More Cuts "Inevitable," BA Chief Says
May 21 2008
While American Airlines was announcing broad capacity cuts and a new baggage surcharge on Wednesday, British Airways was passing the morning in a more celebratory spirit: Unveiling a $30 million renovation to its terminal at Kennedy Airport in New York.
Portfolio.com caught up with British Airways chief executive Willie Walsh to get his perspective on the future of American Airlines, and what the industry can do to fight back against scorching fuel prices.
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Willie Walsh: No, not in the immediate future. In fact we've already taken a decision that we will not be taking any capacity out during the summer period. I think it's inevitable that as we go into the weaker demand through the winter period that we will take some capacity out. But quite honestly, I felt that it was inevitable for carriers like American, and I expect others to follow suit.
Portfolio.com: There's been talk about a joint venture between American and British Airways, and potentially Continental. Are those talks ongoing? Do you think that the state of the airline industry will make it easier to get that regulatory approval for that type of joint venture?
Walsh: Yeah, absolutely. I think the economic conditions that we're seeing now with high oil prices will drive the industry toward consolidation. ... These discussions take place against a backdrop of a difficult economic environment and high oil prices – we've never seen this before. Typically when we see weak economic situations you see a low oil price. So this is uncharted waters for us. And I think it's going to drive more consolidation.
Portfolio.com: Was there a moment you can point to when you realized where oil was going? Did you anticipate this?
Walsh: I never, never thought I'd see oil at the prices we're seeing today. I didn't think that we'd see it go through the $100 barrier and I hope we don't see it at $200 because it's not just going to impact on the airline industry. Fuel is very significant part of our cost base. It's about 35 percent of the British Airways cost base, and increasing. ... The great thing from a British Airways point of view is that we're coming off the back of very strong financial results. We reported profits of about $1.7 billion last Friday. We have a very strong cash position, very strong balance shape, we're probably in a better shape than we've ever been.
Portfolio.com: You mentioned potential capacity cuts later in the year and inevitably fare increases. Are there any other things that BA is plotting out to mitigate this financial pressure?
Walsh: One of the key things that we were doing — and its disappointing that we're not going to see the benefits of this — is we're investing billions in new aircraft. We have orders for the Boeing787 Dreamliner and the Airbus A380. So it's very disappointing to see the Boeing program delayed, because these aircraft are very fuel efficient and it would be great to see them in the fleet today.
Portfolio.com: Will those delayed deliveries be reflected in ticket prices?
Walsh: I certainly hope so. ... The profitability we announced last Friday will be wiped out by the increase in fuel price we've seen in recent times. It's inevitable that consumers will see some of the high energy prices flowing into ticket prices. It has to happen; otherwise the industry is broken.
Portfolio.com: Do you see a joint venture with AA significantly changing this for both airlines?
Walsh: It's always been our ambition to get a closer relationship with American, and it's been hampered by our inability to secure antitrust immunity at what we would consider to be an acceptable price. I think the consumer would benefit from that closer relationship; I think we would be able to provide a better and more seamless integration of our flights from a consumer point of view. ... But these are ongoing discussions, and I suspect they will go on for some time yet.
