Has Willie Walsh’s penny-pinching gone too far at British Airways?

Peter Lawson has flown the equivalent of 1½ times to the moon and back with British Airways. But after clocking up 750,000 miles, mostly in the airline's premium cabins, he has had enough. Even before last weekend's chaos that left 75,000 passengers stranded at Heathrow airport after an IT failure the 65-year-old executive believed the carrier had been "seriously damaged" by management cost-cutting.

"They've cut too far," he says. "I've been an incredibly loyal customer over the years . . . but it has got progressively worse." For Lawson, this was brought to a head in March after travelling with BA from Cape Town to Geneva via London. Each of his four flights had problems.

After he complained, it took the airline’s customer services department more than five weeks to respond. “I’m absolutely shocked at how they’ve handled it,” he says. Although he has a number of flights booked with BA over the next 12 months, Lawson says he will start using other carriers.

For many, inside and outside the company, the Heathrow incident crystallised how far consumers have fallen out of love with an airline that once styled itself “the world’s favourite”. Those feelings were compounded by delays in properly apologising for the cancellation of flights and the absence of senior managers, who opted not to face customers after a power outage severely affected its operations on Saturday.

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“It was hideous. I was with colleagues who have worked for 30 years in the airline industry and they’ve never seen anything like it,” says one BA cabin crew member. “All these people going on their holidays were just left stranded.”

The meltdown provoked a row over cost-cutting, with unions blaming BA's decision last year to outsource 700 IT jobs to India. Willie Walsh, the combative chief executive of British Airways' parent company International Airlines Group (and former Aer Lingus chief), rejected this, instead blaming the incident on a power cut that was followed by an "uncontrolled restoration of power" that caused physical damage to the airline's servers.

“The reality is the problem was created by the loss of electrical power,” says Walsh. “Not by any decision in relation to how the IT systems are managed or operated.”

Walsh, or “Slasher Walsh” as he became known by some during his time at Aer Lingus, has made a name for himself by turning round ailing airlines. The former pilot who rose to become chief executive of BA and subsequently IAG has been great for investors – shares are up more than 120 per cent over the past four years. Under his leadership, IAG has gone from operating profits of €503 million in 2011 to €2.5 billion in 2016. Earnings at BA, IAG’s largest airline, have risen from €518 million to €1.47 billion over the same period. Passenger numbers are also up.

Yet critics say his penny-pinching ways, such as cutting frills from the airline’s onboard service and clashing with crew over pay, could result in long-term damage to the brand and its reputation with customers, even before this week’s chaos.

"As financial analysts, we love BA's product. It has the densest number of seats per square foot that you can get," says Andrew Lobbenberg, aviation analyst at HSBC. "But the flip side of that is a less nice product as a consumer. The magic of management is to balance the interests of customers and shareholders and employees, and it's a subtle task. Whether they've got the balance right is a valid question."

Less room than Ryanair

The glory days of the 1980s when BA savoured its slogan as "the world's favourite airline" have long gone. The nation's flag carrier, still Britain's premium airline, has instead recently attracted new, less flattering monikers – Budget Airways and British Bareways are among them. It has also been criticised for slashing the full-service frills that its reputation was built on.

Since January, economy travellers have had to pay for food and drink on short-haul flights across Europe. Legroom has also been squeezed with BA offering an inch less than budget rival Ryanair in economy on some planes.

"British Airways was pre-eminent in the 1980s and early 1990s. But the aviation landscape has changed dramatically since then," says Chris Tarry, a London-based aviation consultant and former city analyst.

Former state-controlled flag carriers such as BA and its European rivals Lufthansa and Air France have been under pressure from all sides. Some, such as Alitalia, have gone into administration, while others including Air Berlin are struggling to turn a profit.The rise of low-cost airlines over the past two decades has seen Ryanair and easyJet tear chunks out of the European short-haul market, taking as much as 40 per cent of the business over the past 15 years.

Not content with conquering that market, no-frills carriers such as Norwegian Air Shuttle, are closing in on the lucrative transatlantic market that for decades has been dominated by the large European flag carriers and the big three US airlines, Delta, United Airlines and American Airlines.

At the same time, BA, which popularised the fully reclining business-class seat in the mid-1990s, is viewed as offering a shabbier experience to its first class and business travellers. The rapid growth of the cash-rich Gulf airlines has allowed them to steal the mantle for luxury innovation with apartments, showers and bars on their planes. US carriers, once a laughing stock when it came to premium offerings, have also been pouring money into their business-class products.

“The front of the plane service matters and BA has fallen behind,” says Lobbenberg. “The business-class seats of BA are uncompetitive. I think that challenges the brand proposition.”

BA has been busy trying to adapt. Like other full-service carriers, it has adopted many of the tactics used by low-cost airlines in the past five years, such as offering basic fares with no hold luggage and charging to reserve seats.

"I think the trend is clear, the full-service airlines have woken up to the beauty of ancillary revenue and that's not going to go away," says John Bailey, a specialist in aviation crisis communications. "They have to adapt or die, and we've seen other airlines that have died because they didn't change."

Consumer care

Walsh is widely admired for how he runs IAG, with analysts noting that it is one of the most shareholder-focused groups in the aviation industry. But some question whether the focus on cost means brand investment has been left behind. “He hasn’t shown particularly an understanding on brand positioning,” says one aviation insider.

The appointment last year of Alex Cruz, a former chief executive at low-cost airline Vueling, to head BA raised eyebrows, despite his insistence that he was not appointed to "Ryanair-ise" the carrier. He has effectively split BA in two: a budget airline focused on price that can compete with its no-frills rivals and a luxury one aimed at the lucrative business traveller market.

“When we look at economy, we are looking at a commodity product, without a doubt,” Cruz told investors in November.

Many analysts say this is a sound strategy – and necessary to BA's survival. John Strickland, an aviation consultant, notes that it is similar to the way supermarkets offer different price brands.

“They have the premium finest ranges through to the value ranges. We don’t say, ‘oh that supermarket is going downhill because they are offering a value range’. If we don’t want it we can still buy the finest,” says Strickland.

But branding experts warn that BA has to tread carefully.

“The risk from a brand perspective is when you introduce service innovations like flat beds, business class, free drinks, free meals, all the perks the service carriers have added over the years, customers get used to them. Especially in business class, they get used to it and they resent it if you start taking it away,” says Bailey.

While the airline has been trimming frills for years in economy, cuts are stretching to its premium cabins where business travellers are seeing luxury touches removed and food choices cut.

But Walsh has brushed off questions of wider damage being done to the brand through cost-cutting changes. “Change is a feature of our industry. The reality of it is the business has to change to remain relevant, not just to our existing customer base but to be relevant to a wider and new customer base.”

One BA cabin services director, who asked to remain anonymous, says the airline’s mantra has gone from being the “customer is king” to “cash is king” in the 20-odd years he has worked there. “A lot of us feel like the airline is going through a gradual, painful demise and customers are noticing it.

“We internally refer to ourselves as ‘cabin sorry directors’ because most of the time we are apologising for the state of the interiors or things that have gone wrong. It’s embarrassing,” he adds.

An era of enraged customers

Shashank Nigam, chief executive of SimpliFlying and author of SOAR, a book on airline branding, says carriers should remember that it is the "age of the enraged customer".

“I believe it is important that management set the right brand expectations and then over deliver on them. For example, if BA expects me to pay for a sandwich on a flight, then it better be the best sandwich ever served on a flight,” he says.

While BA’s Club World business seats were innovative when launched more than 15 years ago, they have not been significantly changed since, which has left them with a more dated product in the premium cabin than most of its Gulf and US-based rivals.

"It is a very clever design. They can fit in more passengers than other fully flat business-class seat. That's why they probably haven't felt any pressure to change it," says Tom Otley of Business Traveller magazine.

Others suggest the airline is protected by its strong position at Heathrow, where it has a market share of 56 per cent, and its popular frequent flyer programme. “BA offers nonstop flights to London from more destinations and at higher frequencies than any other airline. Combined with the frequent flyer programme and Avios points, this means they have a strong grip on most of the [London] market,” says one City analyst.

In April, BA revealed plans for a £400 million investment into Club World, with a focus on improved catering as well as a new business-class seat. However, critics point out that the seat – of which there are no details yet – will not be ready until 2019 and will initially be available only on its A350 and 787-10 aircraft, representing a small share of the fleet.

Another cabin crew member says she is concerned that BA thinks its strong market share means it can get away with reducing quality. “They said we’ll take off the free food for economy and invest that money into Club, but I can’t see that they have done that. In Club Europe, the product you are now getting is not an enhanced product, it is actually a reduced one,” she says.

“It is remarkable how aware the frequent traveller is of every change that is made,” says one former director of BA. “They are probably more aware of the product than most of the people in the airline whose job it is to manage the delivery.”

Up until last weekend, passenger dissatisfaction did not appear to have dented demand at BA. The airline continues to see its passenger numbers grow, rising from 37.6 million in 2012 to 44.5 million in 2016. But with customer and employee satisfaction scores, based on Skytrax and Glassdoor surveys, already among the lowest in the industry, analysts say BA will need to work hard to repair the damage caused by the IT chaos.

Walsh admits to being “clearly concerned” that the incident has damaged the brand, adding: “It’s going to be difficult . . . there are lots of angry customers out there. We will have to work hard to make sure we satisfy them.”

Copyright The Financial Times Limited 2017