British Airways chief executive Bob Ayling is entering the most crucial period in his career. The airline is expected to lose over £200m in the year to March and its share price recently hit an eight-year low at 261.25p.
Ayling insists this is not because the airline has failed to perform but because capacity in the market has greatly exceeded demand.
To cope with the market conditions, Ayling has embarked on an ambitious plan to improve profitability and will surely stand or fall by the results.
A key part of the strategy is increasing revenue via a £600m investment in its product.
This includes a fourth cabin, World Traveller Plus, between BA’s business and economy cabins which is aimed at full-fare-paying long-haul economy passengers.
The airline will also introduce the world’s first fully flat business-class bed on long-haul flights for BA’s Club World passengers. Ayling’s strategy is to make BA the number one choice for travellers.
While these product improvements have been widely applauded, it is the second part of the strategy which has caused most controversy.
To cut costs, BA is scrapping commission from January 1 next year and replacing it with fee payments which start as low as £5 (Travel Weekly January 31 and February 7).
Agents are expected to top up their payments by charging a fee to clients for their services.
Reaction to the commission plan has been mixed. While some have quietly congratulated BAfor making a forward thinking move, others are outraged, claiming the airline is biting the hand that feeds it.
Travel Weekly’s postbag has been full of letters from irate agents, many of them making personal and unprintable attacks on Ayling.
Meanwhile, Manchester agent Jill Waite is currently trying to organise a week-long boycott of the airline in May and Ayling may get a lukewarm greeting from grassroots agents when he speaks at the Scottish Passenger Agents’ Association’s 70th annual dinner in Glasgow on Thursday.
The product
Ayling is adamant the airline’s investment is absolutely vital to future prosperity and he is sceptical about rivals’ ability to match its product.
“British Airways is the best in Britain and one of the best in the world,” he said. “We need to invest in products and people and we are making the single biggest investment in fleet and product.
“Someone always has the edge in product quality and design and then the competition catches up.
“But it will take quite a while to catch us up. The patents on the design belong to BA and, anyway, it took four years for anyone to catch up with our first-class product. People will talk big but BA is ahead.”
I asked him whether he was concerned that more people might trade down to the new super economy class, World Traveller Plus, than trade up from discounted economy.
“If people trade down then that is an opportunity for us,” said Ayling. “The business market is telling us that it doesn’t want to be confined to just the business cabin and this is a direct response to what corporate customers want.”
But isn’t it a confusing proposition offering people four cabins on flights?
“We’ve got World Traveller for economy passengers and incidentally, we are not turning our back on economy passengers because we are investing £150m in this product. We are simply reducing our exposure in the transfer economy sector where people want discounted tickets.
“Then we’ve got World Traveller Plus with a more individual service if that’s what the business traveller wants. Club World will have the in-flight bed and First Class and Concorde will be revamped.”
How long does he have to make the strategy work?
“It is already bearing fruit and the recent third-quarter results proved that we’d turned the corner.”
He talked earlier about investing in people but BA is rumoured to be making 10% of its worldwide workforce of 65,000 redundant over the next few years.
“We must continue to be efficient,” said Ayling. “I think there will be fewer people working for BA in three years’ time but I’m not prepared to put a figure on it.”
The agent debate
BA’s confusing strategy over commission since November 1997, which included the introduction and axing of the controversial Performance Reward Scheme, has done little to help the relationship between agent and airline.
“We’ve learned a lot of lessons with the UK trade,” conceded Ayling. “Like anyone, we can always see that things could have been done better. Now we have an excellent sales team which has approached the situation intelligently, with an open mind, and listened to what people have said.”
But is axing commission really necessary?
“Everyone in the travel business is going to see more change in the way products are distributed than they have ever seen before,” he said.
“The Internet revolution is genuine and spreading like wildfire. There are no barriers to entry and how do we cope with that?
“Agents perform a vital function and we stand or fall together but there is a commission structure which bears no relation to the work being done and we need to ensure agents are paid fairly for what they do.”
I point out that this seems like a convenient argument for an airline which wants to save millions in commission payments.
“The new system is not happening immediately and we want to hear what people say but we have had a very positive dialogue.
“The world of the agent is changing and unless they are competitive, they will go out of business. We have to identify what the agent does and then fairly remunerate them.
“All change is difficult. Human beings don’t like change.
“But the world is changing and we want a long-term balanced relationship with agents.”
Does he feel it is a realistic proposition for a high-street agent to start charging clients?
“Yes it is,” said Ayling. “Provided the agent offers a service which is valuable. People pay a booking fee to theatres; the consumers are willing to pay for that.”
I asked Ayling if he had a message for those agents which are angry with the airline and worried about their futures.
“I know what it is like to run a small business,” he said. “It was a firm of solicitors but there was no limited liability.
“I have the highest level of empathy with agents. But no business can survive on false economics because, at the end of the day, it will collapse like a pack of cards.”
Personal attack
In addition to the personal attacks from agents, Ayling has been the subject of much criticism in the media as the airline has tried to come to terms with tumbling profit and cost cutting.
Predictable headlines such as “Ayling airline” and “Ayling morale” have been plentiful. But Ayling claims not to have been personally affected by it all.
“This is not a job you do for popularity,” he said.
“If you look back at the press cuttings, both Lord King and Lord Marshall had rough episodes when they were trying to do the right thing.
“A person has to be willing to take the exposure inevitably involved in running BA.
“Malicious comment is not worthy of anything but the wastepaper bin but serious critical comment is worth having whatever you do. We want to know things directly from customers. Their personal comment is essential.”
Ayling strongly refuted the suggestion that many City analysts had turned against him.
“Every one of the major analysts have written favourably or very favourably about our position. The few that have criticised have been from small banks which have got an interest in supporting our rivals.”
The future
Within five years, Ayling expects around half of BA’s ticket sales to be through the Internet, although not necessarily at the expense of agents.
“A lot of people will have a Web phone and work with travel agents or the Net direct to buy electronically,” predicted Ayling. “There will be next to no paperwork.
“At the moment only a tiny percentage of BA’s sales go through the Internet but this will rise.
“Last week Go (BA’s low-cost airline) sold 64% of its tickets on-line. A year ago it was just 7%-8%.”
Ayling claimed Oneworld was the premier airline alliance and would strengthen further in the future. Japan Airlines has been invited to join but is yet to respond while Ayling conceded that Canadian Airlines is likely to move over to rival Star Alliance, following its purchase by Air Canada.
BA is currently filing for codeshare rights with American Airlines but the relationship seems unlikely to go further as Ayling is not prepared to pay the price of giving up a large number of Heathrow slots in return for a full-blown alliance.