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In the Battle of Britain, Winston Churchill famously praised the Royal Air Force’s performance by saying, "Never in the field of human conflict was so much owed by so many to so few." Today, British Airways is stealing a page from his book, trying to deliver greater profits to its many shareholders by flying fewer passengers in fewer planes to fewer destinations. This approach is not exactly conventional. Most airlines attempt to pack ever more bottoms into ever more seats, even if they have to cut prices on many tickets to do so. But BA had to do something different. Like most European companies, BA (www.british-airways.com) had entered a new era of competition because of the creation of the pan-Europe trade area spanning 15 countries and because of sweeping deregulation. With a common currency further unifying most of Europe, companies can no longer count on only limited competition or government policies that favor national business over foreign competitors. If companies don’t adapt, they risk eclipse or worse. Because BA moved slowly in dealing with the tougher environment, it began posting such large losses on its European operations that the company as a whole turned unprofitable. Its chairman was sacked. When the chairman’s successor, Rod Eddington, arrived a little more than a year ago, he had to only glance at the experience of his predecessor to know how impatient investors were for a new strategy and for better results. So, displaying a willingness to challenge any and every tradition, he quickly decided to stop fighting fare wars with start-up airlines and the many established carriers that were trying to blanket Europe with flights. Instead, he would give up on some types of travelers and focus on the business traveler and those leisure travelers who would pay higher fares. Using sophisticated data-mining techniques, he figured out that many routes were unprofitable and began paring BA’s capacity. He even gave up on the hub-and-spoke approach that has dominated the airline industry for decades and cut back BA’s presence at London’s Gatwick airport—an act that would once have been considered heresy. Sometimes, less is more. BA posted a $558 million profit for the year ended March 31, reversing a $160 million loss in the year earlier, and analysts are sanguine about its future.
"Eddington has done a fantastic job," says Damien Horth, London-based travel analyst with ABN Amro Holding NV (www.abnamro.com). "BA’s air crews really believe in what they’re doing again and the quality of service has improved dramatically. Even more impressive is that he’s cut costs while improving morale." Fifteen years ago, results didn’t matter much at British Airways. Like many European companies, it was state-owned and operated under the assumption that bigger meant better. Profits, if there were any, were beside the point. The point was keeping jobs, and maintaining a service tied to national prestige. BA was, after all, Britain’s flag carrier, a representative of the government in major cities throughout the world. Then, in 1987, BA was privatized. Subsequently, the airline industry in Europe has been deregulated, and competition is now the fiercest it has ever been. Since the European Union’s Single European Act in 1992, which broke down many of the old national trade barriers, successive phases of deregulation have meant that any airline based in the European Union has the right to fly from any EU location to any other EU location. Liberalization of regulations has encouraged a raft of no-frills carriers to enter the fray. Low-cost carriers such as Buzz (www.buzzaway.com), easyJet Airline Co. (www.easyjet.com), and Ryanair (www.ryanair.com) are now operating out of multiple hubs in Ireland, Britain, and Continental Europe, offering cheap service to budget travelers. For the first time, Europeans have begun enjoying the benefits of inexpensive air travel, with lean start-ups offering round-trip flights from Paris, London, and Frankfurt to a whole raft of Mediterranean holiday destinations for prices as low as $100 to $150—compared with full-fare prices of $600 to $800. Carriers also must compete against an efficient—and, in many European countries, subsidized—high-speed train network. BA, without the British government to protect it, found itself being undercut by new rivals on price. The airline had a $461 million loss in the newly competitive European market in fiscal 2000, pushing the company as a whole into the red despite BA’s highly profitable North Atlantic routes. The loss was the first for the company since it was privatized. When Eddington landed in the middle of the mess at BA, he seemed to be the right mix of insider and outsider. The straight-talking Eddington had spent 30 years in the industry and had headed Cathay Pacific Airways (www.cathaypacific.com) and Ansett Australia (www.ansett.com.au). But Eddington, who was born in Australia, wasn’t a product of the nationalist European airline system. "One of his great advantages is that he’s neither British nor European and has no particular nationalist stake," says Amanda Forsyth, an air travel and transport specialist at the UK’s Standard Life Investments Ltd. (www.standardlifeinvestments.co.uk), a major British funds-management house. "He sees the European business with new eyes and seems entirely pragmatic." One of the first things Eddington did on winning the BA job was to slash seat capacity by 10%. A further 10% is to go by the end of 2002. Using data-mining to gain a better understanding of European demand for air travel, he decided to stop flying to Salzburg; Ljubljana, Slovenia; and Orly, Paris’s second airport. He cut back on flights to Genoa and Verona and has put some other Mediterranean cities under review. He sold Air Liberte (www.air-liberte.fr), BA’s discount French-based carrier, to Swissair (www.swissair.com) for $62 million. He also sold Go Fly Ltd. (www.gofly.com), another European budget subsidiary, this summer. These cutbacks come at a time when Lufthansa AG (www.lufthansa.com) and Air France (www.airfrance.com), BA’s main European competitors, are ramping up seat capacity by 5% or more. Is Eddington sure he’s not missing something? "Sure, I’m sure," he says with a grin through a sporty mustache. In fact, analysts agree that he’s on to something. "BA was beating the competition at putting people in seats," says Chris Tarry, senior European air industry analyst with Commerzbank Group (www.commerzbank.com), the German investment bank. "The problem was that on some European routes they were generating about four and a half cents of revenue per passenger kilometer but had around 23 cents in costs. Every time they sold another discounted ticket they were losing more money." So Eddington is ceding the low end of the market to the newcomers and concentrating on moving upmarket, where margins are better. “The goal is to focus on business and discerning leisure travelers who are willing to pay more for a premium service,” Eddington says. “We are not in the business of discounting tickets anymore.” Horth, the analyst with ABN Amro, says, “There’s a whole set of European travelers who fly to the U.S. through Britain because the cheapest trans-Atlantic fares are there. These are not the type of customers the new British Airways wants anymore.” Last year, 40% of all BA customers were transfer passengers. The goal, Horth says, is to cut that to 25% over the next four years or so. To woo wealthier Europeans and U.S. passengers flying to the U.K. and Europe, BA has fitted out its European fleet with new seats and furnishings. Flight schedules to major commercial cities such as Brussels, Frankfurt, and Paris have been reshuffled to focus on weekday early mornings and evenings—the times of peak business demand. Economy cabins now account for only 20% of total seats, and the business traveler is treated like royalty. Eddington also is trying to win higher-paying customers by scheduling more frequent flights to business centers on smaller aircraft. Over the next three years, British Airways will retire or sell around 40 Boeing 757 aircraft, which typically seat around 180 people, and replace them with 70 smaller Airbus A318 and A319 planes, which seat 100 to 120. BA’s investments, which will total $300 million, should reduce the pressure to discount, because, in part, it was the need to fill more seats on larger aircraft that drove BA to cut air fares in the first place. BA also will be able to offer more direct flights—which businessmen are willing to pay more for—rather than have big planes fly the efficient hub-and-spoke routes that have dominated the airline industry since the late 1970s. BA has upgraded its Web site so that all three million executive club members worldwide can buy a ticket, select and reserve seats, and check in from either a PC or from a digital cellphone. BA also offers a “call-me” service that will arrange for a person to phone the passenger and talk him through everything if he is having trouble on the Web site. Eddington has even abolished the BA hub at Gatwick airport, 20 miles south of central London. Eddington’s analysis found that Gatwick had lost BA $60 million in fiscal 2000 because it was attracting bargain hunters looking for cheap trans-Atlantic charter flights. Heathrow, London’s premier airport, had attracted such a critical mass of flight connections that all the profitable business travelers wanted to fly through there. BA is now using Gatwick as a local airport serving the needs of the 10 million affluent residents of southern England who live within an hour’s drive. No longer a transfer hub, Gatwick will offer higher-priced, direct flights to a variety of European business centers. It will offer bankers, brokers, lawyers, and other professionals an alternative to congested Heathrow. "I saw that Gatwick was never going to be a successful international hub," Eddington recalls. "But it can serve the local population well. There’s a new generation of travelers who have money and are willing to spend it to fly direct." BA faces plenty of obstacles. While many analysts say Eddington has BA on the right glide path, they don’t expect European operations to return to profitability until 2003. Navigating through the new Europe will remain tricky for years after that because rules will keep pushing toward a more unified market, while culture and practice work to preserve nationalism. For instance, BA’s talks to acquire Dutch airline KLM Royal Dutch Airlines (www.klm.com) fell apart because officials at the Dutch carrier felt they had to have an equal say in the merged company even though their airline was far smaller. Still, Eddington’s drive toward an efficient, pan-European system of flights may put BA in the pole position to expand whenever cross-border European airline mergers begin in earnest, perhaps within a year or two. Is that the plan? "You bet," Eddington says. "It’s bound to happen sooner or later." In the meantime, Eddington hopes that giving high-end travelers the royal treatment will win back some of the loyalty that BA has lost in recent years. Generating loyalty hadn’t been possible in the discount-fare bracket that Eddington is abandoning. Economy customers generally showed no loyalty to any airline. They were merely looking for the cheapest ticket possible. Although BA may never again bill itself as the "World’s Favorite Airline," Eddington thinks it can be the business traveler’s and high-end leisure traveler’s favorite—and thinks that will be just fine.
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