Interview: Willie Walsh

“We call it E15,” says Willie Walsh. “It starts with an E and there are 15 letters in its name.” The chief executive of British Airways has more important matters to worry about than pronouncing Eyjafjallajokul, the Icelandic volcano whose eruption this year grounded European flights. His sales plunged £1 billion last year leaving BA with a record £531 million loss; it has faced US and UK fines for price-fixing; the £3.7 billion pension fund deficit exceeds the company’s stockmarket value and the UK airline is dogged by labor disputes.

Yet Walsh - a pilot who rose to become an airline boss - regards attack as the best form of defence. Rather than firefight at home he will this year expand British Airways’ business by linking with Iberia, the Spanish carrier, and American Airlines. BA has been seeking a US partner since the 1980s – wooing United Airlines and then USAir before first opening talks with AA in 1997 – and Walsh describes the eventual deal as a major strategic milestone. “It is a very significant development and one which we have pursued for some considerable time,” he says. “It is more important strategically than it ever was in the past.”

Even before anti-trust regulators gave the final go ahead for the airlines to swap data, 7,500 staff have been undergoing training at Heathrow, BA’s main London airport, Dallas and New York. Those terminals, plus Miami, Chicago, Madrid and London Gatwick will be the hubs in a network flying daily to 500 destinations in 100 countries and serving 70m frequent flyers.

A PROSPEROUS ALLIANCE
The alliance will generate £5 billion of annual sales and account for a fifth of transatlantic traffic, making BA and AA closer competitors to the Star and Skyteam alliances that include Delta, Continental, United and Air Canada. “We believe the consumer will gain significant benefits,” says BA’s Irish-born chief executive.
The code-sharing deal will mean passengers booking on one airline could find themselves flying on the other’s planes, but while it will provide a third of British Airways’ revenues, it remains an alliance rather than a merger with both companies remaining independent. “It is not the creation of a legal entitity,” admits Walsh. “We fully recognise that alliances do not deliver the same scale of cost synergies as a merger but there are clearly cost benefits available.”
Yet Walsh is attempting a simultaneous merger of British Airways with Iberia to create one Spanish registered group where he will be boss. But even within that union, the airlines will operate independently. “We made it clear from the start that we did not intend to merge the two operations to make a single airline but rather retain the operating companies and, importantly, retain the brands,” he explains. “We’ve got two very strong brands.”

He prefers to invest in those brands than create a new one – using the Air France merger with KLM as a model – but still believes synergies will reach E500 (euro) within five years as costs are cut and revenues rise. The Spanish carrier brings valuable links to Latin America and the joint company will become one of the world’s top-five airlines. And with Britain’s new Conservative government cancelling plans to build a third runway at Heathrow, Walsh sees Iberia’s Madrid base as a valuable new hub in his network.

DELIVERING ON SYNERGIES
“We’ve got a lot of confidence in our ability to deliver on the synergies,” says Walsh. “This isn’t rocket science. We’ve watched what other people have done and delivered. The networks complement each other in a significant way.”

However Walsh will have no help from his Spanish partner on one key problem – labour relations. BA has a long history of trouble with pilots, ground staff, caterers and other staff who regularly threaten services. This year a series of strikes by cabin-crew has cost the airline well over £100m as passengers switch to rivals.

While predecessors have given in to the airline’s tough unions, Walsh believes he must make a stand. But he blames the local representatives of the Unite union rather than their national negotiators. “What we’ve faced over the past 15 months is a dysfunctional relationship between one branch of Unite and the senior officials,” he says. “The joint general-secretaries can sit down with us and negotiate successfully on all the issues but they struggle to convince the branch that has been engaged in the industrial action.”

Even so, Walsh reckons cabin-crew costs can be cut by £160m a year as highly-paid staff are replaced with cheaper recruits. “Further cost reductions could, and should in normal circumstances, be possible if we could reach agreement, but that has not been possible.”

The cabin-crew strikes have cost BA even more than the eruption of Eyjafjallajokul which halted most European flights for six days until regulators admitted they had been too harsh. “The volcanic ash that never was affected us by £90m to £100m,” complains the BA chief executive. A quarter of that was to meet EU regulations requiring airlines to provide hotels and meals to stranded passengers and Walsh is seeking to recover that sum from governments. “We believe we have strong grounds to pursue compensation,” he states. “There’s a strong precedent in the closures of US airspace following 9/11.” He does not believe the EU regulation was intended to cope with such situations and says: “We’ve had some constructive dialogue at the European level. We do believe the case is strong. We will be able to recover some impact of the volcanic ash in due course.”

So despite a full in-tray of problems, Walsh remains an optimist. And as ticket sales recover from recession-hit levels he is already looking beyond the Iberia and American Airlines deals. “I’ve long been a proponent of consolidation”, he says. The US agreement allows for change over time he points out, while on the Spanish merger he adds: “Governance was one of the key issues to get right. We need to allow for further consolidation.

“The synergies have been identified. This makes us more attractive in terms of future consolidation. This is not the end of the game.”