CASE STUDY- British Airways: a fly in the ointment?

This account is quite long but is written in the form of a newspaper article and is
designed to be read without paying a great deal attention to the details
British Airways (BAs) position at Heathrow is central to its success: it holds the
dominant position in terms of prime time slots and thus has an unrivalled world
wide route network from the busiest international airport in the world. The most
lucrative route from Heathrow is to the US, and BA ,has in the past, been accused
of exercising monopoly power in holding on to its slots.
When demand in Asian routes fell due to the Far East crisis, other airlines,
including those operating from European airports, switched to Jumbos on the
transatlantic route which increased total capacity by about 25%. This led to a price
war and industry revenues per seat fell by about 10% on the transatlantic route. On
top of this the strong British pound had reduced the value of BAs foreign
revenues.
BAs profits had climbed from 300 million in 1994 to 640 million by 1997, only
to fall back to 225 million by 1999; as might be expected the share price fell
dramatically, from a high of 760p to less than 300p. In 1996 the CEO, Robert
Ayling, initiated a 1 billion cost cutting programme out of a total cost of 8
billion, which entailed more flexible working practices and selling off many of the
services such as in-flight catering and engineering. BA appeared to be heading in
the direction of becoming a virtual airline focused on selling seats and operating
flights.
The cost cutting tactic was not simple because at the same time BAs labour force
had increased from 57 000 in 1996 to 64 000 in 1999. BA had increased its
operating range, with subsidiaries such as Deutsche BA and GO, the UK based low

fares operation; the number of aircraft had increased from 294 in 1996 to 335 in
1999. The good news was that revenue to one kilometer per employee was up by
12% over the same period.
Strategy is born
In 1997 BA had to make a major investment decision because its fleet of Jumbos
and DC-10s was ageing. The analysis of appropriate replacements revealed that as
many as 100 passengers on each Jumbo were paying less than the average cost. Mr
Aylings strategic move was therefore to reduce the number of passengers carried;
this reduction would be at the cheap end of the market (the backpackers)and BA
would focus on high revenue generating first class, business class and full
economy fare passengers. It was therefore decided to purchase smaller wide bodied
aircraft for long haul routes and focus on the higher revenue generating passengers.
The logical extension of this was to shrink the scope of the airline and eliminate
unprofitable short haul services.
Critics pointed out that this might enable competitors to increase their size and
benefit from scale economies which may make it possible to operate profitably
even on low margin routes. For example, the budget airline Ryanair, which is only
one tenth the size of BA, announced a 17% increase in profits in 1999 at a time
when BA announced a 77% fall. Ryanair runs only type of aircraft, offers only the
most basic in flight service and turns aircraft round in half the time of competitors
and uses out of town airports where the additional travelling time is often
compensated for by the lack of airport congestion. BA has even started Go, its own
budget airline which had not made profits by 2000.
BA had attempted to merge with American Airlines (AA), which would have
solved the open skies problem with the US, but that move was frozen by the

European Union monopoly watchdogs. BA then set up a global alliance with AA

and a few other airlines, but by this time other alliances such as Star (Lufthansa,
United Airlines, SAS and All Nippon) had two years lead.
Tail fin spin
Mr Ayling decided to substitute ethnic art for the Union flag on the tail fins and this
was met with a mixed reaction. While it was argued , at the time, this move
reflected the fact that 60% of BA passengers come from outside the UK (BA refers
to itself as the the worlds favourite airline) customers from many countries felt
that it was inappropriate. The net result was that a version of the flag was put back
once again.
Service, service
Clearly a high level of service is required to attract high revenue passengers, and
this is an area where BA has had trouble in the past. In 1996 the pilots threatened
to ground the airline in response to Mr. Aylings proposed costs cuts. Then, in
1997, the proposed changes in working patterns led to a month of disruption
including a three day strike by cabin staff; this may have contributed to a fall in
morale with implications for the level of service. Taken with the tail fin episode,
observers wondered whether the brand itself was being adversely affected.
Action to improve the quality of service focused on the new business and first class
cabins, which critics have claimed to be inferior to those of many of their rivals.
Mr Ayling was the first to introduce beds in first class and this innovation is being
extended to business class. In the light of the investment in new business class
seats, it is a valid question why first class is being retained, given that it has been
abandoned by many other airlines. There are some additional perks in first class,
such as pyjamas and self selected mealtimes, but the real demand for first class,

argues BA, is from those wealthy individuals and celebrities who wish privacy
among their own kind.
Needless to say other airlines are investing in better service. For example Virgin
installed beds and Lufthansa invested in better airport lounges.

Competitive reaction
At that time BAs rivals appeared to be pursuing an expansionist strategy ; for
example, Lufthansa brought airline service businesses including catering and
ground handling. This is in contrast to BA which appears to be retreating to its core
activities. Air France more than doubled the number of US cities which it flies to in
a single year. In fact, Charles de Gaulle airport has plenty of room for expansion
and has indicated that it intends to overtake Heathrow in the next decade.
It could be argued that BA has done all it can to increase labour productivity and
that the real way forward is to increase capital efficiency with smaller aircraft,
frequent services and high levels of service aimed at premium passengers. But
given the over capacity on the transatlantic route , it is possible that these premium
fares will continue to decline.

Mr Aylings story
Robert Ayling took over as CEO from Lord King, who was forced to leave after the
dirty tricks affair involving Virgin Atlantic, so he was always going to have a
tough job

The drive to reduce costs was difficult to achieve and he was accused by many of
being autocratic in the handling of the cabin crew strike in an aggressive manner.
Besides the handling of the strike and the tail fin episode Mr Ayling became
chairman of two major government sponsored attractions designed to celebrate the
year 2000. Together they cost British taxpayers well over $1 billion. The London
Eye millennium wheel did not begin operating until March 2000 and the
Millennium Dome was also beset by operational and financial problems. Mr Ayling
was fired by BA at the beginning of March 2000, and subsequently from both the
London Eye and Millennium Dome enterprises. It could be argued that his
successes in reducing costs and realigning the company were not generally
appreciated because of the publicity surrounding the tail fins episode, his relations
with staff, and the perception that he had diverted his attention from BA to his
other interests at a crucial time.
Required:
1. What competitive influences faced BA during the early part of Mr Aylings
period as CEO?
2. Analyze the strategic process in BA under MR Ayling. )
3. Discuss the strategic potential for BA.

Supplement

The dirty tricks affair involving Virgin Atlantic

The early history of Virgin Atlantic is one of intense rivalry with British Airways. BA

tried all it could to keep the government from granting VA permission to and from Heathrow.
Allegedly, BA's CEO John King told his PR staff to do something about Branson," thus
triggering the so-called \dirty tricks" campaign of the early 1990s. One major opportunity
for BA came in 1991, when Virgin Atlantic made a highly publicized mercy mission to Iraq
to bring home Saddam Hussein's hostages. David Burnside, BA's PR director, published a
story in BA's magazine arguing that Branson's mission was just another of his publicity
stunts. Branson sued for libel and the case went to trial in 1993. Sensing defeat, BA settled
by paying Virgin's legal fees, $500,000 to Richard Branson, and $110,000 to VA. (Branson
divided the $610,000 among Virgin's employees, in what came to be known as the \BA
bonus.")
In 1997, when BA proposed to merge with American Airlines, Virgin engaged in an
intense campaign to thwart its rival's plans |to the extreme of painting VA's aircraft with
the clear message \BA/AA No Way." (The merger fell through when it failed to clear US
review.) In 1999, when British Airways' announced it was removing the union jack from its
tail_ (an unfortunate marketing move), Virgin painted a union jack design on its aircraft
winglets (a fortunate marketing move).
The relations between BA and Virgin improved when Rod Eddington became BA's chief
executive in 2000. Shortly after taking over BA, Eddington paid a peace-making visit to
Virgin's headquarters. In November 2004 the two airlines came to an agreement over a
precious set of Heathrow runway slots for which VA had the rights but not the aircraft to
make use of.