Willie Walsh
Asked during a briefing this week whether British Airways is changing its corporate sales strategies to replace lost business from the financial sector, CEO Willie Walsh told The Transnational: "Our sales teams are always active in the market. We have taken the view, and I think we have been consistent, that we have a superior product and will always maintain a differential product superiority on key business routes." Walsh was more direct in answering other questions from analysts and reporters about weak premium traffic trends and the banking sector's impact; where the airline can cut costs; merger and acquisition activity among European airlines (including potential cooperation with the Compagnia Aerea Italiana investor group that is bidding for Alitalia); and his belief, opposed by pilots, that antitrust immunity with American Airlines would support job growth.
Do you see a leveling of the decline in premium traffic?
We have limited visibility. What we have reported was a 2.2 percent increase in premium traffic in August, and at the time of releasing our traffic statistics we added a note of caution because we felt that the market might see that as an overly positive indication. August is not normally a strong month for business travel and corporate travel. We had a very strong premium leisure performance in August. September was broadly in line of what we expected. We saw an 8.6 percent decline in September and then a 9.2 percent drop in October. The 9.2 percent was less than what the market had expected; a number of analysts predicted a double-digit decline in premium traffic in October. What we saw, in the immediate aftermath of the collapse of Lehman Brothers, was the booking patterns from particularly U.K. banking corporate customers were very low, as you would expect. There was a lot of uncertainty in the banking industry, and we saw the booking patterns change completely. Those bookings have now stabilized, but it is a double-digit decline on last year in terms of bookings from the banking corporate sector, and we believe that there is still some underlining uncertainty in that industry. We would expect that to improve from the current booking trends that we are seeing. But it is far too early for us to give you any certainty going forward. We don't believe it is a case of trading down. There is no evidence of them trading down from premium cabins to non-premium cabins. It is more of a case where these people just aren't traveling.
If the financial markets can stabilize, are you sure that the demand will come back to where it once was?
I think it will. We have committed to introducing all-business-class flights from London City to New York in autumn next year. We have reviewed that decision and have spoken to a lot of corporate clients and potential corporate clients, and the feedback is very positive. They want us to do that. I think there will always be a strong corporate market. Banking is an important part of that, but it is not the total market. It surprises people that banking represents about 30 percent of our corporate customer base. A lot of people feel that it is closer to 80 percent. It has certainly improved a lot since governments took decisive action to stabilize the sector. It will take a bit of time before we see traffic volumes to return to the levels that they were at.
Where are we likely to see the greatest decline and adjustment in your cost base during the next 12 months?
A number of our costs have been impacted by currency. We have quite a lot of dollar-denominated costs, and that has clearly been hit as a result of a very significant strengthening of the dollar versus the pound. We've also got quite a bit of euro-denominated costs. All of our air traffic control charges in Europe are in euro, so that clearly has been a major factor. Another factor is airport charges, particularly charges at our home base of Heathrow. Pricing in the London airport market is regulated ... there is very little that we can do to offset that particular charge. The areas that we will focus on clearly going forward will be on labor costs, distribution costs and what is shown as "other," which includes disruption costs (where we are benefiting from a much higher standard of performance in the operation). But the main focus will be on all areas where we can control our costs, and that is limited.
One of your competitors seems to be buying anything with wings. Does that put pressure on you to compete?
No, it doesn't. Consolidation activity around Europe has definitely accelerated. Our focus remains on Iberia in Europe, with a secondary focus on developing a commercial relationship with a new Alitalia--not as it is currently structured, but with the company that is proposed following the takeover of Alitalia by the CAI consortium. Lufthansa has been spoiled for choice and has acquired a number of stakes in a number of carriers, and is certainly associated with consolidation activity with a number of other carriers like Austrian and SAS. We believe that while size is important, it is not the most important factor. Any consolidation that we pursue will only be done if it can strengthen the performance of the business, and that means letting a lot of opportunities go by because, quite honestly, these carriers are in very poor financial health. The prospect for quick turnaround is very limited with most of the airlines that we have looked at. So we are talking to Iberia about a merger--I think that is a good deal for British Airways a good deal for Iberia. We are talking to CAI about a commercial relationship with Alitalia, with no interest in any equity. Air France and Lufthansa both offered to invest in both of them and have indicated that they would be prepared to take about a 20 percent stake in the new company, but we have made it clear that we are not interested in any equity participation. The proposal that we have with Alitalia is quite different, but we believe it is a very credible proposal and actually plays to their long-term ambition of reestablishing Alitalia as a premium European airline. We see little reason to pursue any airlines that are available in the European market at the moment. Outside of Europe, we are still challenged by ownership and control restrictions that make acquisitions and mergers very complex from an air service agreement point of view.
What will be the impact of the change in [U.S. presidential] administration?
We see it as neutral, to be honest. Obama has been quite vocal in relation to ownership and control, but we have no proposals in relation to any changes to ownership and control. We believe that the proposed joint business with American Airlinesis positive from a job security point of view, because it will strengthen American and allow American to compete more effectively--with British Airways--against the other two immunized alliances. It is a relationship that is mainly based on revenue synergies and improved revenue flows that is a result of making the oneworld alliance more attractive relative to the other two immunized alliances. It will have little to no impact on jobs, so we would see it as being generally positive toward job security, and overall we see the change in administration as being neutral to the ATI application.