Major carriers on both sides of the Atlantic have been soul-searching over their role in the world and British Airways chief among them.The UK carrier's pledge to simplify its business structure and make pricing more transparent could provide a large part of the answer.
When British Airways unveiled its long-awaited review of size and shape, it was inevitably the job and capacity cuts that grabbed all the headlines. But there was something else tucked away in the proposals that could make this more than just another desperate bout of cost cutting. That was the pledge by chief executive Rod Eddington to set about simplifying the business and, in particular, to simplify the airline's pricing structure.
That may prove a more fundamental challenge than any amount of downsizing, but if it succeeds, perhaps BA could reverse more than half a decade of strategic funk and reclaim its place as the industry's most admired role model.
In common with other network carriers, most of whom are going through similar soul-searching, BA finds itself in a very different environment than the one for which its heritage has equipped it. Decades ago the classic skills needed to succeed as a national carrier hinged on the ability to manage a big, bureaucratic institution - in some cases virtually an arm of government and always bound up with heavy applications of red tape. Today the markets are open and fast moving, while the customers are smart and empowered. Entrepreneurial skills would seem to be the order of the day. In short, flag carriers are at risk of being good at doing all the wrong things.
Market share too was a crucial survival factor for those hoping to emerge as the dominant national carrier. Small rivals tended to become hoovered up, but not always seamlessly integrated into the whole. Growth has helped to cover over the cracks but not necessarily to repair them. Today, many of those ghosts are still in the machine. Little wonder then that the full-service, full-network business model is looking somewhat fragile.
In Europe, as in the USA before them, the more agile low-cost carriers have made customers start to question room is left for their slow-moving major competitors, at least within shorter haul markets. The answer is plenty, but only if those majors get a hold on some simple fundamentals.
It is true that the new entrants have a massive cost advantage. Ryanair can break-even on roughly a third of the fare that BA would need within Europe. American Airlines needs more than twice the fare level of a Southwest. But that is not fatal. There are plenty of examples of markets where a whole range of products and prices happily coexist. The presence of a low-cost burger bar does nothing to threaten the business of a five star restaurant. What the low-cost threat has exposed, however, is a belief that there is no extra value to be had from paying the higher fare. Leisure travellers have voted with their feet leaving the business market to bear the burden. The ratio of premium to economy fares in Europe has soared to a multiple of more than three times and six times on the transatlantic. Notably the ratio is already down to below a multiply of two and falling in the more mature US domestic market.
The long-term solution for network carriers is simple: to raise the perceived value of their product; or to lower the cost; or preferably both. And that is where Eddington is right to start hacking through the age-old layers of complexity that have been obscuring the task.
A large part of the low-cost secret has been to keep it simple: no mixed fleet; no meals; no connections; no congested hubs; no complex revenue management; and often no distribution chain. Above all, they have a simple message that is understood by staff and customers alike: Why pay more?
It is that question that the network majors need to answer. Despite the conventional wisdom about the complex and expensive nature of running a network, there is no reason why the majors cannot borrow some of the lessons from their low-cost rivals. Indeed BA is now planning to do just that, including keeping the short-haul fleet at London Gatwick to a single type. Revenue management will be carried out on a straight line basis, rising steadily as departure approaches - easyJet would be proud. By mid-year BA promises to come up with a new pricing structure which will be simple, transparent and online.
Above all, the network majors need to reconsider what exactly it is that each of their customers value and how much it costs to deliver. Providing a fully flexible, refundable business class ticket with limousine and champagne is clearly expensive and those who demand it should pay heavily. But such services are not needed by all customers nor on all routes. Major carriers already regularly offer discounted fares that match or even beat those of the low cost carriers, although as ever they come with mysterious strings attached such as the hated weekend stay. The product too is, by and large superior. Perhaps what it needs to achieve is "a premium service at everyday prices". Now that would indeed be a proposition to give the low-cost carriers a run for their money.
Source: Airline Business
