British Airways: "Fit for Five?" Aug/Sep 2005

On the eve of transition of power from Rod Eddington to the new CEO designate at British Airways, Willie Walsh, once again we take a look at the group’s strategy and the success at implementing that put in place some years ago.

The BA strategy has not changed that much in the past five years — except perhaps the public name of the strategy. At the annual investor day earlier this year the company announced that it was now calling its strategy "Fit for Five" in anticipation of moving all its operations into the new single terminal at Heathrow in 2008. It hesitated to explain or give any further details until next year.

Over three years ago the company introduced a strategic plan entitled "Future Size and Shape", which was a continuation of existing plan that had been in place for the previous three years. The company at the time stated that it had four main targets: 10% operating margins within three years; simplify the fleet structure and product proposal; compete with the no frills operators; resize staffing levels to a realistic level for the new environment. It also contained one promise "We will deliver".

It was in all appearance a continuation of the earlier strategy, with a full realisation that BA cannot operate its bases of operations at either Heathrow or Gatwick as a full transfer hub–and–spoke network operator. It must concentrate on maximising frequencies on core business routes and minimising low performing routes.

Although the strategy had highlighted the requirement to chase premium and business traffic and reduce exposure to leisure transfer passengers, the media had latched on to the idea that BA was spurning leisure passengers and cheap tickets. As for any full service carrier BA could never afford to turn away from a segment of the market; the publicity at the time probably had a deleterious effect on the appearance in the market of BA’s leisure product. The main differences in this plan were the proposals to target the budget conscious passenger effectively once more and tell them about it.

The aim was that the plan would result in a 9% reduction in overall capacity (52% lower capacity at Gatwick), 10% higher short haul utilisation, 15% fewer destinations, 49 fewer aircraft, 40% fewer aircraft sub–types, and a total manpower reduction of 13,000.

The financial aim was to generate a 10% operating margin by which under CVA it could show shareholders that it was creating value.

Last year the company emphasised a vision of "Customer Enabled BA". The company saw CeBA as a fundamental part of simplifying the business processes that is the core of its strategic aspirations. It described it as a multi–functional programme that would aim to cover the full process of the customers' experience from booking to returning home.

As an essential element it would try to streamline the product offering in order to ensure consistency of delivery and elimination of duplication. In addition it does help that the internet is proving a viable way for the consumer to interact with internal systems without the intervention of any human agent.

How successful has BA been?

Capacity: At the end of March 2002 the company had 360 aircraft.

At the end of June this year this number had fallen to 287 in operation.

Admittedly seven of the fleet in 2002 were the Concordes and there have been some fleet alterations from the disposal of DBA among other elements. BA has also continued to streamline seating configurations in the fleet types to remove sub–fleet complexity.

Actual capacity figures as published have not quite come up to aspirations with only a fall of 4% in seat capacity since Mar 2002 and a 1% fall in total capacity.

Profitability: Revenues in the twelve months to June 2005 touched just under £8bn, down some 4.7% from the £8.3bn achieved in the FY ended march 2002 (and some 14% from the peak revenues achieved in FY 2000/2001), but up by 4.2% compared with the 12 month period ending June 2004.

Costs in the rolling period to June 2005 were some 12.6% below those in the financial year ended march 2002 (but 3% higher than those in the previous 12 month rolling period). The operating margin in the twelve months to June came in at 7.1% — a significant improvement on the negative 1.3% operating margin of FY2002 but just a little short of the 10% target "within three years".

Had the fuel price behaved itself the company would be well on track to achieve its targets. When jet kerosene was at its recent nadir it accounted for some 8–10% of a major airline’s operating costs. Since then the price has nearly trebled. It seems unlikely in the short run (if ever) that the fuel prices will return to the halcyon days of only four years ago and that the industry will have to cope with a fuel burden to costs similar to that of that in the 1970s fuel crises. However for the moment fuel only represents a little less than 20% of BA’s operating costs (after allowing for hedging policies) compared with staff costs accounting for some 30% of costs.

LCC competition: the company’s website (ba.com) is the most innovative of all the major carriers' sites for online bookings. It also (given the complexity of a legacy carrier’s operations) competes very successfully with the offerings of the low fare carriers.

The initial aim was to provide the potential passenger with a simple way of finding the lowest fares available for a time that he or she may want to travel. It has (through judicious advertising) generated significant customer awareness of the competitive offering, and the ability to offer prices often well below those of the LCCs.

When the company launched the service it limited some of its features to members of its FFP (the Executive Club). Since then BA has expanded the ability to check in online and print boarding cards to all passengers (for departures where self–printed boarding cards are legal or feasible). This is an unusual example of company–introduced cost savings benefiting the customer (as part of CeBA of course). Having given up the idea of trying to beat the LCC competition by fighting head on with like–for–like services, it may be the only legacy carrier to have effectively found a way of competing against them with only the marginal otherwise–unfilled–seats.