BA Chief Talks Global Air Game

British Airways is in the midst of reshaping its business and returning to profitability. BTN editor David Jonas recently traveled to BA headquarters in London to discuss with CEO Rod Eddington global corporate travel, the changing distribution landscape and ongoing security and market liberalization developments between the United States and European Union.

BTN: What is your current outlook for premium travel across the Atlantic?

Rod Eddington: The North Atlantic in particular always is susceptible to external threats. Broadly, our premium numbers have looked better during the past few months, but there still is a lot of pressure across the airplane on yields. We have said that revenue this year would be up 2 percent to 3 percent, which is hardly a robust recovery, but more optimistic than we have been.

BTN: What is your sense from large corporate clients about their forward-looking traffic patterns?

Eddington: We are beginning to see more economic activity, which is behind the improvement we are seeing in premium numbers. The investment banks are much more positive compared to where they were 12 months ago. Some of our other corporate customers are seeing the same thing. The economic challenges of Germany and France still are with us more than ever, but the good news is that U.S. and U.K. economies are pretty robust compared with the past few years.

BTN: A product of the economic challenges is industry consolidation, most notably the nearly completed merger of Air France and KLM. Have the competitive concerns of that merger been cleared up by the concessions that were agreed upon?

Eddington: It is clear that a combined Air France-KLM is a much more substantial competitor for us, so clearly I am concerned. Having said that, Brussels is very thorough in these matters and has come up with remedies that I won't argue with. I also won't argue with the principle. There are too many full-service network carriers. Philosophically, consolidation is the right thing.

BTN: So, what are the next steps in this trend, specifically for British Airways?

Eddington: All I know is there needs to be more consolidation, and if BA is to be a significant player in Europe, it needs to be part and party to that process. We would like Swiss to come into Oneworld, but it has to be on terms we are comfortable with. We have an interest in Iberia—9 percent and two seats on the board. The Spanish market is important to us, and the relationship with Iberia is a strong one.

BTN: Consolidation of another sort is occurring between the largest travel management companies. What is the impact on major airlines?

Eddington: It is part of the business that also naturally will consolidate. The game has changed as technology and distribution have evolved, but there still is a strong role to play for travel agency groups. At the end of the day, these big companies work with large corporations that have preferred partnerships with travel suppliers. As consolidation occurs among airlines, the big travel companies will look to have sensible working relationships with those major airlines. The way in which these travel suppliers earn their compensation also has rapidly changed. It recognizes the changes in our business, in their business and how technology links them together. Just as we looked carefully about how we sell and distribute, the travel providers have had to ask themselves the same questions: What added value do they offer to big corporate customers, and how are they reimbursed for what they deliver? We are not looking to cut the corporate travel provider out of the loop, as long as the customer wants to use them. It is good that stresses and strains get resolved. The BA-Amex relationship, for example, was ultimately settled in a way that I welcomed.

BTN: You mention compensation. BA first eliminated commissions but has since partially back-tracked. What is the end game?

Eddington: As you know, in this market we pay a 1 percent commission. What we are seeing increasingly, which I believe is the right thing, is that effective travel management organizations are moving to service fees. The customer values these organizations because, in an expert way, they do a lot of work for corporates that they could not do themselves. Increasingly, I hear from large corporate travel providers, as well as smaller niche players, that they are doing as well on service fees as they did in the old days. It is a difficult transition for many, but the industry was a lot less efficient 10 years ago than it is right now. The smart travel providers have used service fees and technology to carve out an important piece for themselves.

BTN: Regarding the deregulation of global distribution systems, does it make sense for suppliers to pay for bias in the GDSs, given the transparency created by the Internet?

Eddington: The market will answer that for us. If you move to bias displays, what will that do to the way the customer sees you? One of the things customers look for from the third-party providers is an unbiased view of what the options are. You need to be very careful about all of that.

BTN: Is it likely that major carriers will begin dropping out of GDSs?

Eddington: A good question. Part of it will depend on how the GDSs behave, and part of it will be how the individual suppliers view their competitive position.

BTN: Switching gears, how global is corporate travel management, and how can British Airways respond to the needs of companies that are taking their travel programs to the global level?

Eddington: Travel management is increasingly global. The big travel companies recognize that their biggest clients need global support. Some of the consolidation is a product of the bigger companies recognizing that. Airline alliances are another example of providing customers with a global travel solution. BA's strength is its global network. There are occasions when we make a pitch as BA, make a pitch with one or two other Oneworld partners and times when it is a Oneworld pitch. The big clients, oftentimes in conjunction with their travel management provider, tell us how their needs are changing and ask us how we can address those needs.

BTN: Travel managers at some of your global corporate clients told BTN that British Airways has not been as competitive on pricing across the Atlantic. Is that a fair criticism?

Eddington: We certainly are not the cheapest on the North Atlantic, but then again we have not been the beneficiary of billions of U.S. dollars in state aid. I have no doubt that some of the money that has been tipped—and continues to be tipped—into the accounts of all the major airlines in the states ends up as cheap fares on the North Atlantic. We get no state subsidy. I understood the first $5 billion. It is the next $10 billion to $15 billion, and the other things, that I have trouble with.

BTN: Which brings us to the current E.U.-U.S. aviation relationship. The United States appears unwilling to grant cabotage rights to European carriers. Is that a deal breaker?

Eddington: The single most important issue to me is market access in the United States. The Fly America program cuts significant chunks of the U.S. market away from European airlines, yet American companies are not denied similar market access in this country. For example, British officials regularly travel to the United States on U.S. airlines. Their U.S. opposites are not allowed to make those journeys on British Airways. Those things simply are unacceptable. The U.S. all along has championed liberalized capacity to its markets, and I admire them for doing so, but it has not shown that same liberalized view toward market access. It is an inconsistency and absolutely must be addressed. Then there is the issue of ownership and control. Those restrictions have plagued global aviation.

BTN: Can you envision a scenario favorable to BA that includes opening Heathrow to additional U.S. competitors?

Eddington: Yes, as long as we get U.S. market access and there is a genuine liberal deal on the table. We compete with United and American at Heathrow already and Delta, Continental and Northwest are just down the road at Gatwick anyway. These guys are in the market, but I don't mind complete access to the U.K. market as long as we have complete access to the U.S. market. We believe that as part of a liberalized market on the North Atlantic, which would include the opening up of Heathrow, we would get antitrust immunity with American.

BTN: Regarding U.S.-European cooperation on security matters, do you feel, on the whole, that U.S. demands are reasonable and practical?

Eddington: It is a global problem and governments need to work together. U.S. security agencies need to be well-coordinated so we can march to the beat of one drummer in North America, not 22. Secondly, there needs to be clear discussion about who will pay for security initiatives. We need consistency. The Europeans particularly are sensitive to unilateralism in this. There is no doubt that the Pan Am disaster over Lockerbie produced a coordinated European response. It was thought through and implemented. You get much further in life working alongside someone than telling them what to do.

BTN: Back to the business traveler, and considering the aggressive cost-cutting programs underway at carriers around the globe, how do you strike a balance between restoring airline health and maintaining the value proposition for premium travelers?

Eddington: Organizations obviously are reviewing their travel policies. First class travel no longer is on the agenda for big corporates. BA launched the super-economy World Traveller Plus a few years ago, which was timely. It is doing increasingly well for us. It is a good seat in a discreet cabin, and the customers love it. Some customers are trading up from economy and some are trading down from business. Corporates are looking to intelligently stretch their budgets and see which products are appropriate for their travelers.

BTN: Has the widespread reworking of corporate travel policies forever changed the nature of business travel?

Eddington: The only reasonable answer is yes. Has it changed as irreversibly on the long haul as on the short haul? Only time will tell. Another development is the unparalleled transparency in the buying process brought about by new technologies. That has changed irreversibly.

BTN: Has BA done enough to combat the advance of the low-cost carriers?

Eddington: It is a never-ending journey. There are those who thought they would drive us out of the short-haul game, and that clearly is not happening. We have had to be smarter about the short-haul business, and we no longer can be all things to all people in those markets. We have improved our unit costs substantially and done all those types of things to get ourselves back in the game.