Saturday 22 July 2017

BA's lost weekend points to a cost-cutting campaign at its limit

People wait with their luggage at the British Airways check in desks at Heathrow Terminal 5 in London
People wait with their luggage at the British Airways check in desks at Heathrow Terminal 5 in London

Chris Bryant

One of British Airways boss Alex Cruz's first acts was to commission a new feature in the staff magazine: 'Mistake of the Month'. The airline's employees, Mr Cruz complained, were reluctant to admit their errors.

Finding material for the magazine's next issue won't be hard.

A computer failure forced BA to cancel hundreds of flights at the weekend. Thousands of passengers were stranded, struggling to find alternative flights or reasonably-priced accommodation.

Regardless of what caused BA's computer to break - Mr Cruz insists it had nothing to do with the airline's recent decision to outsource key IT functions to India - the airline's back-up systems and crisis-management were shown to be woefully lacking.

BA's parent IAG has done a better job than other legacy carriers at cutting non-fuel expenses.

It rounds off the picture of an airline that's prioritising cost-cuts over customer service.

BA has already abolished free food for short-haul passengers in economy and crammed in more seats. Meanwhile, BA pays new cabin crew far less than long-serving employees.

In most industries, treating staff and customers well is a prerequisite for success. Like other airlines, BA has learned there's another way - one that involves avoiding competition, scrimping on service while ensnaring passengers who might otherwise be tempted to take their business elsewhere.

The cancellations may deprive the Willie Walsh-headed IAG of a low single-digit percentage of operating profit this year, according to analysts. But IAG will live to fight another day. Even after Tuesday's 3pc fall, IAG's share price is close to a record high.

Management seems to think decent returns are locked in: thanks to costs-cutting, the company expects operating profit margins to consistently exceed 12pc until 2020. Underscoring the impression that investors, not customers, are IAG's top priority, the company used an expletive-laden slide at the company's capital markets day last year to discuss its returns to shareholders.

How can investor and customer satisfaction be so misaligned? Ryanair kept customers coming back due to its low fares.

Carriers like BA once tried to be nicer, but Mr Cruz, who made his name at IAG's budget carrier Vueling, believes the economy cabin has become a commodity product. Customers will put up with a lot so long as the fare is competitive.

And, crucially, competition is lacking. US airline margins have been fattened by mergers which have left just four carriers controlling two-thirds of domestic routes.

IAG controls 55pc of Heathrow's slots and 37pc of all high-margin London to New York traffic, according to Exane.

Low-cost operators like Norwegian Air Shuttle ASA are beginning to make inroads into the transatlantic market.

Though passengers have to fork out for meals, they seem to like the brand and its fancy new 787 planes.

BA still flies a lot of aging 747s. Stranded passengers can at least console themselves that IAG shares trade on just 7.5 times estimated earnings, less than half of the multiple investors apply to Ryanair, the airline Mr Cruz denies trying to copy.

That discount may be justified. Though it's protected now, BA may yet come to rue not being nicer to passengers. Rather than picking on his employees for mistake of the month, Mr Cruz needs to look in the mirror. (Bloomberg)

Irish Independent

Promoted articles

Also in Business