BA's in-flight revolution prepares for take-off

INSIDE THE breezy, futuristic complex that houses British Airways' new headquarters on the fringes of Heathrow airport, a revolution in airline strategy is quietly being put in place.

The City will not see much evidence of it when BA reports its full-year figures tomorrow. The house brokers, Merrill Lynch, are going for a pre- tax profit of just pounds 173m, against pounds 580m in 1997-98. The savage decline in profitability is the result of two principal drag factors - the fierce price war that is being fought out on long-haul routes and a decline in premium passengers.

If BA has got its strategy right, then it may have found the answer to both those problems. Since the start of modern jet travel, airlines have been organised and run as a network of routes. In BA's case, the centre of the web is Heathrow, the world's busiest international airport, and conventional wisdom says that the more passengers BA can get to interconnect through that hub, the more profits it will make.

But conventional wisdom has now been debunked at BA. Instead of aiming for volume, it is targeting only the profitable segments of the market. And instead of aiming to attract transfer passengers, it is focusing on point-to-point traffic.

At present the ratio of point-to-point passengers to connecting passengers is about 60:40. The aim is to raise that to 75:25. Likewise the proportion of business passengers to economy passengers is targeted to rise from 30:70 to 45:55.

Transfer passengers now have so many options for flying across the Atlantic - for instance someone travelling economy from Lyon to New York has a choice of six different airlines - that yields have fallen to the point where fares no longer even cover the cost of the aircraft.

The key to achieving that holy grail of attracting more point-to-point business passengers is more efficient use of the BA fleet. David Spurlock, a 31-year old American who moved over from the Boston Consulting Group two years ago to become BA's director of strategy, says: "It is always cheaper to shift underperforming assets into profitable market segments than it is to go out and buy new aircraft. That has never happened before in the airline business but it is happening at this one."

BA is reconfiguring its fleet so that nearly half its long-haul aircraft will soon be Boeing 777s, which have fewer seats for economy passengers and lower operating costs.

BA estimates that, on average, it will be able to increase yield per seat by 23 per cent on its North Atlantic routes by switching to 777s, which cost about pounds 40m a year to operate against pounds 50m for a 747.

In total, it believes that its fleet reconfiguration, which will also see larger 757 aircraft replaced by Airbus A320s will increase operating cash flow by pounds 200m a year. Freed from the mentality which said that BA's short-haul European network had to be run as a feeder for its long-haul routes, means that BA can concentrate on maximising returns rather than volume. The aircraft themselves are also being financed on a different basis. For instance, the fleet of 59 Airbus A320s which start arriving this September will come with lifetime engine maintenance contracts that are the responsibility of the manufacturer, so that BA pays for "power by the hour".

Mr Spurlock says that BA's aim is improve its capital efficiency by at least 15 per cent over the next five years - which is to say the amount of revenue generated through its asset base. Given that the BA fleet has a gross replacement value of pounds 15bn, that provides significant scope for improvements.