Airline will emerge stronger by year-end

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By Nadia Saleem, Staff Reporter  www.gulfnews.com

Dubai : Despite the seemingly perpetual threat of industrial action and other looming crisis be it clouds or damp season, British Airways continues to power through the struggling European aviation industry.

    *  Willie Walsh, the CEO of British Airways, at the head offices in Uxbridge, Britain, on the eve of a four-day walkout by BA cabin crew. Walsh said the carrier would increase capacity by three per cent this winter.     * Image Credit: Rex Features
* Willie Walsh, the CEO of British Airways, at the head offices in Uxbridge, Britain, on the eve of a four-day walkout by BA cabin crew. Walsh said the carrier would increase capacity by three per cent this winter. * Image Credit: Rex Features

At the end of second quarter, it posted a loss of £164 million (Dh940 million) for the three-month period ended June 30 2010, due to strikes and Icelandic ash cloud that effectively shut down European airspace for five days and continued to disrupt flights even after that. However, its yields — the revenue it makes on each passenger for every mile travelled — rose 12.7 per cent as costs fell.

But things are looking up for the carrier as the European Commission unconditionally cleared its merger with Spain’s Iberia earlier this month. It is also in talks with American Airlines, a codeshare partner, to strengthen its ties, which will see it increasing revenues from United States after the US Department of Transportation granted antitrust immunity status to the Oneworld airline alliance, to allow American Airlines and four partners to collaborate more closely on transatlantic travel.

The carrier will be expanding capacity for its winter schedules. Chief Executive Willie Walsh, in an interview with Gulf News, said it would increase capacity by 3 per cent this winter, over winter 2009, with a Boeing 777-300 ER delivered this year.

Gulf News : How will you be managing capacity over the next few months in Middle East?

Willie Walsh: We believe there is some scope for capacity and we will be increasing slightly our flying there next winter, and we are looking to put larger aircraft the [Boeing] 777-300, which we have taken delivery of. The Middle East will be one of the destinations, which will use the 777-300. That with allow for some increase in capacity and that aircraft will enter into service at the end of this month, the beginning of September. We’re adding frequency to the destinations — but could see us operating a larger aircraft.

Overall we are looking at a 3 per cent increase in capacity in winter 2010 versus 2009.

What is the plan to return to profit next quarter and end of year earnings expectations?

The target for this financial year is for a break-even position. That would indicate a profit at operating level and we believe we remain on track with a combination of revenue growth and cost reduction. We have made progress so far this year and the general environment has improved since last year.

How are you going to deal with union’s strike plans over pay freeze while keeping costs down?

There is no question that we can continue to control cost and at the same time resolve the differences with Union. It’s a no on conceding ground to the Union. Its an industry that needs to control costs and financials. We are confident on both sides. [The airline] is not actually facing industrial action at this time, but we have robust contingency plans. If it does happen, and I hope that it will not, we will be able to operate 100 per cent of long- haul schedule.

How have the Middle East routes performed in the last quarter?

Middle East has areas of significant economic improvement. We have seen strongest economic recovery in Asia. Middle East is alongside or slightly behind that. The areas of continued weakness is in Europe and United States. I’m pleased with performance of all routes in Middle East and the general economic environment we are seeing there.

That has clearly been the case with all operators in the markets… we have seen some significant capacity increases.

How important is Dubai in this region for BA, especially with the new Al Maktoum International Airport in the picture?

Dubai has always been an important market and it continues to be the case. Most areas in the world like Dubai were impacted but demand has recovered well. We’re optimistic with Dubai as a destination for British Airways. We have a strong competition from Emirates, but even in the face of direct competition Dubai has performed well and we remain confident about it.

How has been the performance of premium class travel? Is an all-economy flight to certain destinations a possibility? In which markets could it serve well?

We are not considering all economy flights because we are sure that our mix of service is absolutely right for the region. There have been some Middle East carriers that are doing this, but it is not in our strategy. Demand that we see for premium traffic to and from Middle East is strong and we expect that to continue. And we will also continue to invest in that product.

Has the recent period of industrial action affected customer confidence at all?

Some of our customers were clearly upset by the fact that their travel plans were disrupted and we are taking action to ensure that we can operate full schedules if we face further industrial action. I’m hopeful that won’t be the case and we’ll be able to avoid further industrial action. I think the fact that we have been able to do so much of our flying and negate the impact of the strike action by the Unite is clearly significantly positive, and has helped to address the issue of confidence.

What we are seeing now looking forward is that our bookings have not in any way been affected by the experience customers had seen during the industrial action. Indeed I think the fact we were able to operate such a significant part of our schedule has given people confidence. We believe that by committing to operating a full long haul schedule we’ll be able to restore any loss of confidence that some small numbers of our customers may have had.

Are you looking at possibilities for consolidation in Middle East?

We haven’t had any discussions but it is clear that the Middle East is an area we are looking at and an important market, and one that globally will be an important market for the future. We haven’t had any discussions with anyone but when we are looking the development of the industry overall in the next 5-10 years, we believe that the Middle East is going to play an all-important role and that makes its carriers a more attractive proposition than they have been in the past.

We are not having any discussions but it is a market that is clearly important and a region that has a lot of opportunity. Clearly one of the things we will make sure we do is to have a presence in that region for opportunities. I have no doubt that there will be scope for opportunities at some stage in the future, but there are no plans at this point.

Having experienced a series of challenges including the world recession and the ash cloud and industry battles… what do you think are your current challenges?

Well pleased you reminded me of what some of the challenges were because when I look back to 2009 and think of some of the challenges we met then, clearly 2010 looks like a much less challenging environment. The biggest challenge, without any questions, has been the global economic environment and we are really pleased to see that recovery is evident in most of the key markets. All of the indicators that we are seeing at the moment in all of the major markets that we operate are positive but there are concerns in the background, particularly about the European economy and to a lesser degree the US economy, about the strength of the economic recovery. While we are not seeing anything that would cause us to be concerned about the recovery, we are hearing a lot of people express concerns, so I think one of the challenges that remains is the global environment and just how strong or fragile that recovery is.

Regarding volcanic ash, I would like to think that the reaction by the regulators will be more measured in the future than it was back in April, though obviously volcanoes are still likely to be a feature. I think a number of regulators panicked and didn’t fully understand the risk that industry faced as a result of that. I believe that it was unnecessary to close European airspace and that aircraft could have continued to fly without any risk right throughout that period, and I hope that the regulators recognise this and don’t make that mistake going forward.

Clearly the industry remains in a challenging position because of the high oil prices and I think these prices are likely to continue. Although they are about $75 a barrel today, we have seen oil at over $80 a barrel and I think with evidence of an economic recovery it’s likely that the oil price will be over $100 rather than $50. The industry has had to adjust to increasing oil prices and I think that is something we will have to deal with again going forward.

I’m confident that even with all these challenges we are well able, and we have demonstrated we are well able, to continue to make progress and return British Airways back to healthy profitability.

There has been talk about the ash cloud compensation also, how are you going to deal with this?

I don’t believe airlines will receive any compensation from governments, and although I believe there is a strong argument that we should, I think it is highly unlikely that we will receive any. In terms of us paying compensation to our customers, we estimate that we have paid over £25 million pounds in direct compensation to customers that were affected as a result of the closure of airspace. These are costs that clearly were encouraged because our customers were unable to travel as a result of the closure of the airspace.

I think it has been unfair on the airline industry to bear these costs considering the situation was completely out of our control, and was made worse by regulators in Europe taking the decision to close airspace when I believe it would have been safe to operate. However, I don’t believe we will receive any financial compensation as a result.

About the airline mergers, Lufthansa has been acquiring many airlines and some have been companies like BMI who have been quite strong here in the recent past. When do you think you can enter this competition?

I think consolidation will be a feature of our industry over the next few years and as you quite rightly point out Lufthansa has been acquiring a number of airlines around Europe, and we have seen Air France/KLM merge take a strategic stake in Alitalia. This is why I am pleased that we are progressing with our merger discussion with Iberia which we hope to conclude by the end of this year. This will make BA and Iberia much stronger in the European and global environment, and will mean we can start consolidation in Latin America. With the announcement over the weekend of LAM and TAM coming together, consolidation is very much going to be a feature of the industry in coming years and I believe it is part of the solution to the structural problems that our industry has had, and therefore I am very supportive of the move towards global consolidation. I think British Airways is well placed at the moment and the merger with Iberia will strengthen our position. I think it makes both British Airways and Iberia attractive for further consolidation which will be our objective as we move forward.

What is you main focus for investment at this time?

Our main focus for investment at the moment is in new aircraft. We have a number of new aircraft being delivered to us this year the Boeing 777-300’s, and we will take delivery of more777’s next year. In 2012 we start taking delivery of the Boeing 787’s and in 2013 the delivery of the Airbus A380.

We are investing billions of pounds in fleet renewal and expansion over the next few years. We are also investing in upgrading the cabins onboard our aircraft.

We are putting a new First cabin on most of our long-haul aircraft and that will continue over the next 12 – 18 months. That’s a £100 million investment programme in upgrading our First class cabin on BA aircraft, so clearly quite a lot of investment is going into new aircraft.

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