Willie Walsh
British Airways executives were here this week to brief analysts and media on the latest financial results--a pre-tax loss of £292 million (US$465 million) for the six months ended 30 September. CEO Willie Walsh and CFO Keith Williams touched on a number of topics, including capacity (BA's winter capacity will be down another 6 percent year over year, with Boeing 777s replacing larger 747s on some long-haul routes) and manpower reductions (the airline announced 3,000 more positions would be cut by March 2010). Williams said the airline is "seeing some signs of stabilization," including improving yields (with long-haul premium yields, in particular, "tracking where they were a couple of years ago"), higher load (seat) factors and recovering premium traffic. "The premium volume decline has steadily improved since the bottom in February," he said. "In October, premium volume was down 1.4 percent" versus a year earlier and down "about 10 percent" from the "peak" two years ago. Williams also noted the "very clear distinction between long-haul premium and short-haul premium," with long-haul premium traffic actually up about 1 percent year over year in October, while short-haul premium traffic remained down by about 20 percent. Meanwhile, Walsh restated the case for industry consolidation. He expressed "surprise" that the Delta-Northwest merger did not trigger additional M&A in the U.S. market and explained that "you don't need 500 or 600 airlines of reasonable size operating around the globe to generate the level of competition that consumers require to have a competitive environment. If you look at profitability of our industry, it is not sustainable. You cannot have an industry that destroys capital. Something has to give." Walsh fielded questions on these and other topics. Excerpts follow.
On transatlantic routes, are your corporate customers traveling in premium, or are they downgrading to economy class?
For long haul and short haul, we have seen diverging behavior. On short haul, people are traveling in the economy cabin. On long haul, it has been more the case that they are just not traveling. And when they do travel, you are seeing a shift in the mix within the premium cabins; less people buying the fully flexible fare. So the overall yield in the premium cabin has been affected by that shift to restricted fares. We have seen structural changes in consumer behavior. In previous downturns, we have witnessed short-term corporate travel policies changing--people temporarily moved, on short-haul routes, from the premium cabin to economy, and then they quickly moved back. This time around, we have seen corporate travel policies for short-haul introduced and applied rigidly and permanently. That is why we call it a structural change. For us, short-haul premium is an important revenue stream, but long-haul premium is a much more important revenue stream. We believe long-haul premium volumes will recover as general economic conditions recover.
If premium long-haul yields are effectively where they were prior to the economic downturn, what are your thoughts about potentially increasing capacity as opposed to cutting?
We have only got back in the last few weeks; I wouldn't celebrate yet. We are very clear that the only reason yields are recovering to where they were is a result of capacity coming out. You only get an opportunity to manage yield when your seat factors are high. Long-haul premium seat factors got back to over 70 percent in September. In October, it was around 71 percent or 72 percent. If we were to put capacity back in, you would see the seat factors fall again and you would see the yield fall as a result. It is a careful balance. By taking capacity out and getting seat factors up, we have managed some yield in what is still a weak demand environment. So there is still some time to go before we would envisage putting capacity back in.
On bmi [ which Lufthansa ownsand now is considering options], can you talk a little about how an acquisition would work in terms of moving it from Star Alliance to oneworld, and whether you would operate it on a separate operating certificate?
The main interest we have in bmi is their slot position at London Heathrow. If the opportunity arose for us to acquire bmi, it would be to integrate that into our operation. So the alliance issue would not be an issue at all. Bmi is a small player in the Star Alliance, so I wouldn't see that as having any impact on our antitrust-immunity application [with American Airlines and Iberia] or on any of the other activities we are involved in. That is the reason we decided to make our interest known in a public way, in case people were to assume that our ATI application or [ongoing merger] discussions with Iberia would preclude us, either in terms of capacity or regulatory issues. We see no major regulatory impediments to us acquiring bmi. We are interested, and we wait to see what Lufthansa will do with that business.
What are your sensitivities with regard to the price of oil?
It is clear that big twin-engine aircraft come into their own in terms of fuel efficiency and operating cost once you go beyond $60 or $70 a barrel. Our focus has been to use fuel-efficient aircraft on the longer routes and the more inefficient aircraft on shorter routes. It is a complex tradeoff in terms of aircraft utilization, volume and demand. In this demand environment, replacing 747s with 777s is absolutely the right thing to do--taking capacity out and putting much more fuel-efficient aircraft into the operation when fuel is where it is today, $76 or $77 a barrel. I will say something that people will think is a bit strange, but I think $70, $80 or $90 oil will actually help the industry. I would not have been upset to see oil continue at $147 because we were well hedged, and the industry needs some tough medicine. Everything points to that, and it will be a different environment, which should lead to better behavior and hopefully sustainable, acceptable levels of profitability for the industry going forward.
How likely is it that low-cost carriers like Ryanair start long-haul service in the short- or medium-term?
I don't think it is likely, and if you are a shareholder in Ryanair, I'd advise you to sell if they do. Long haul is different than short haul. The cost differential [Ryanair] was able to identify on short haul is not the same on long haul. They get much greater use of their aircraft than the traditional industry players. Long haul is a more difficult environment. But somebody will try to do it. [Ryanair CEO] Michael O'Leary has talked about doing it for five years and now is talking about doing it in two years. But there are a couple of things that make it difficult: Aircraft availability is not there, and the cost differentials are not as significant on long haul. No doubt someone will try; I would argue that Ryanair shouldn't. They are an excellent company that should stick to their core activity. They have not run out of places to fly to.