Nice big article on BA from today's Telegraph newspaper, for those interested in the airline-plenty of interesting stuff here, including why Eddington thought selling GO was the right thing;
'The amazing shrinking airline
BA is slashing jobs, cutting routes and scaling down operations at Gatwick. The next job is to tackle the no-frills carriers. In an exclusive interview with Damian Reece, chief executive Rod Eddington pledges short haul will be in the black by 2004
ROD EDDINGTON, chief executive of British Airways, made a promise on Friday morning which his shareholders are unlikely to forget in a hurry.
Sitting in the airline's enormous headquarters, he pledged that profits from BA's chronically troubled short-haul business will be rolling in by 2004. This will be no mean feat but is the real thrust of last week's measures announced in BA's Future Size and Shape review.
Restoring profits to the group, which is expected to announce annual losses of £570m in May, is Eddington's simple ambition. If he fails, not only his job but the commercial future of the entire airline will be threatened.
But even with the shrinking of loss-making long-haul routes, annualised cost savings of £650m and 5,800 new job losses, all announced on Wednesday, the really ugly problem that has to be fixed is BA's sink hole at Gatwick, where most of its short-haul business is based.
While all the attention last week was focused on whether Lord Marshall, BA's soon to be septuagenarian chairman, should stay or retire, and alleged splits in the board over how radical Future Size and Shape should be, the question of if and when BA's short-haul operations would ever make any money was somehow left behind.
Eddington confirmed that BA's short-haul business would be restructured to compete against the low-cost airlines, not as a new brand but by selling cheaper tickets over the internet, as revealed in The Telegraph two weeks ago. But how soon all these changes would mean the short-haul business moving into profit was not discussed.
"Wednesday was about fixing the core business," says Eddington. "A huge piece of what we announced was about how we get smarter on our short-haul operations. The problem we have and have always had since before I arrived is that the profitable long-haul business has subsidised the short haul. I've said that can't go on, it's unacceptable."
A glance at the company's last set of full-year results, albeit from a time when profits were still being made, shows the scale of the imbalance in BA's business. For the year to March 2001 group operating profit was £380m while BA's transatlantic business alone had operating profits of £470m, or 124 per cent of the total. BA's European short-haul business was the main culprit for the group result.
"Before I arrived short haul was losing £300m a year, 12 months later it was losing £170m, still a big hole but a big difference. We have to get that into the black and my sense is it will take us two years, to 2004, provided we are in what I would describe as still air, or normal conditions.
"But recasting the short-haul proposition and making the right judgment about route structure is critical. My goal is to get short-haul operations into the black in two years' time."
Wednesday's announcement was a line in the sand for Eddington and BA, a mark by which they will both be judged. It was the unveiling of new BA, the BA that will hope to recover its gargantuan losses in the next few years as trading on its premium-priced long-haul routes recovers to some degree of normality. By then he hopes to have fixed the short-haul business so it will contribute to earnings as well.
While some in the City were satisfied with Eddington's plans, others felt he has missed the opportunity for a truly radical re-think and suspect a board split over how far he could go.
Eddington's relationship with his chairman, Lord Marshall, 20 years as chief executive and latterly as chairman of BA, is under scrutiny for signs of stress, especially as some investors are demanding a clear succession plan. Marshall intends to stand for re-election as chairman past his 70th birthday, the age where modern corporate governance thinking says enough is enough.
It is clear that the articulate Eddington, a friend of fellow Australians such as Rupert Murdoch and Rodney Marsh, the wicket keeper, argued fiercely with Marshall over the detail of Future Size and Shape. But he says these arguments were all part of the normal cut and thrust of top level corporate debate and did not carry any personal rancour.
"Not one word, not one word of disagreement," says Eddington about his board room sparring over Wednesday's announcement.
"I've known Colin for 20 years. He and I have always had a good relationship. We have argued and debated about all sorts of things. Actually argued is a bad word. We've debated and he and I have been able to get very quickly to the same place on any issue. He was absolutely aligned on the Future Size and Shape exercise."
Eddington is used to emergency management. Having arrived at BA in May 2000 he has had to master a flabby organisation flying too many loss-making routes with rock bottom morale after the final days of Robert Ayling's empire. The onset of a punishing global slowdown, the French Concorde crash and September 11 have all happened on Eddington's watch.
"The overall strategy at BA has not changed," says Eddington. "But as ever the devil is in the detail. We are a full service, network airline focusing on profitable segments, but that no longer means to say we will fly everywhere.
"We are a British-based company that trades globally but we will never be the airline of choice between, say, Hong Kong and Taipei. We were flying there three times a week. Cathay Pacific were flying 20 times a day. Is anyone going to fly BA no matter how good our product?
"We will fly to places that make a profit or contribute to network profits but there is no sense of empire. There is no sense of us going wherever there is a 3,000 metre strip of concrete. It is not strategically important for us to fly to Gdansk and Gothenburg. If you can make money, great. If not, get out," says Eddington.
Wednesday's announcement saw BA accelerate the shrink-to-fit process started by Ayling in 1999. Costs are being slashed, with £450m taken out by March 2003. Head office costs are reducing by a third and 13,000 jobs have gone since August last year.
BA's fleet and route network continue to be simplified and reduced to the point where BA's overall capacity reduction between 1999 and 2003 will be 21 per cent, a figure anticipated well before September 11.
Gatwick is losing a further eight routes to Heathrow, four long haul and four short haul, while a further 10 routes will be axed in October. By summer next year BA's Gatwick presence will have shrunk 60 per cent since summer 1999. This year passengers will fly long haul from Gatwick on 41 different routes. By 2003 that will have shrunk to just 15.
"The mistake BA made with Gatwick was developing it as another hub and spoke airport alongside Heathrow," says Eddington. Heathrow is a hub into which European and US passengers will fly to transfer on to long-haul routes. It is closer to London than Gatwick and is the airport of choice for American business travellers.
Gatwick, with one runway, is not. Even so, BA set it up as a hub and replicated many of Heathrow's short-haul routes to generate transfer traffic. As recently as 18 months ago planes from Heathrow and Gatwick, just 20 miles round the M25 motorway, were flying to the same places on 26 short-haul routes.
"Gatwick is an important part of our network but forget about it as a hub and spoke operation," says Eddington. "Think of it as a regional airport like Manchester or Birmingham, serving the South East. BA will still do transfer traffic but it will be 25 per cent of our capacity rather than 40 per cent, although at 25 per cent that's still 10m transfer passengers a year."
Eddington's short-haul business will now concentrate on taking on the growing threat of the no-frills airlines such as Ryanair, now valued at £2.8bn compared with BA's £2bn, and Go, which Eddington sold last year for £110m.
"There is a lot to learn from the no-frills carriers," admits Eddington. "The way they use the internet to sell tickets, the simple pricing structure and the high utilisation of a single aircraft size." All these methods are being drafted into BA's new modus operandi for short haul.
But why sell Go in the first place? Surely it could have been the basis for BA's short-haul operations, particularly at Gatwick where the likes of easyJet are now muscling in. "I arrive at BA and say 'Ryanair and easyJet are eating our lunch'. What's the answer, how do we compete? Go, we own Go, that's how we compete.
"Wrong answer," says Eddington. "The real question is what do we need to do with BA short haul so it can compete with the no-frills carriers? Go simply got in the way of us making the decisions we needed to make to our core business.
"We couldn't make short haul part of Go because in order for us to set up Go in the first place the Office of Fair Trading required us to have nothing to do with its management, so how does Go help BA?"
By closing short haul and selling it to Go as another option, BA would have seen a substantial number of customers who remain no-frills refusniks simply transfer to Lufthansa or Air France instead, says Eddington.
Eddington's next big date will be May's annual results and the headline-grabbing losses. But having coped with Concorde and September 11, Eddington is not phased by red ink. "There are no easy answers but what we have to do is make sure we have a more robust core business and therefore get the cost down and simplify our operations.
"We also have to find a way of competing against the no-frills carriers, not on every route, but if we are smart we can make money."
TELEGRAPH NEWSPAPERS 2002.