Chief executive focuses on the long term and insists industrial unrest won't ground the airline, writes SIMON CARSWELL

THE FRAUGHT industrial relations battle between British Airways and its cabin crew has less to do with addressing outdated staff practices and more to do with ensuring the long-term future of the business, according to the airline’s chief executive Willie Walsh.

Walsh said that the future growth of the airline was at stake in the 16-month dispute with cabin crew, which shows no signs of ending.

The Irish chief executive – who spoke at a business alumni event at Trinity College – has been warring with cabin crew through a series of strikes since March. Walsh has refused to back down, keeping BA jets in the air during four waves of work stoppages by cabin crew.

He has hired extra aircraft and crew, trained volunteer attendants and relied on legal challenges to block the strikes, in an effort to prevent one of the most protracted airline disputes in Europe bringing BA to a grinding halt.

Walsh, who is in his fifth year as chief executive of BA, explains that the airline’s employee costs are second only to fuel costs, which totalled £2.4 billion last year – an increase from £1 billion in his first year at the airline.

This, he said, was one of the structural changes being experienced in the airline industry that were forcing the company to radically overhaul the airline’s costs.

Walsh points to the cost-cutting he introduced after taking over as chief executive of Aer Lingus in 2001 as an example of the benefits that come from such strategies.

“The story that people tend to talk about at Aer Lingus is the cuts, but the reality is that we made the airline more efficient, which allowed it to expand,” he said. “We started flying a hell of a lot more people at lower prices to more destinations in a little over three years that I was there.”

Cost-cutting is a reality of a changing industry that is undergoing serious “structural” shifts in terms of falling revenues and mounting overheads, said Walsh.

There are about 1,060 airlines in the world today, he said, of which about 570 were formed in the last 10 years. Yet during that time almost 200 airlines went bust and the sector lost money in seven of the 10 years. The industry has lost more money over the past decade than during any other period, he said.

“It was probably the worst period and yet you had over 500 new airlines come into the business,” he said. “When you see a lot of new entrants coming into an industry challenging the established carriers, you have got to respond and to some degree that is what all airlines have to do.”

BA’s revenues fell by £1 billion, or 11.1 per cent, last year. Walsh shaved almost the same amount – £987 million – off its overheads.

The merger with Spanish airline Iberia has created “synergies” of £400 million, he said, which was considerable for the two airlines but only part of the solution. “Anyone who thinks that consolidation sorts out all your problems, it doesn’t but it is part of a solution. The real solution, the biggest part of it, is tackling the internal issues, tackling the individual airline cost base,” he said.

Walsh is determined to keep BA aircraft flying through the summer as the Unite trade union, which represents the cabin crew, plans more strikes to undermine the airline’s plans for further changes in work practices.

BA has cut full-time staff numbers by 12,000 in Walsh’s five years in charge at the airline. Further changes will reduce costs by £160 million in 10 years and by higher amounts in later years as the airline plans to grow further.

“We are doing this so we can grow the business. You cannot shrink a business to success. You can shrink a business into survival or improve profitability in the short term but longer term you have to pursue growth,” he said.

Walsh has not felt it necessary yet to start dismissing employees for striking but it’s an option to prevent future stoppages at BA.

Any striking staff member dismissed during the 12 weeks of an official dispute can automatically made a successful unfair dismissal claim, he said, which would lead to a financial cost for the airline.

This is why he believes the union ended the June strike just two days short of the 12 weeks.

“They were concerned that if they had gone beyond that 12-week period, I would consider dismissing people who were taking part in the strike,” he said.

Walsh, who has been described as “pugnacious” by the British media over his tough position in the dispute, believes he must take steps now to fix BA’s costs before his options are reduced in future.

“It would be very easy for me at BA to fudge the issues that we are dealing with with cabin crew because it is not going to create a massive problem in the short term,” he said. “But longer term, 10 years from now, people will look back and say why didn’t you tackle these things back then. I think the economy is going to be tough for some time.”

Walsh believes that it is “regrettable” that the Irish Government didn’t take steps earlier to fix the costs at Aer Lingus, which were out of sync with falling revenues. He believes his successor as chief executive of Aer Lingus, Dermot Mannion, ceded too much ground to the unions to get the airline’s IPO off the ground. This was “absolute madness”, he said.

As a result, the airline lost the momentum he had built up after he took over as chief executive following the 9-11 attacks, overseeing a harsh cost-cutting plan under which a third of staff departed.

Ironically, he believes Michael O’Leary and Ryanair may have ended up ensuring the survival of Aer Lingus through the recession by taking a 29 per cent stake.

Had O’Leary not made a bid for Aer Lingus, the airline would have pursued Mannion’s plan of buying new long-haul aircraft. “That would have been a disaster because there isn’t a big long-haul market out of Ireland,” he said.

“Trying to develop a long-haul market out of Dublin in the current market is absolute suicide; even in the best of economic times it would be very difficult.”

As a result of Ryanair’s stake-building, Aer Lingus maintained their cash reserves as Ryanair “paralysed” the airline, blocking Mannion’s expansion plan. While the financial performance was poor, the cash pile “kept them going”.

Given the structure of the Aer Lingus shareholding, Walsh finds it hard to see how BA or a large international partner would find value in the airline without agreeing some sort of strategic deal with O’Leary and Ryanair.

The likelihood of BA ever tabling a bid for Aer Lingus is low. “I wouldn’t rule it out but there are lots of other options and opportunities out there,” he said.