One-On-One With British Airways CEO Willie Walsh: Corp. Cutbacks, Carrier Pacts

British Airways CEO Willie Walsh this month spoke with BTN senior editor Jay Boehmer to discuss premium travel, the nature of corporate client cutbacks and the status of new business agreements with other carriers.

BTN: From your first-half results, you seem somewhat optimistic about the revenue outlook.

Willie Walsh: It's a strange one in that we reported a 92 percent fall in profitability but it was generally perceived as a positive performance. It just shows how difficult the environment is. We believe you've got to price in the cost we see in the industry, particularly high fuel. Our strategy has been around yield and price, at the expense of volume. We're not chasing volumes. We're managing that tradeoff between the price and the volume well. That came through in the first-half results, where our profitability at an operating level was better than the market had expected. Our guidance in terms of full-year revenue was more optimistic than the market had expected.

BTN: BA is heavily vested in financial services companies as corporate clients. Is that all accounted for in the outlook?

Walsh: Banking represents about 30 percent of our corporate client base. It has been impacted, particularly since the collapse of Lehman in the beginning of September. The trends there are still unclear because we're still seeing the general reaction to the turmoil in the banking industry. It will take some time to see that stabilized. We weren't exposed to the collapse of Lehman from a corporate point of view—it wasn't a corporate customer. We also didn't have much financial exposure: We had one fuel-hedge policy that was worth about $7 million, so our exposure to Lehman was quite minimal from that point of view. But the financial services industry is an important part of our corporate client base, and as you would expect it has impacted premium traffic. We reported 8.6 percent down in September and 9.2 percent down in October. That may have surprised the market. I think the market was expecting a higher, double-digit decline in October, so the traffic stats were slightly more positive than people had expected.

BTN: In addition to cutting travel, are you seeing clients trade down from business to economy?

Walsh: Not as much on our long-haul, and we've been monitoring corporate travel polices. We have seen some of our clients extend the stage length for economy versus business, but we haven't really seen that impact on our long-haul premium. I think the value of the product that we offer to our corporates is still important. People have a very significant benefit from being able to sleep in a flat bed as opposed trying to get some sleep sitting in a regular seat. For the long-haul market, we haven't really seen that impact on our travel patterns. For us, it's more that people are just cutting back on travel, not trading down on the long-haul side. On the short-haul side, I think we've seen both: We've seen people cut back on travel and also move away from the premium cabin.

BTN: Do you plan on adjusting capacity further to mitigate that?

Walsh: We're not going to necessarily take out any premium capacity, certainly on the long-haul. Our target has been around just taking general capacity out, so we haven't had a focus on premium versus non-premium where we've cut back on capacity. We took just over 3 percent capacity out for the winter, and we're looking at a 1 percent capacity reduction next summer. That's typically taking some frequency out where we have multiple frequencies. Where possible, we wanted to protect the network.

BTN: What's the status of your proposed merger with Spanish flag carrier Iberia?

Walsh: It's taking longer than we had expected. We announced it at the end of July, and the intention at that stage was to progress as quickly as possible. The main complication has been for Iberia to understand the complexities around defined-benefit pension schemes. They don't have one and haven't had one for many years, so that's delayed progress because clearly they need to understand the accounting issues and actuarial issues. I think they've done that, but it's taken us about two months just dealing with that and we would now expect to start making progress around the general discussions of the merger issues, in particular things like merger ratio and corporate governance. Our original intention was to do it by the end of March next year. That's not going to happen now. Realistically, we're probably looking at June or July of next year.

BTN: That's when you'd begin integrating?

Walsh: Yes. Clearly we've got to agree on things like merger ratio and corporate governance, and it would have to be approved by shareholders at both companies, so there's a lot of work that needs to be done, but I still believe it's the right thing for BA and the right thing for Iberia.

BTN: What's the status of your antitrust immunity application with Oneworld partners American Airlines and Iberia?

Walsh: We've had the advantage of following on from Star Alliance and SkyTeam, so we had a fair idea of what the U.S. Department of Transportation was looking for. One of the additional areas of our focus has been on what has been the impact of Open Skies since it was introduced at the end of March. That's in process, and we remain confident that we will get approval for that application.

BTN: How committed is BA to its recently launched OpenSkies subsidiary?

Walsh: It's played out pretty much as we thought, even though the environment is very different. The plan for the business was to break even in the third year, and that's still the plan. Clearly, the external environment is much tougher than it was, but we've learned a lot from it. We're pleased with what we've seen so far, and we'll monitor the business, but like for every airline, the environment is much tougher than it was a year ago, and it will remain so for the next 18 to 24 months.