Aviation Strategy Issue No: 78 April 2004 British Airways: back to the Future Size and Shape. CONTENTS Analysis ollowing the events of September 11 2001, British Airways Fannounced the introduction of a "new" strategy to cope with the changes in the parameters of the business - it was not actually new, BA: an update but a reiteration and reformulation of the strategic thinking of the on FSAS 1-4 previous few years. We have reviewed this strategy several times in the past two years (see Aviation Strategy, January and March, Virgin Express: 2002 and April, 2003) in an attempt to see if the company might be a disappointing LCC 5-7 on track with its plans. Here is another update. In March, the company held its annual Investor Day where it out- SN Brussels: lined current thinking and progress. As usual the outcome is more Sabena’s almost of the same - BA is on track to deliver the Future Size and Shape successful successor 7-9 (FSAS) envisaged two years ago -- but given the way the industry has failed to recover fully to pre-September 11, 2001 levels, the full Virgin Express and delivery is going to take more time than originally expected. SN Brussels: strategic The bedrock of the FSAS strategy is simplicity. All incumbent differences on merger menu flag carriers have an inherent complexity of operations that has built 9-10 up over the past eighty years to the point where it has been all too easy for new entrants to muscle in on what were mono- or duopo- Briefing listic routes and services. From the basic assumption that the com- pany had to simplify this dynosauric business, follows the current Delta Airlines: strategic priorities: maintain the best UK-based network and sched- deteriorating financial position ule; deliver the "customer promise" consistently; deliver a superior 11-15 experience for premium customers; develop a high performing organisation; strengthen the company's reputation; deliver a com- petitive cost base; strengthen the balance sheet - and finally provide Databases 16-19 returns for share- holders. FSAS TARGETS Airline traffic and financials The management Achieved by Target end was adamant that Dec ‘03 Mar ‘04 Aircraft available the FSAS strategy MPEs has not just been Manpower Regional trends about costs. In one reductions 12,652 13,000 sense we may say Orders that - to produce £m some awful Manpower cost metaphors - it has savings 460 450 PUBLISHER been an attempt to Distribution cost turn the oil tanker on savings 212 100 a sixpence, or to Procurement / Aviation Economics force the evolution of IT savings 123 100 James House, LG, the stegosaurus into Total 795 650 the 21st century. The 22/24 Corsham Street Disposals 723 900 company has had to London N1 6DR Tel: +44 (0) 20 7490 5215 Fax: +44 (0) 20 7490 5218 www.aviationeconomics.com e-mail: [email protected] Aviation Strategy Analysis SELLING COSTS AS A PERCENTAGE which in itself has led to selling OF REVENUES efficiencies. At its worst, selling 20% costs as a percentage of revenues approached 18% in 1995. This proportion will have been halved 15% by the end of March 2004. Currently travel agents account 10% for some 65% of all bookings, online through ba.com and call centres around 12% each with the 5% remaining 10% coming from other Aviation Strategy 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 online agents. The company is is published 11 times a year anticipating that by March 2007, by Aviation Economics at the beginning of cut costs to stay alive: but it has tended to cut ba.com will account for nearly 30% of book- the month "back office" costs while investing strongly in ings, there will be a shrinkage in the propor- the front end product that the customer sees. tion of bookings from call centres and a min- Editor: The first element of the strategy is almost imal change in the proportion of bookings Keith McMullan in place: BA embarked on a major fleet re- from other online engines. Even then, tradi- [email protected] equipment programme to bring the fleet in tional agents would account for at least 50% line with the new liberalised air service envi- of bookings. The bookings from ba.com and Contributing Editor Heini Nuutinen ronment. That meant downsizing many call centres overall account for 28% of book- routes to the 777 from its ageing 747 fleet. It ings, which means that some 72% of book- Subscription enquiries: then moved on to disposing its older Boeing ings go through the four major GDSs. The Julian Longin short haul fleet, replacing it with the flexible company has recently renegotiated deals [email protected] A320 family. This re-equipment is almost with the four major GDSs to reduce transac- Tel: +44 (0)20 7490 5215 over. There are currently only 16 aircraft on tion costs by a further £80-90m. order between now and 2008. Over the past This channel shift is bound to accelerate. Copyright: few years it has also gradually been rolling Domestically, the company is enforcing this Aviation Economics out the "dusk" product on long haul business through a renegotiated 1% on travel agent's All rights reserved class - the innovative sleeper service - and commissions, an emphasis on e-tickets, with incorporating the fourth class of the premium a charge for physical tickets, the introduction Aviation Economics Registered No: 2967706 coach class service. of the facility to pay by debit card on ba.com (England) In the belt tightening announced early in and increasingly, a service fee for wanting to 2002, the company set itself cost saving tar- speak to someone. The increasingly appar- Registered Office: James gets of an annual run rate of £650m by end ent effect of the internet phenomenon is to House, LG 22/24 Corsham St FY March 2004. In all areas it appears to reduce the cost, time and effort involved in London N1 6DR VAT No: 701780947 have been on or above target. In fact the resolving easy questions. The company's call annual running cost saving by the end of centres have been cut back dramatically in ISSN 1463-9254 March will have reached £850m. the past three years with a reduction in The opinions expressed in this publica- tion do not necessarily reflect the opin- ions of the editors, publisher or contribu- Calls UK CALL CENTRE VOLUMES tors. Every effort is made to ensure that Distribution channel shift (m) the information contained in this publica- tion is accurate, but no legal reponsibility 20 is accepted for any errors or omissions. The largest percentage difference from The contents of this publication, either in 16 whole or in part, may not be copied, targets is in the area of distribution. BA stored or reproduced in any format, print- ed or electronic, without the written con- says it has achieved a cost saving of 12 sent of the publisher. some £212m per annum against a target of £100m. There are several elements to 8 this disparity. At the end of 2003, the com- 4 pany reduced agent's commissions in the UK (to a 1% booking fee) and in the US to 0 zero; the success of ba.com has resulted 2001 2002 2003 2004 in a significant distribution channel shift, April 2004 2 Aviation Strategy Analysis staffing levels from 2,400 in 2001 to 1,400 in so that now some 60% of its net debt is at 2003/4. Calls to the BA call centres have fall- fixed rates, compared with only 30% in en from 17m calls a year in 2001 to 10m cur- FY2001, with a forecast average rate of 4.5% rently. for FY2005. A major part of the success that BA can BA also reined back on its capital expen- claim in the past two years is the develop- diture programme - although it was, in any ment and roll out of ba.com - the internet case, coming to the end of its fleet re-equip- based booking system. The company has ment programme, (see chart, below). put in place an unparalleled system for any of the major carriers. It is easy and simple to Revenues and costs use: it allows the user to find the lowest fare for the trip he wants with minimal fuss. BA In the immediate aftermath of the has been enhancing the system with this September 11 atrocities, we anticipated that very fact in mind. It now allows the passenger there would be a relatively swift recovery in to confirm seat allocation, and to check in. It industry traffic levels. BA also assumed this will shortly allow the passenger to print out in its forecasts then and plans to return to a his own boarding pass. Throughout the 10% margin. In fact, there has been a far design the company has emphasised sim- more damaging impact of the terrorist attacks plicity: and has been rewriting the convoluted on demand - not least of all the significant booking restrictions to make it even easier for increase in security measures, constraints on the punter to understand what he is buying. travel imposed by authorities and the weak economic environment. The Gulf War, the Finance Bali bombing and SARS added even further to the general malaise. BA's FSAS plan effectively provided for After September 11, 2001 there were modest downsizing in activity. This, com- severe concerns that BA would not have the bined with the weak industry environment, funds to survive without coming to the capital lead to a near £2bn drop in annual revenues markets for funds.