Credited with resurrecting Irish carrier Aer Lingus, Willie Walsh this month officially took the reins as British Airways' CEO. Before making his first public speech to a travel trade group—last week at the Association of Corporate Travel Executives global conference in London—he spoke with BTN editors about competition against U.S. carriers, ramifications of renewed aviation talks between U.S. and European Union regulators and BA's position in the market.BTN: What are BA's plans for a new premium-class offering?
Willie Walsh: We will be announcing some things on that within the next six weeks. We will be making a significant, multi-million pound investment in our long-haul products. BA set the trend with the introduction of flat beds in business class. A lot of airlines—not all—have tried to catch up and some still struggle to get there. To be fair, a number of our competitors have made significant improvements to their products. We are at a stage now where we want to move to the next step in that development. It is important to remain ahead of the competition. It is time to address the issues that customers have commented on over the years.
BTN: Meanwhile, how do you reconcile corporate customers' need for complete content and the airline's need to reduce distribution costs?
Walsh: The Internet has been a major benefit to airlines in recent years. My experience at Aer Lingus was very much focused on making the Internet the primary distribution channel. That was largely a result of the shape of the business, where it was predominantly short-haul, largely point-to-point and largely in direct competition with low-cost carriers, with Ryanair in the main. The Internet probably has been one of the largest areas of cost reduction in recent years, and there are more opportunities there for all airlines. It brings the relationships with GDSs into flux, and I have no doubt that people will respond to that, but a large-network, full-service carrier like British Airways will always have a relationship with the traditional global distribution system. We intend to work closely with our suppliers to ensure that is a hugely beneficial relationship, but we will continue to focus on the development of ba.com. I do not see the Internet becoming the primary sales channel, as it did at Aer Lingus, but it has and will become a very important distribution channel for all airlines. If traditional channels become too expensive, then you are likely to see a reduction or restriction in the inventory that is made available.
BTN: What is your outlook for business travel demand?
Walsh: If you look at our last statistics from September, you would have describe them as good, with overall traffic up 7.8 percent and capacity up just over 5 percent. Significantly, premium traffic was up by 11.6 percent. Based on those results, there is no reason for us to be pessimistic about the outlook for the rest of the year. We are sticking to the guidance we have provided on our financial performance, in which we said revenue would be up 5.5 percent to 6.5 percent. We see no reason to adjust that at this stage.
BTN: Have you seen changes in how BA relates to its large corporate clients?
Walsh: Nothing suggests a major change in the near term, but one of the things we do well is sticking close to our customers and finding out their needs and wants.
BTN: Several U.S. carriers have announced that they are shifting capacity to the transatlantic market. What is the impact on BA?
Walsh: When you look at Delta, in particular, announcing their intentions to be leader across the Atlantic…but they are bankrupt. It is a failed airline, which is a horrible thing to say about what used to be a fantastic airline. It is a pity to see it struggling the way it is today, but when you see an airline like that, unable to compete domestically in the U.S., targeting international expansion—not where it can be profitable, but where it can lose less money—you have to question what is going on and it is a concern for us.
BTN: Have you adjusted your strategy as a result?
Walsh: We believe we can compete, and compete effectively. It is annoying to see a carrier like Delta dump capacity into international markets, under the protection of Chapter 11. That does distort competition, but we will live with that, compete with that and be successful doing so.
BTN: What is your overall assessment of the spate of airline bankruptcies in the United States?
Walsh: I do not think it has made the air transport industry in the U.S. any stronger. It has not helped the situation. It is not an airline issue in the U.S., but an industry issue. I do not think it was ever intended to be used the way it is being used today. It distorts competition. If we are going to see fundamental change in the industry, people are going to have to address the problems that are inherent in their own operations. Chapter 11 discourages people from genuine restructuring and encourages bad behavior. It would have been better for the industry to see some failures in the United States. I still believe it is needed. Until we see some genuine market forces come into play, you will still see a weakened U.S. airline industry.
BTN: What is the current status of British Airways' financial position?
Walsh: The financial position of BA is much healthier than it was in the immediate aftermath of 9/11. The balance sheet is much stronger, but there still is much work for us to do. We are making steady progress toward our goal of a 10 percent operating margin.
BTN: Is BA on the acquisition trail, as consolidation takes hold throughout the European aviation industry?
Walsh: To be fair, Air France-KLM has been a success. The results are better than most people would have expected. They have demonstrated that there are mergers that can work. It still is very complex, given ownership and control issues. If genuine consolidation can take place and the regulatory issues can be addressed, you will see even greater benefits. We want to participate. It is important to be positioned to do so. The targeted focus we will have is not consolidation for the sake of it, but where it makes us better and plays to our strengths: worldwide network and delivery of customer service. It would have to make us a stronger player in every aspect of that business, not just bigger. There have been plenty of examples of people just focused on size and they have gotten themselves in trouble. We have learned from mistakes that others have made and learned from mistakes that we have made. We have acquired quite a number of airlines, and if you look at our track record, it has not been very positive. Some of the investments we have made have generated a financial return, but they have not developed the way we would have liked. This is something that is critical. It is important that we get it right. We want to participate when the time is right and that time is in the near future, though we are not active with anything at the moment.
BTN: Negotiations for a new air services agreement between the United States and European Union recently resumed. What are your expectations?
Walsh: I have felt that since the European Court of Justice ruling in November 2002
(BTNonline, Nov. 5, 2002) that it probably would take between three and five years to see change affected. We are now within that timeframe. I would hope that the European Commission and the EU are clear that what they need to do now is get an agreement that will take the transatlantic operating environment into the 21st century. There is quite a bit of work to do. We are very keen to see the issues of ownership and control addressed. We need to see regulatory convergence and to see the market open up. I am hopeful that the negotiations now and in November will lead to an agreement that could be used as a template for agreements in all areas of the world. It is a critical issue. We must have the right sort of agreement and not just movement for the sake of movement.
BTN: Absent meaningful progress, are there ways to enhance the British Airways-American Airlines alliance?
Walsh: I do not think so. We have looked at antitrust immunity in the past, and on each occasion, the price we would have to pay was just too high. I have not seen anything in the interim that is likely to change that.
BTN: Even with the advances by your competitors' alliances?
Walsh: I have not seen anything recently that would give us any cause for optimism that the price this time around would be any different than the price last time around. The relationship we have with American is a good one. It is a pity we cannot work more closely together, but the price on that has to be one that makes sense. We are not going to pursue it when there is a penalty associated with a closer relationship.