The world's failing airline? How turbulent times sent BA off course

In February 1987, staff at British Airways wore a collective smile, as well they might. The historic privatisation of a large national airline was 11 times oversubscribed, with an instant premium on the share offer price of £1.25. Many employees chose to add to the 76 free shares each was given in the flotation, to cash in on the Thatcher government's generous write-off of BA's alarmingly high debt.

British Airways rebranded even more successfully than the Labour Party. At the peak of "new BA", five years ago, each share was worth £7.70. A typical employee with 3,000 shares would have made a profit of about £20,000 by selling at the top of the market.

But if the share price was then an accurate barometer of the mood of a workforce buoyed by the success of its employer, it is an equally good indicator now. Between then and last night, each sharelost £6 in value. In the same period, morale has been buffeted by cost-cutting and redundancies.

But matters have now come to a head in the form of a dispute over an electronic system of clocking-on. Staff, concerned that management is trying to impose a regime of unsociable hours, have staged a series of wildcat strikes in the last few days. What is particularly damaging is the timing - at the frenetic start of the summer holidays - which could not have been worse for the airline. So seriously is the dispute being taken that Rod Eddington, the chief executive, was yesterday forced to intervene, arranging to meet union leaders before they ballot their workers on an official strike.

Mr Eddington's involvement reflects a fear that this dispute could undo all the work he has done to restore the glory days of the Eighties, when BA's self-styled status as "The World's Favourite Airline" was a view shared by traveller and employee alike.

Like most flag-carrying airlines, British Airways' corporate culture grew in the best of times. During the Sixties and early Seventies, the short-haul BEA and long-haul BOAC were cosseted by the Government, which owned them. They were protected from competition by an absurd array of rules that prevented upstarts from offering cheaper tickets and stopped rivals offering a better service.

When BA was created in 1972, it instantly became an entity of national prestige. To keep the flag flying, management gladly entered into generous agreements with unions that were ultimately underwritten by the taxpayer. Under Colin Marshall (now Lord Marshall), the airline blossomed after privatisation.

But the enviable industrial relations BA enjoyed soured dramatically under Sir Robert Ayling, Lord Marshall's successor in 1996. His attempts to take £1bn out of BA's costs culminated in a cabin crew strike in 1997. Since then the airline industry has been rocked by a series of blows including the collapse of the dot-com boom, 11 September, foot-and-mouth, the Sars virus - and airlines whose costs are half that of BA.

To combat the most recent threat, BA set up its own budget airline. So successful was the stand-alone operation, Go, that it was easy for Mr Eddington to sell it. (The joke at the time was that the board should have kept Go and sold the rest of the operation.)

The latest crisis is no laughing matter. The mere threat of further industrial action is enough to drive the share price down. The prospect of disruption scares passengers away more surely than anything other than a plane crash.

Whether they are flying to Munich for a morning meeting or the Caribbean for a honeymoon, air travellers want to get to the right place at the promised time. As we saw last weekend, airlines are complicated businesses where a walkout by a relatively small group of workers can affect a vast number of people. Even the whisper of industrial action is enough to persuade prospective passengers to desert an airline.

The revenue lost by BA by customers' short-term disloyalty will never be recovered. The long-term impact will be even worse - as shown by the grins from competitors as BA wallowed in chaos. Even Eurostar, the fast train which runs between London and the Continent, which is losing business as fast as the airline, is bidding to poach passengers with a £30 deal to Brussels or Paris this weekend to anyone who shows a BA ticket.

The bosses of no-frills airlines are gleeful. British Airways recently created an expensive advertising campaign criticising the customer service of the low-cost airlines, with the message that "when things go wrong, we'll take more care of you". Now Ryanair is running ads with pictures of the airport chaos captioned "Hell at Heathrow".

The Irish no-frills airline has customer-service issues of its own; last summer baggage snarl-ups at Stansted inconvenienced thousands of passengers. But BA passengers, still waiting for their underwear to catch up with them after last weekend's disruption, may be wondering what it was all about - and precisely which decade the three unions who oppose the introduction of "swipe cards" believe they are living in.

Mr Eddington, who commands great respect in the industry, believed he could meet the challenge of no-frills competitors and declining long-haul fares by increasing productivity - such as, for instance, clocking-in ground staff electronically. He sorely underestimated the strength of feeling of the employees who walked out last weekend.

Staff at Heathrow fear the next step will be for the airline to tailor rosters to match passenger flow. They are right to worry, since it would be negligent for Mr Eddington and his colleagues not to recognise that far fewer ground staff are needed on a Tuesday in November than on a summer Saturday.

Two days ago, a passenger at Amsterdam airport needed to fly to London. British Airways wanted £175 for the one-way flight. The travellercaught a train for three-and-a-half hours to Ostend in Belgium, where a Ryanair plane was waiting. The flight cost £25 - one-seventh of what BA was demanding to feed its expensive cost base.

British Airways is an excellent airline, with excellent service on the ground and in the air. It is far better placed to thrive than many of its flabby European rivals. But with each day the dispute continues, the brand's strength is eroding. If the current deadlock is protracted, the two sides may merely be fighting over the corpse of a once-great airline.

THE LONG HAUL

By Rebecca Armstrong

1974 BOAC merges with BEA to form British Airways.

1976 BA launches world's first Concorde service.

July 1979 Government announces intention to privatise BA.

April 1983 BA starts using the tagline, the 'World's Favourite Airline'.

February 1987 Privatisation. More than one million applications received for 125 pence shares - 11 times oversubscribed.

July 1987 Freed from government ownership, BA announces merger with British Caledonian.

1992 Ryanair becomes a low-cost airline offering domestic and international flights from Stansted.

1995 EasyJet is launched.

1996 Debonair starts up at Luton as a more upmarket no-frills airline. It goes bust three years later.

1998 BA sets up its own no-frills airline, Go, at a cost of £25m.

2000 Buzz starts flying from Stansted.

June 2001 British Airways sells Go for £100m to 3i - one year later it is worth £400m. Go carries around two million passengers a year to 25 destinations.

September 2001 BA cuts its 56,000-strong workforce by 12.5 per cent, grounds 20 planes and reduces capacity by 10 per cent.

1 July 2003 BA's credit rating cut to junk status, prompting a fall in the airline's share price. BA has net debt of £5.2bn - about three times its market capitalisation.

19 July 2003: BA staff stage wildcat walkouts at Heathrow causing huge chaos.