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Tuesday, 26 May 2009

Crashing airlines

One of the best pieces of advice I ever heard as a young banker was “Never lend money to an airline run by pilots. All you see in the cockpit is blue sky, and you have no idea how the rest of the business is running.”

So it seems to be at BA under the management of former pilot Willie Walsh. I must declare an interest as a shareholder although I have sold a large part of my holding while Mr Walsh has been in his post.

BA chairman Martin Broughton told the press: “In the last twelve months we have gone from a record profit to a record loss due to the current tough economic environment. That only serves to underline the extremely difficult trading conditions that we are facing, despite our best ever operational performance, and any recovery is likely to take longer than initially envisaged. The revenue outlook continues to be weak during the current financial year but we expect lower fuel prices to reduce our fuel costs by approximately £400 million.”

One might ask what BA’s fuel cost surcharge on every ticket is all about? If they are charging customers more because of higher fuel costs, how do they manage to make a loss. Maybe passengers are going elsewhere because BA said the level of premium fare travellers had fallen by 13% in the second half of its financial year and it had seen a rise in fuel costs.

How strange then that Virgin Atlantic should report a sharp rise in profits in the year to the end of February, almost double the profit of a year earlier. The airline said the results had been helped by a rise in premium fare passengers. Virgin Atlantic chief executive Stephen Ridgway (former sales manager for a food company, teacher and business development manager for a powerboat company, but not an airline pilot) told the BBC: "We are winning market share from our competitors during the toughest trading environment ever." adding that successful hedging of fuel had helped the firm. Hedging involves buying fuel at set prices in advance to avoid fluctuations in costs on the open market.

In other words, Virgin got right all the things that BA got wrong. If Virgin have hedged their fuel costs, they don’t try to pass the higher cost onto their customers and they don’t switch like the former BA customers.

I am not a particular fan of Virgin. I was grateful 25 years ago when their brightly coloured interiors provided a welcome alternative to the drab BA service to New York, but my enthusiasm waned when I found out the ages of the planes they were using, some even older than the hostesses - always a bad sign, but I am even less a fan of Walsh and his policy of turning BA into a low-cost airline. He tried that at Aer Lingus, and the airline would have disappeared into the arms of Ryanair had the European Commission not blocked the merger on competition grounds. His main “achievement” appears to be to have battered the staff at BA into submission. Profits increased on relatively flat earnings, by squeezing employees salaries and pensions – never a wise move at a “premium” business. Inevitably, when Terminal 5 opened the grumpy staff were not motivated to sort out the problems. So Walsh was driving the airline down the low cost route, but with all the wide-bodied aircraft, early morning and evening premium landing and take-off slots and general overhead of a premium flag carrier.

Nobody wants to pay thousands of pounds to sit on an 8 hour flight to the US served by grumpy cabin staff. The market for premium travel is still there and always will be - even if one or two “business-only” airlines folded last year. Like the in-flight entertainment system that brought down Swissair 111, Walsh’s strategy is filling the cockpit with smoke, and although the business is still flying, it is only a matter of time before the Air Accidents Investigation Branch is called out.

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