same style that he employed to effect at Ansett. News Corp, the hard-headed media conglomerate which held half of the failing Australian carrier, had brought him in to Ansett from Cathay Pacific at the start of 1997 effectively to sort out the mess. The airline group had been on a diversification spree, buying up a bit of everything from leisure resorts to leasing companies. He set about pruning back the undergrowth and reinvesting in the neglected core flying business, much as he has since done at BA. By the time he left, the carrier was back in profits and the staff more or less lined up behind the recovery plan, although that achievement has subsequently been overshadowed by later events. He had planned to steer Ansett into the safe arms of Singapore Airlines - who had asked for him to remain for a couple of years as a condition of the deal. But in the event Air New Zealand decided to take over Ansett itself and the rest is history.
How far the BA team will follow remains to be seen, but they have already been through a lot together. Only two months after he arrived, the fatal crash of the Air France Concorde left BA's own flagship aircraft grounded. Then followed the nationwide outbreak of foot and mouth disease among UK cattle which left the country virtually in a state of quarantine. Finally, there came 11 September with its devastating impact on BA's cherished North Atlantic routes. "Much of what we've done over the past couple of years has been to react to those profound and unforeseen events," concedes Eddington.
However, early on he set about stripping out the clutter from BA's portfolio. That included the Air Liberte and Deutsche BA businesses, the result of unsuccessful forays into France and Germany, as well as Go, BA's own standalone low-cost offering at London's third Stansted airport. All have now gone. The loss-making Air Liberte was the first to go, sold much to BA's surprise for a good price to Swissair - an acquisition that it came to regret. Go was floated off in a management buy-out a year ago and has since been snapped up by easyJet. Deutsche BA may follow too if easyJet takes up its option to buy the German airline now reinvented as DBA.
Low-cost divestment
The Go sale has raised eyebrows. Not only was the carrier proving relatively successful in a rapidly expanding low-cost market, but the £100 million ($153 million) that BA got for the business was only a quarter of what easyJet paid a year later. Eddington remains unimpressed with such quibbles. He argues that BA got a good return on the sale of what, at the time, was only a marginally profitable and non-core business.
More fundamentally, the sale rid the company of a dangerous distraction from the work that was urgently needed in its core network. It was only after Go had gone, he says, that BA was forced to face up to some deep flaws closer to home.
Eddington set his management team to work on the Future Size and Shape project, a fundamental review of BA's operations. It was finally unveiled in February with reform of the fragmented short-haul operation as its centrepiece.
BA has never made meaningful money from its European network and when Eddington arrived at BA they had just delivered the company an annual loss of over £300 million. The business behind the losses involved a mix of different regional and mainline businesses split between London's Heathrow and Gatwick hubs. Borrowing a phrase he coined at Ansett, Eddington adds that it had a "Noah's Ark fleet", with two of everything, ranging from the Avro RJ right through to the Boeing 767.
The expansion into Gatwick has caused much of the heartache. The airline has wavered over exactly what to do with its second London airport ever since it arrived there in earnest with the acquisition of bankrupt Dan Air a decade ago. At the time it was an instinctive move, in part defensive and in part as insurance against the time when Heathrow would have no further room for growth. Yet by the mid-1990s the airport was being ramped up as a full-blooded hub and spoke operation. "You could see that was never going to be successful," says Eddington. "It's only got one runway."
The change now taking place at Gatwick centres on dismantling the hub and spoke network and rebuilding around the needs of an origin and destination (O&D) market, which Eddington insists is a "significant, substantial business" in its own right. The advancing presence of aggressive low-cost competitors easyJet and Ryanair at the airport suggests that the demand is indeed there if the fares are right.
BA will retain a limited long-haul presence at Gatwick but only serving "pure leisure" routes such as those to the Caribbean and some to the USA, which must remain pending a change in the US-UK bilateral. By the end of the process Gatwick will have shed 60% of its seat capacity, nearly half its aircraft and around 50 destinations. In fact, the spread of routes will slim across the whole system. "We're much tougher about where we fly," says Eddington. Thin routes without a big premium market are being stripped out across the system, in favour of a "stronger offering" to key destinations.
Meanwhile, hubbing will be concentrated back at Heathrow, although even here Eddington remains realistic about the level of connections at the highly congested airport. It still has only two runways and no prospect of getting a third any time in the next decade. Connecting traffic there had peaked at around 40% at the height of BA's scramble to fill seats, but he now sees the number falling back towards the 25% mark.
In the background, BA has continued to build its tally of slots at its home base. Today it holds just shy of 40%, having squeezed out an extra percentage point. "I will always be an acquirer of slots at Heathrow," says Eddington, although adding with a smile that he prefers to call them "swaps".
At Heathrow the Noah's Ark mainline fleet will eventually be brought down to just a single family. "Basically we're now saying that it will be Airbus A319s and A320s," says Eddington, adding that BA is still mulling over whether there is a place for the larger A321. However, the 737 of which BA still has a sizeable fleet, will remain for the time being as the short-haul workhorse at Gatwick, pitted against the low-cost challenge. Finally, the regional operations, which BA had built up piecemeal over the years, are being brought together under the CitiExpress banner and the fleet sent off to the regions.
While BA with its full service product will never be able to better the cost base of the new challengers, the simplified operations should at least offer some hope of narrowing the yawning gap on aircraft utilisation and productivity. BA's initial goal is for a modest 10% improvement, although Eddington concedes that it will have to do "much better than that"if it is to come any where near the 13h a day utilisation being posted by the likes of easyJet.
Pricing complexity
But operational efficiency is only half the challenge. The other has lain in reforming the complexity of the BA fare structure. "When I arrived here it was clear to me that the success of easyJet and Ryanair was not just built around lower costs," he says. They also had a much simpler and more customer-friendly pricing model.
By contrast, BA's typical full-service fares structure, with its micro-revenue management and manifold restrictions, was "massively complex and not at all transparent". It was also near impossible to offer effectively via the Internet. "You can't put online what you don't understand," says Eddington. "We had to learn very quickly and we're still learning," he adds, with a humility that has not always characterised BA.
The Evesham project group, which Eddington himself regularly attends, was established to answer the question of where BA should indeed position its shorthaul product against that of the low-cost carriers. In April BA had learnt enough to roll out its own version of a flexible online booking system, initially for its domestic services but extended in June to large parts of the European network. It allows customers to see a range of lowest available fares, based on different combinations of outward and return journeys - and with no Saturday night stay restriction. In the recent words of BA's new chief information Paul Coby: "The low-cost carriers already ate our breakfast and we're trying to stop them eating our lunch."
Eddington points out that BA has always offered discount fares, traditionally through massive seat sales a couple of times a year. Now it is offering them online throughout the year. Online bookings are currently approaching 5,000 a day, with around 20% of non-premium shorthaul sales coming via the Internet. The target is to hit a third of sales by the end of this financial year to March and to raise that to half a year later.
The experiment is still in its infancy, but Eddington already sees some impact on load factors around the system. "People who dealt us out of the equation are now thinking about using us again."
"The real question for me is if we have a seat that's available at a particular time of day and so does a low- cost carrier, then what premium will a customer pay to travel on BA?" he says. "We need to make sure that we understand that dimension."
While righting the European network has taken priority, Eddington has also had to bring some pragmatism to bear on an alliance strategy that has, for the past five years, been overshadowed by BA's failure to win antitrust immunity on the transatlantic. BA and American Airlines went back through the regulatory hoops last year, but just as BA was unveiling the Future Size and Shape, so the US Department of Transportation in Washington once more imposed an impossible set of conditions.
Having failed to secure the BA/AA deal for the second time of asking, Eddington seems ready to see the airline put the experience behind it and move on. Although the US and UK have held fresh bilateral talks of late, he is not betting on any major breakthrough. "We're assuming that it will be quite some time before the question of BA and American can be revisited," he says. In the meantime there may be some opportunities to apply for tactical codesharing with American - which BA still argues it can claim as of right. But he remains philosophical about the importance of the transatlantic link in particular and alliances in general. "Alliance benefits are important, but they are the cream on the cake," he says, arguing that they are no substitute for getting core operations right.
oneworld limbo
The oneworld global alliance too had found itself in a state of limbo as it waited for the AA/BA decision. With that wait now ended, there has been a renewed surge of activity. Eddington is clear, however, that the primary goal should be to strengthen the bilateral relationships that bind the existing partners.
BA already has strong ties with Qantas and has set about forging a deeper relationship with Iberia. The two plan, regulators permitting, to run what amounts to a joint venture on the Spain-UK market - mounting a challenge to the growing low-cost challenge. Other such relationships are being forged across the oneworld alliance, says Eddington, citing the transatlantic co-operation between American and Finnair, recently blessed with the antitrust immunity that eluded BA.
"The main focus has to be to strengthen those bilateral links. It's not about getting more people to sit around the table. There's only one or two places we would like to fill," he says. One of those places is clearly Japan, where oneworld has long been courting Japan Air Lines (JAL). In a twist of fate Eddington recalls that it was he, as Ansett chief executive, who chaired the Star Alliance meeting that welcomed All Nippon Airways into the grouping in October 1999.
His test for assessing the worth of potential alliance partners is characteristically pragmatic: "What customer base do they bring to the table?" In the case of Iberia, it brought one of Europe's largest markets and network strength on the South Atlantic which was largely complementary to BA's own.
Despite the pockets of progress, BA still has far to go before it retains the glory days of the early 1990s, when it shone as the world's favourite airline. The weakness of the transatlantic market, to which BA traditionally looks for the bulk of its profits, looks like a blight which is set to remain for the foreseeable future. Even before 11 September BA was reining back seat capacity on the Atlantic and that continued with the Future Size and Shape review. Between summer 2001 and 2003, the review is due to shed 11 destinations and 14 aircraft across the long-haul system. At the same time the older fleet types will go, coming down to just the Boeing 777 and 747-400, with a few lingering 767s.
Sonic advice
As an aside, Eddington says that he has sat down with Boeing to talk through the potential of the Sonic Cruiser concept with its promise to make bold use of leading edge technology. He knows Allan Mulally of old and has praise for the collaborative style he has pursued at Seattle as president of Boeing Commercial Airplane Group. When Eddington was at Cathay Pacific he played a leading role on the 777, working together on the team then being headed by Mullaly. An engineer by training, Eddington quickly warms to the subject of aircraft technology and economics.
In the case of the Sonic Cruiser concept, given the choice between taking the new technical advances to raise speed or lower unit costs, he leaves little doubt that he is on the side of taking the efficiencies. Mulally himself has already hinted that the the Sonic Cruiser investigation may be now leaning towards an offering in the intermediate 250-seat category. Eddington clearly believes that a more efficient replacement for the ageing 767 would indeed make sense, suggesting that 2008 could be the right in-service date. As he says, for every giant A380 that Airbus turns out, there will be a couple of orders for intermediate types.
But BA is not itself in any rush to add to its already overstocked long-haul fleet. "We've got more than enough widebodies and we're not about to order any more," says Eddington.
The jury is still out on whether Eddington will ultimately succeed in his mission to cut through the complexity at BA. His first test will be to achieve the promised goal of bringing the short-haul business back to break-even by the end of the next financial year to March 2004. That will represent a major turnaround from the £244 million loss that it again posted for the last 2001/2 financial year. Some analysts still worry that the Future Size and Shape review should have cut deeper and on a more ambitious timescale.
There is a further risk that Eddington's honeymoon could come to an abrupt end if labour conflict returns. There have already been ominous rumblings throughout the UK, including a faint groundswell of unrest at the powerful pilots union. Eddington is well aware of such potential pitfalls, but they are not necessarily within his gift to control. For the present he wants to see the company "get cracking" on the job of creating a simpler, leaner BA.
REPORT BY KEVIN O'TOOLE IN LONDON
Source: Airline Business
