BA boss digs in for long haul

Few businessmen are as exposed to collapsing demand and high energy prices as Willie Walsh, chief executive of British Airways. Yet Jeremy Warner finds him in resilient mood, determined to take the opportunities for consolidation he thinks the economic downturn is certain to bring

Built on acreage reclaimed from a former landfill site, the headquarters of British Airways somewhere on the outskirts of Heathrow airport exude a business-like calm that belies the extreme turbulence the airline industry is flying through. A soothing sound of running water fills the foyer – the product of artificial, indoor streams – while a giant model of Concorde reminds us of former glories.

I've come to meet Willie Walsh, the Irishman who has been chief executive for the past three years of Britain's flag carrier airline. From the near crash landing of a BA flight to the fiasco of Terminal Five and soaring fuel prices, it has been a baptism of fire, yet with the economic downturn now biting hard, the biggest challenges are yet to come.

Mr Walsh has recently returned from a visit to his native Ireland and he can confirm that things feel bad. "I definitely saw a completely different mood in Ireland than I had been used to. I haven't spent much time there this year, but it's a very different atmosphere to twelve months ago. Ireland has been growing for 25 years and there is a whole generation of people that don't know what tough times are like."

Unfortunately, what's happening to the economy in Ireland looks as if it is just a front runner for the rest of Europe and beyond. Demand is in retreat seemingly everywhere, yet Mr Walsh is unfazed. Rather, he sees it as an unprecedented opportunity to bring about consolidation into bigger, stronger airlines.

Already, BA has made a start, having announced plans to merge with the smaller, but more financially robust Iberia, and, assuming competition regulators allow it, to merge transatlantic routes with American Airlines. Yet the bigger consolidation opportunity in Mr Walsh's view will be brought about simply through other airlines going out of business. Already thirty have gone so far this year, and he wouldn't be surprised if another thirty don't go under before the economy bottoms.

"Traditionally in this industry, the summer is the peak period. This year it coincided with sky-high fuel prices, which many airlines would have been unhedged against. So their cash position over the summer would have been significantly worse than they had planned for, and now they are heading into a period of much weaker demand. The oil price has eased, but the dollar has strengthened. For some, the cost base will be a lot higher than anticipated, and many of them won't have the cash to survive the winter."

Much the same thing was said in previous downturns, I point out, yet somehow or other airlines are never allowed to die, or they are reborn, phoenix-like, from the ashes of insolvency. Mr Walsh thinks it will be different this time.

In his view, many of the low-cost, upstart airlines are already history, and he predicts more main league casualties too, including at least one of the major US airlines. As for Alitalia, he can scarcely believe the Italian flag carrier is still in business. "I have no sympathy for the company," he declares brutally. "Most of the other legacy airlines in Europe have faced up to the need for fundamental change since 9/11, but Alitalia hasn't done anything. This is a business which is technically bankrupt but is being kept alive on a drip feed of government support which to my mind is illegal under European law.

"The business model they have is fundamentally broken, but every time you think they are about to go down, there's a stay of execution. The Italian consumer deserves better. There's plenty of capacity within Europe to fill the gap left by Alitalia. There is no need for flag carriers in Europe any more."

But surely BA is itself a major beneficiary of flag carrier status, I interject. "Absolutely not," says Mr Walsh. "We don't get special favours from the UK government any more. The UK has a very liberal attitude to our service agreements, granting traffic rights to non-UK carriers often when there's no reciprocal benefit to the UK."

This will bring a wry smile to the face of Sir Richard Branson, who has emblazoned his Virgin Atlantic planes with the slogan, "No way, BA/AA", in his campaign to halt the British Airways tie-up with American Airlines. Mention of Sir Richard has Mr Walsh positively hopping around with indignation.

"He's trying to portray himself as acting in the interests of consumers," Mr Walsh says, "but I think everyone has seen through that and will recognise that this is Richard Branson acting in the interests of Richard Branson. This is a challenge to his business, and that's why he is opposing it.

"It's got nothing to do with the consumer. If he really thought it was going to result in higher prices and reduced competition, he'd be saying bring it on, because in an environment where prices were higher and quality of service lower, he would be in a much stronger position.

"Branson's arguments are exactly the same as he trotted out last time we tried to do this, but the world has changed since then. There is no logic to his position. Why would he oppose this if it was going to lead to higher fares and poorer service? That would be an opportunity for him, wouldn't it? That's why his arguments are nonsense."

Mr Walsh is scarcely any less critical of the Tory party's opposition to a third runway at Heathrow, though he readily admits that the politics of the project is awkward for all three main political parties. Any expansion of capacity at Heathrow, BA's "hub" airport, would benefit the airline's growth strategy, yet to the BA boss, this is not about narrow self-interest.

"I really do think London will struggle to keep up with other major cities in Europe and the rest of the world without an efficient transport infrastructure. I just don't see a new airport in the Thames estuary or wherever as being a credible alternative.

"If we had started talking about this thirty years ago, then maybe, but the way planning inquiries and lead times work, we'll still be discussing this in thirty years from now and the world will have passed us by. I don't expect to see an airport in the Thames estuary in my lifetime or even my daughter's lifetime. There is no credible alternative to additional capacity at Heathrow."

Never mind the long term, how's BA going to get through the next few years? Barely has the airline industry recovered from the last, post-9/11 downturn, than what promises to be an even worse one looms. Mr Walsh is confident the airline is much better prepared financially for this one, with manageable debt, all his new aircraft orders fully financed, and the ability to be much more flexible in shifting capacity around the world than has ever been possible in the past.

There are still parts of the world – Asia and the Middle East in particular – where growth, though slowing, remains relatively strong. BA's global spread should allow it to take advantage of any growth spots that are left in the world economy.

As for prices, he thinks the cost of air travel will inevitably rise, though just recently BA has been removing some fuel surcharges to take account of the now falling price of oil. "You'll still have the likes of Ryanair advertising their cheap deals, but when you aggregate all the prices, there's no question about it, air travel is going to become more expensive. We've got a bankrupt industry, and that's obviously unsustainable."

Might BA be interested in buying some of the industry's less solvent players? That's not what Mr Walsh means by consolidation. "These airlines have no strategic value to us. You could buy any number of airlines right now for nothing, but for us, it is better to let them fail. To buy them would only weaken us."

Prices are already rising steeply, Mr Walsh points out, once you include the check-in and baggage handling charges levied by low-cost airlines. "If you look at the percentage growth of those fees, they've gone from not very much to a significant proportion of the fare that bares no relation to the cost of baggage handling and check-in."

On my last Ryanair flight, I tell Mr Walsh, I managed to get away without paying the excess on my baggage because there was such chaos around the check-in that the staff had lost the capacity to take the money. "Better not publish that," Mr Walsh warns me, "or Mr O'Leary [the chief executive of Ryanair] will have the debt collectors on to you."

Mr Walsh was not always so confident in his position that he could afford such joking. In the aftermath of the Terminal Five debacle, he faced widespread calls for his resignation. He survived, and the Terminal is now thought by most to be an outstanding success. Yet the episode has tainted the record. If Mr Walsh can as promised bring BA out the other side of the downturn stronger than it went in, then in the City's eyes at least, he will be fully redeemed.

Fighting talk: Walsh on Branson

"He is trying to portray himself asacting in the interests of consumers but I think everyone has seen through that and recognises that this is Richard Branson acting in the interests of Richard Branson. It's got nothing to do with the consumer"