Why Ayling’s last legacy will make or break BA

Bob Ayling’s strategy for cutting seat capacity will either catapult BA ahead of its competitors, or lead it down a road to self destruction, says Alan Mitchell

If rumours are right British Airways could soon have a new chief executive in the form of Rod Eddington, head of Ansett Australia and a heavyweight within Murdoch’s News Corporation. If he does join – the rumours are still being officially denied – he’ll be arriving at a time when things are beginning to look good (at last) for BA.

The North Atlantic market is reviving; business travellers seem to be returning to BA; the stalled partnership talks with American Airlines are being cranked up again; and internal morale seems to have improved since former chief executive Bob Ayling’s humiliating departure.

Ayling’s time at BA was marked by a series of bold initiatives, each one justified by the best of marketing rhetoric about customer service, global branding, total brand experience and relationship marketing. But none have lived up to their promise.

Take customer service. From the days of the “World’s Favourite Airline” BA led the airline industry in recognising that the service delivered by frontline staff is critical to the brand’s reputation – and to “repeat purchase”.

But Ayling tried to lead the pack on customer service at the same time as cutting costs and fundamentally altering BA’s psychological “contract” with its employees. Back in 1996, when BA first announced the need for “a second transformation”, including plans to cut £1bn of costs, Ayling publicly admitted that BA’s employees had “a lack of confidence in us, their managers”.

“We have to face up to this and improve,” he said. A year later, the cabin crew strike proved how right his analysis was, and how he had failed to act upon it. Two weeks ago, BA’s chief financial officer Derek Stevens was still banging the same drum. BA is constructing a “virtuous circle” of high staff morale, leading to excellent service, to satisfied customers and to strong profitability, he told a Merrill Lynch aviation investor symposium.

Brilliant in theory. But is it any closer to happening?

Another of Ayling’s strategies was for BA to become a global player. With 60 per cent of BA passengers being non-UK nationals, Ayling was absolutely right when he said that the era of “national carriers” is over and that BA needs to be a global player. Those controversial tail-fin designs at least had the merit of being bold and mould-breaking. But actually, the initiative was superficial. BA was pretending to be the global visionary; the real prize for global branding goes to founders of BA’s rival Star Alliance – Lufthansa and United Airlines. Their network of blue-chip airlines now serves every major market in the world, dictating the globalisation pace – including BA’s disastrous attempt to marry American Airlines. The tail-fins talked globalisation. The Star Alliance did it.

A third plank of Ayling’s strategy was to deliver a superior total brand experience “from contemplation [of a journey] to reflection”. As far back as 1996 Ayling was saying “we must look at the whole travel experience, from the decision to go, to arriving home”. But again, it has hardly happened.

One possible reason why is because it implies building a very different business, one focused not on the operational necessities of catapulting heavy steel tubes through the sky, but on bundling many different services into a single co-ordinated solution for each customer.

Now BA is gambling the business on another piece of marketing theory: the relationship marketing ideal of winning and keeping the customers who deliver the highest lifetime value.

BA was among the first to realise just how skewed its profit profile was, when early analysis of its loyalty card data revealed that a core user base of about 1 million people, the frequent flying business traveller, accounted for about half of its 30 million flights, and much more than 50 per cent of its profits.

Since then, BA has become obsessed with this segment: its profits depend on them. But there is a problem with this focus. Grafting the logic of a niche marketing strategy onto what is, effectively, a mass-market operational infrastructure creates all sorts of tensions. Like the fact that 85 per cent of BA’s passengers fly economy, and that BA needs them to fill its planes, and profitably.

To ease these tensions BA is breaking new ground, cutting capacity (by 12 per cent over the next three years), buying smaller planes (so that it has fewer seats for low-margin oiks at the back), and creating a separate brand for the oiks (its discount venture Go).

But there is a downside. As BA admits, its strategy means that, in a cut-throat market, unit costs must go up. It just hopes and believes that profits will go up even faster.

For a real niche operator that may be true. But in a mass-market, unit costs and low prices are important, and if your unit costs are higher than your rivals’ costs you have to charge more to break even. Contrast BA’s approach to Lufthansa, which is adding capacity: a massive 15 per cent this year.

Looking back on Ayling’s legacy, we can see that, perhaps because he tried to do too much too quickly and failed to take key constituencies with him, textbook marketing rhetoric got impaled on practical, operational business realities. Usually, marketers try to formulate marketing strategies that are in tune with underlying business realities. With his latest smaller planes strategy, however, Ayling started changing the shape of the underlying business to fit his marketing strategy – his obsession with the premium traveller.

This was his boldest bet yet. Defending it in his last formal results presentation to City analysts, Ayling declared: “BA has the right strategy, it’s about customers, and it’s working.” If he is right, in a few year’s time BA will be sitting pretty with happy customers (the ones that matter, anyway) while rivals like Lufthansa desperately struggle with capacity they can’t sell. In that case, the new chief executive will look like a genius – thanks to Ayling.

If not, BA will be a perfect example of the road to business hell being paved by good marketing intentions.

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