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Posts Tagged ‘british airways’

We have just OneWorld, but we live in different ones

May 10, 2010 1 comment

Within a few years, there will only be about five real long-haul airlines, all based around the current alliance systems. The non-alliance airlines will stop flying long-haul, or where national egos won’t allow that to happen they’ll cut down to a couple of planes on flagship routes that nobody in their right mind would use unless their ticket cost fifty quid (good example: Nigeria’s Arik Air) [*]

Once you’re in the air, the best alliance currently going is OneWorld, which features most of the world’s most likeable airlines, plus America’s least awful major one.

BA are the BBC of airlines; I’ve posted before about why I like them. In short, old-school Britishness is a good counterpart to the unpleasantness and sheer weirdness of long-haul flying.

AA aren’t as awful and generally customer-averse as the other US airlines (although they’re not good, reflecting the general impossibility of finding an airline to fly on in the US that is good. I haven’t had the chance to try Virgin America [**]. They may be an exception).

Cathay Pacific and Qantas are desperate to outperform BA for obvious, post-colonial reasons. And they do, a bit: Qantas has newer planes, because Australia is richer than the UK, and Cathay has prettier stewardesses. But the general experience across the three airlines is pretty similar.

Then here’s Iberia, who aren’t as bad as you’d expect: they’re the least worst airline with serious numbers of flights from Europe to South America, which is Useful.

Unfortunately, as I’ve posted before, British Airways spent most of the 2000s being run by an idiot. So when BA and airport operator BAA built their new terminal at Heathrow, which is OneWorld’s most important hub, they only made it big enough to accommodate BA flights – not to accommodate all OneWorld flights.

Terminal 5 is one of the best airport experiences in the world. It is architecturally stunning, it is massively useable; overall, it’s really not a bad place to pass a few hours. Or even a week. But flying into Heathrow on a OneWorld partner flight and out on a BA flight is a massive pain in the arse, and involves losing the far-from-lovely Terminal 3, and Heathrow’s terrible internal transport links.

Given that everyone’s endgame at the time T5 was being planned – even Rod Eddington’s – was to run OneWorld as an integrated airline, this is the most insanely stupid thing ever.

It means that for any long-haul journeys that don’t start or end in London, you’d do better to buy a Star Alliance ticket rather than a OneWorld ticket. And because BA and Qantas have integrated their UK-Australia routes and there’s no room to bring Qantas over, all BA flights to Singapore and Australia (so not important destinations or anything) also leave from Terminal 3, so again you’d be daft to use them or to try and transfer onto them.

The Star Alliance partners (the big ones are Lufthansa, United, Singapore and Air India) mostly aren’t as good as the OneWorld airlines, apart from Singapore, who are better. But they’ll have a single, integrated terminal at Heathrow that’s just as good as Terminal 5, as well as good hubs in Frankfurt and Singapore. So they’ll kick OneWorld’s arse on Europe-Asia/Pacific and Europe-US flights, despite offering mostly-German levels of customer service once you’re onboard.

This is what is known as “the kind of obviously stupid, even at the time, short-termist idiocy that could only be implemented by the management of a quoted UK company”.

[*] Obligatory footnote: if Jim Bliss is right about the scale of the impending oil crash, then none of the above applies. On the plus side, Terminal 5 will then easily be big enough to accommodate what’s left of OneWorld…

[**] It’ll be interesting to see what happens to Virgin alliance-wise and as ownership rules change. In theory, Virgin Atlantic, Virgin Blue/V Australia and Virgin America could be a decent global airline in their own right for primary routes, in the same way that at least one of the Middle Eastern carriers will survive. The problem here is that Star’s Singapore Airlines owns 49% of Virgin Atlantic. Integrating Virgin Atlantic into Star would kill it as a brand, and would leave the Aussie and US businesses as basically domestic/local carriers, which would be a terrible shame. But Richard Branson doesn’t have the cash to buy the stake back, and I can’t think of anyone else who’d be willing to fund the deal. For a start, the last company to back Branson on a major airline investment lost over a billion dollars and then quit passenger aviation for good….

Those British Airways strikes

March 29, 2010 4 comments

While there’s been a lot of commentary on the British Airways strikes, the analysis (whether pro-company or pro-union) tends to miss two major points.

The business model is unsustainable – but that’s the management’s fault, not the unions’

BA’s model before the global financial crisis was to charge a fortune for excellent service in Club World and First, while matching its competitors’ prices and service levels in World Traveller. Together with BA’s massive global coverage and its excellent connections between the financial boom centres of London, New York and Singapore, this business model allowed BA to attract a lot of passengers and make a lot of money.

This was lucky, as BA’s cost base is and remains far higher than that of its competitors. Not on planes, or marketing, or even management – but on staffing. At the time, the money that bankers were willing to pay to fly to Singapore in a bed whilst being served champers by reassuringly camp gentlemen was so vast that BA could get away with paying long-serving cabin staff double the national median wage.

However, this wasn’t a sustainable business model unless you believed the boom times would never end. BA should have taken advantage of the good times to stuff its current crews’ mouths with gold (pay rises, massive early retirement packages, one-off bonuses), in exchange for permission to hire new recruits under less generous contracts so that the long-term cost base was more sensible. Virgin Atlantic pays new recruits gbp15,000 ranging up to about gbp30,000 for senior crew, and anyone who’s flown on Virgin will confirm that this is enough to attract motivated people who provide excellent customer service.

Unfortunately, BA’s CEO for most of the boom – Rod Eddington – had approximately no aptitude for long-term strategic thinking, so kept with the status quo for an easy life (my assessment of his aptitude is supported by his report on UK transport policy two years ago, which managed to miss out high-speed rail completely. I’ve only just discovered via Google that he’s done much the same half-arsed job in Melbourne). Willie Walsh has a better track record, but by the time he’d taken over and settled in, the recession was already imminent. Now, BA has to cut costs for long-term survival, but doesn’t have the money to bribe its staff to accept the cuts.

The unions are in a far stronger position than most commentators realise

BA’s enterprise value – the amount that its assets plus goodwill are worth, before taking into account its financial liabilities – is something like GBP7bn. The reason its market cap is only GBP3bn is because it also has a GBP4bn pension deficit. In other words, money that BA owes to its workers and former workers accounts for more than half of the company’s total value.

This has two policy implications.

One is that Red Tory Philip Blond’s suggestion that the government should mutualise BA isn’t quite as insane as it looks – more than half the company is already owned by the workers, and if things were to get worse then the pension fund has priority over the shareholders as a creditor. A deal like the one the US government brokered for GM, leaving the workers as majority shareholders, isn’t totally implausible.

The other consequence of this ownership pattern is something which should make BA shareholders rather nervous.

If the industrial action were to turn into a major, long-term dispute that drove down passenger numbers and revenues to such a severe extent that BA had to go into administration, then the pension fund would have priority over BA’s assets (including not only its physical assets, but also its brands, goodwill, systems, etc). It’d be hard work to rebuild BA as a global brand after that kind of collapse, but it wouldn’t be impossible – particularly with worker ownership ending the company’s labour crisis overnight. The shareholders, however, would lose everything.

So while the “nobody backs down” outcome isn’t good for either side (as the workers lose salary in the short term, and in the long term their pensions end up secured on a much less valuable asset), it’s a lot more optimal for the workers than it is for the shareholders. This makes negotiations, erm, challenging.

Conclusions? None really, except that I wouldn’t want Willie Walsh’s job, and Rod Eddington shouldn’t be put in charge of the strategic direction of a whelk stall (although he’s probably competent to administer one day-to-day).

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Update: another conclusion is that if you blame the strikes on Gordon Brown’s ‘weakness’, you’re so utterly clueless that you shouldn’t even be allowed to assist Rod Eddington at his whelk stall…

Update 2: Jim notes that BA’s business model is also unsustainable in the sense that the oil’s going to run out. This is true, and worth a read (I’m not yet totally sold on Jim’s view on precisely when the oil’s going to run out, but that’s mostly based on sheer incredulity that if the oil’s really going to start running seriously short by 2015, governments and large companies haven’t done more to mitigate that. The GFC highlights that this may be over-trusting of me…).