Heathrow, We Have A Problem

CAN BOB AYLING PUT THE WHEELS BACK ON BRITISH AIRWAYS?

For someone who had just announced a 60 per cent plunge in annual profits coupled with a warning that things are not about to get a great deal better, Bob Ayling was in upbeat mood yesterday. This former civil servant and son of a south London shopkeeper has come a mighty long way in a short space of time and now he occupies one of the hottest seats in British business - the chief executive's job at British Airways.

But with success comes envy, resentment - and enemies. And Mr Ayling has those in spades, both inside and outside the airline. They have been storing up the ammunition too. Since Mr Ayling took up the job in January 1996, BA's shares have underperformed the stock market by 40 per cent. Today, BA is worth no more than it was three years ago.

Moreover, the airline has gone through one of the most damaging strikes in its history while the business alliance on which Mr Ayling has rested so much of his reputation - the link-up with American Airlines - lies grounded indefinitely. To cap it all, the colour-blind chief executive of BA has betrayed the airline's heritage - and, say some, its very birthright - by abandoning the royal crest and union flag and adorning its tailfins with ethnic designs.

The pounds 85m loss BA reported yesterday, for the first three months of the year, is only the second time since privatisation in 1987 that the airline has failed to make a quarterly profit. The first occasion was under Mr Ayling's watch too.

Listen hard and you can almost hear the refrain whistling through the fake cobble streets and bars of BA's swanky new Waterside complex next to Heathrow: "This would never have happened under Lord King."

Well, Mr Ayling is Lord King's protege and he has a lot to live up to. Brought into BA just eight years ago, after a career spent largely in Whitehall, Mr Ayling has climbed the boardroom at dizzying speed. Within two years he had progressed from company secretary to group managing director, and then seized the top job in the aftermath of the Virgin Atlantic dirty- tricks scandal, an affair which prompted the premature retirement of Lord King as chairman.

It was always going to be a hard act to follow. Lord King and his first co-pilot, Sir Colin Marshall, took the controls just as BA was heading down the runway towards privatisation. They inherited an over-staffed and poorly managed business where morale was at rock bottom, and with a blend of ruthless cost-cutting, allied to service improvements and clever marketing, the two turned BA into what truly was "the world's favourite airline".

Because there was also lots of fat to trim, and because the airline industry was heading into one of its cyclical upswings, BA also quickly become one of the world's most profitable airlines. The fact that it also controlled a third of the slots at the world's busiest international airport, Heathrow, helped in this success.

When Mr Ayling took over the reins, his most pressing challenge was what on earth to do for an encore. The airline market was still buoyant but the first incipient signs of a slowdown were beginning to appear on the horizon, and it was clear to most in the industry that a prolonged period of turbulence was not far off.

The strategy he adopted was to implement a hugely ambitious business efficiency plan which would take pounds 1bn out of the airline's cost base within three years. Coupled with this was a decision to reduce the growth in BA's seat capacity virtually to zero, so that when the slowdown came it would not be flying half-empty planes around the world.

Contrary to initial reports that 5,000 staff would be axed, the airline's headcount is actually growing. But the make-up of the workforce has changed. Mr Ayling got rid of operations like catering and ground handling, and shifted more staff into front-line jobs in sales and marketing and customer service.

But some form of confrontation with BA's unions was inevitable, and it came in the form of a debilitating and morale-sapping dispute involving the cabin crew, two summers ago. The resulting strikes cost BA pounds 125m and taught Mr Ayling a lesson.

But two years on, BA's industrial unrest is largely a thing of the past and productivity is on the increase. Mr Ayling argues that the new pay and working arrangements, ushered in under the business efficiency plan, have enabled BA to improve the level of service quality while keeping costs under control. The payback is not obvious to see at first glance. If BA is such a streamlined and efficient business, then why did profits last year fall by more than a half to pounds 225m?

The question Mr Ayling's critics have to answer is simple: what, in the circumstances, would they have done differently? When this question is posed to them the silence tends to be deafening. Hence, the curious juxtaposition of a share price in a tailspin on the one hand, and a generally supportive set of institutional investors on the other.

BA has largely persuaded the sceptics that were it not for the pounds 600m of savings the efficiency programme has so far yielded then, by now, it would be announcing not merely sliding profits but dramatic losses

These days, the taxi drivers of west London refer jokingly to BA's new Waterside headquarters as Ayling Island. But no chief executive, and no airline, is an island and BA has discovered to its cost that while it was cutting its cloth to suit its purse, other carriers were not so diligent. The result has been massive overcapacity, particularly on BA's profitable North Atlantic routes. Add to this the fact that a quarter of the world's economies remain in recession and it is easy to see why business travel and yields are in retreat.

But Mr Ayling has an answer to the problems. The third phase of post- privatisation development will see BA increasingly turned into a business- class airline flying point-to-point passengers. In other words, if you are a backpacker seeking the cheapest way to fly from, say Lyon to LA, then don't bother to ring BA.

"This will make us less dependent on transfer economy passengers where the yields are lower and the fares are not high enough to pay for the cost of the aircraft," says Mr Ayling.

The process of reshaping the airline is already in full swing and it can be seen in the changing structure of the aircraft fleet and the design of the cabins. BA's latest innovation designed to attract more business passengers - seats that turn into complete beds plugged into a multi-media entertainment and computer service - will cost the company pounds 200m alone.

In three years from now almost half BA's long-haul fleet will be made up of Boeing 777s, which have far fewer economy seats than 747s but the same number of business and first-class seats.

BA calculates that the change in passenger mix will increase its revenue per customer by a quarter, and increase its cashflow by pounds 200m a year. Within five years, Mr Ayling would like to see BA carrying four business- class passengers to every six economy-class passengers and nearly as many point-to-point passengers as transfer passengers - ratios until now unheard of in the airline industry.

Does that mean that BA is jettisoning the ordinary passenger in favour of profitable corporate clients? "No," says Mr Ayling. "BA is in five sectors of the market and in only one of those, economy transfer passengers, do we not see a future. If you ask whether we intend to leave the Great British Public behind then the answer is absolutely not."

Yesterday the market took a shine to BA, marking the shares higher. But Mr Ayling knows that the financial community is a fickle mistress. Nor does he expect the rumour mongering about his life expectancy at BA to go away overnight and not return.

"There is a black economy out there of people who like to criticise chief executives, he says. It is almost a national sport. For now, let's just say I am immensely proud of what we have achieved at BA and flattered that people should take such an acute interest in my future."