Will BA take off again?: BA has just endured one of its worst years, but is confident it now has a recovery strategy in place. Danny Rogers outlines the strategy and the marketing plans

The past year has been British Airways’ annus horribilis. From tailfin design U-turns and cabin crew strikes to cost-cutting exercises and the latest poor financial results, the BA brand has been through one of its most testing years since privatisation. It culminated in chief executive Bob Ayling’s announcement that the airline will slash capacity by 12% over the next three years, in spite of a growing world airline market.

The past year has been British Airways’ annus horribilis. From

tailfin design U-turns and cabin crew strikes to cost-cutting exercises

and the latest poor financial results, the BA brand has been through one

of its most testing years since privatisation. It culminated in chief

executive Bob Ayling’s announcement that the airline will slash capacity

by 12% over the next three years, in spite of a growing world airline

market.



Ayling - formerly BA’s chief marketer - says he intends to re-establish

BA as the premium global airline brand, focus on wealthy and business

passengers and ditch all unprofitable operations. It’s an appealing

theory, but changing the direction of the world’s biggest international

passenger airline is not going to be easy.



To put the new strategy in perspective, it’s worth looking back a few

years. As the UK emerged from recession in the mid-90s, the outlook was

looking rosy for BA. Hitting record profits in 1996, Ayling prudently

embarked on his Business Efficiency Programme (BEP), which set targets

to save pounds 1bn by 2001. He also began to reveal plans for an

increasingly global airline, based around international alliances and a

bright new image.



Three years on, however, BA’s performance speaks for itself. Profits

plummeted from pounds 580m in 1997/98 to pounds 225m last year, and its

first quarter results for this financial year have followed the same

downward trend; first quarter profits fell 84% to pounds 23m. City

analysts now predict the airline will do well to break even this

year.



The poor figures are due in part to a tough trading climate. The

economic slowdown in Asia last year seriously cut revenues and had a

knock-on effect in North America. The big airlines have switched

capacity to the US, creating excess supply and half-empty planes. Above

all, route deregulation has created a burgeoning low-cost airline sector

and a price war in European air travel.



Nevertheless, Ayling’s chosen direction has delivered a series of extra

body blows to the BA brand.



His cost-cutting programme has led to industrial unrest, most

prominently in the bitter cabin crew strike during the summer of 1997.

At the time of the strike, BA launched its controversial Project Utopia,

in which the airline played down its ’Britishness’ in favour of ethnic

liveries.



Just as the strike was being settled, Baroness Thatcher famously threw

her handkerchief over a model of the new design in disgust, to the

delight of the tabloid press. Branson characteristically exploited the

situation by announcing he would put the Union Jack on his Virgin

Atlantic fleet.



The controversy raged on until June this year, when Ayling eventually

announced that at least half the fleet would once more ’fly the

flag’.



Lastly, Ayling’s much-publicised alliance strategy - based around a

tie-up with American Airlines - is now all but dead in the water.



On top of all this, it could be argued that Ayling’s biggest failure is

a marketing issue: BA’s loss of high-revenue business and first-class

customers to rivals, specifically Virgin.



It’s all a far cry from the late 80s and early 90s, when BA left behind

its moribund state-owned rivals in Europe. At that time, its Union Jack

livery represented British quality and reliability worldwide. In 1995,

BA spent pounds 1.4m and had Saatchi & Saatchi hire Hugh ’Chariots of

Fire’ Hudson to direct ’Island’, one of the most expensive ads ever -

which spoke volumes about its confidence.



The contrast between then and now has led many in the media to call for

Ayling’s head to roll. However, the City, which instinctively backs his

cost-cutting approach, remains supportive. It is perhaps because the axe

is poised but steady above his head, that Ayling has now decided to

embark on his most high-risk strategy to date.



Despite previous forecasts that BA would grow capacity by 2% next year,

the airline will now dramatically scale down. It will do this by axing

unprofitable routes, switching to smaller aircraft to boost revenue

yields and jettisoning unprofitable customers.



For BA’s marketing director, Martin George, this means a new focus. ’We

want to be the best, not the biggest, and want far less business which

is driven by price alone,’ he says.



His challenge is to maintain an essentially populist brand - the

’world’s favourite airline’ - while getting rid of a tranche of rank and

file customers. An unenviable task.



’It certainly needs to be handled sensitively, but the only segment of

customers that we actually want to get rid of - those transferring to

our flights on short-haul routes - probably didn’t even choose our brand

anyway so we won’t offend them,’ he says.



George is relying on a three-pronged approach to fulfil Ayling’s target

of raising revenue per customer by around 25%.



First, there is a determination to return to BA’s tradition of

innovation.



At the annual results press conference in May, Ayling personally

announced a pounds 200m investment in new ’lounges in the sky’ for

long-haul business-class travellers. By the time next year’s results are

announced, all BA’s Club World cabins will feature seats that turn into

beds and face the back of the aircraft. They will also be plugged into a

multi-channel entertainment system and the internet.



BA is bringing in similar improvements to its other types of cabin. Club

Europe will be overhauled in September, Concorde refurbished by next May

and even World Traveller will get a pounds 150m refit over two

years.



Second, and tied in with new product development, comes a carefully

tiered communications strategy.



BA has already kicked off its first corporate advertising campaign since

the 80s. The TV ad, featuring PJ O’Rourke, has proved a big success, and

is a clear return to pride in BA’s Britishness.



After one more burst of O’Rourke this autumn, BA will begin rolling out

a series of ’customer benefit’ campaigns. This tier of communication is

likely to include new TV campaigns and will concentrate on product and

service improvements.



The final tier will be the continuation of regular World Offers

campaigns; promotions to sell off seat capacity, but designed to keep

this essentially price-led message very separate from the premium

positioning of its new product.



The challenge for M&C Saatchi, BA’s ad agency, is to continue to hit the

right tone with its creative treatments. Just as its ’Red Eye’ ad of the

late 80s summed up the aggressive business culture of that era, M&C now

needs to anticipate the spirit of the next decade.



George believes this will be about balance, innovation and service. He

is also striving to develop a fresh media strategy. ’The premium

audience we are focusing on is the most difficult group to target. They

are busy, watch little TV and are immune to advertising messages. We

need to find new ways of penetrating their psyche.’



Hence the third prong, a significant shift toward relationship and

database marketing techniques. ’Our correspondence with customers grows

by 15%-20% a year and we need to take advantage of this by being

proactive with our dialogue,’ says George.



BA has already made changes to its Executive Club scheme. In a bid to

retain and win back premium customers, it is no longer demoting

long-term Gold Card holders when they start travelling less frequently.

They are allowed access to lounges even when not flying BA, and are

allocated a personal contact at the company.



Much more fundamentally, by the end of this year BA will have completed

Ocean Wave, a huge project which consolidates 20 existing customer

databases into one central information source. This will enable BA to

bring up the travel history of individual customers at check-in, and

anticipate their requirements.



The database improvements will be integrated into a new online marketing

drive, and much of Executive Club communication will soon be switched

from traditional mail to e-mail.



’While traditional advertising is necessary to keep our brand at the

front of mind, we must be able to communicate to our audience what’s in

it for them personally,’ says George.



He accepts that all these efforts in marketing communications will be

useless unless better service is delivered to the customer, but says

there is a renewed push to bring staff onside with each initiative and

increased investment in the ’Putting People First Again’ staff training

programme.



It’s all admirable stuff, and if anyone can turn BA’s brand around it

may well be George. He is only 36 and has a convincing combination of

intellect, enthusiasm and energy. But just how sound is the strategy

that underpins the new marketing drive?



Among leading observers the jury is still out. Jonathan Wober, transport

analyst at Deutsche Bank, gives a typical response: ’BA certainly had to

do something, but I’m cautious about the capacity-slashing approach.



Excess demand and lower yields is an industry-wide problem. If BA trims

back and its competitors don’t, it could become both smaller and

higher-priced, while the majority of its passengers remain economy

class.’



Here Wober touches an important nerve. For, while BA starts scaling

down, Virgin is pursuing the opposite strategy. It intends to continue

to expand capacity and is confident that its profits will continue to

grow.



Virgin added Shanghai as a destination earlier this year and will begin

flying to Chicago in November. It will then compete on nine out of ten

of BA’s most popular routes.



’It is both rare and curious that BA is planning a capacity reduction at

a time when analysts are predicting 5% growth in international flights

this year,’ says Paul Moore, Virgin Atlantic’s head of PR. ’But if BA

turns its back on economy passengers we will happily step in and pick

them up.’



What should be even more worrying for BA is that economy passengers

aside, Virgin has proved more successful in winning over the very

audience that BA is now targeting. In this sense, Moore argues that BA’s

thinking is fundamentally flawed.



’The statement that you are concentrating on premium customers is

short-sighted, because today’s economy-class customers may be tomorrow’s

business and first class. Many of our customers have switched because of

recommendations from friends or family. The secret of our success is to

keep all our passengers happy, regardless of where they sit,’ he

says.



Of course, as the challenger brand and a fraction of its size, Virgin

will always have one marketing advantage over BA, by continuing to

position itself as the people’s champion.



Its leaner operation also makes it fleet of foot. So even where BA does

innovate, Virgin can quickly copy the innovations and implement them

across its fleet much more quickly than BA can update its own

planes.



For this reason, the winner in this battle will be the airline which

delivers the highest service standards. And it is here, in this critical

area, that Virgin has persistently outflanked BA during the past

decade.



One doesn’t doubt that BA genuinely desires to improve its service

standards, but airline service is highly sensitive to company morale.

Following privatisation, BA’s focus on service made it the pride of the

world, but in recent years, industrial disputes, exacerbated by

continuously negative media coverage, have left BA staff morale at its

lowest ebb.



BA’s profit slump this year deprived most of its staff of their

bonuses.



Demoralised cabin crew led to poorer service standards and, in turn,

more disgruntled passengers.



Ayling has also admitted that the cuts in capacity will lead to further

job cuts. While these are not likely to be in front-line or marketing

staff, they will hardly boost morale.



However, with its marketing might, a staff of talented communicators, a

top advertising agency and massive internal communications resources, BA

may just be able to turn its culture and its fortunes around.



If this happens, and Ayling has got his sums right, within three years

BA could once again be leading the pack, rather than chasing it.



BA’S HISTORY

- 1981 Lord King is made chairman, with a remit to make BA profitable

and prepare the group for privatisation

- April 1993 BA is repositioned as ’The world’s favourite airline’

- February 1987 BA is privatised; the flotation is 11 times

oversubscribed

- January 1988 introduces New Club World and Club Europe brands

- February 1991 4600 jobs go, following the outbreak of the Gulf War and

a significant downturn in traffic

- October 1992 BA unveils its first fully integrated ad

campaign,’Feeling Good’

- January 1993 BA pays pounds 610,000 in a libel case brought by Richard

Branson

- February 1993 Lord King steps down as chairman, Sir Colin Marshall,

later Lord Marshall, takes over with Bob Ayling as group managing

director

- March 1994 BA launches World Offers

- January 1996 Bob Ayling becomes chief executive

- June 1997 unveils its new ’global’ corporate identity

- July 1997 cabin crew go on a three-day strike; settlement reached in

September

- May 1998 Go operates its first flight from London Stansted to Rome

- June 1999 BA announces it will drop many of its ethnic tailfins and

return to the Union Jack

SCHEDULED FLIGHTS

International             Passengers (m)

                                    1998

BA                                  30.1

Lufthansa                           24.8

Air France                          18.2

American Airlines                   17.3

KLM                                 14.9

SAS                                 12.5

Singapore                           12.3

United Airlines                     11.5

Japan Airline                       11.2

Swiss Air                           11.0

Int+domestic              Passengers (m)

                                    1998

Delta                              105.3

United Airlines                     86.8

American Airlines                   81.5

US Air                              58.0

Northwest Airlines                  50.5

All Nippon Airways                  41.5

Continental Airlines                41.3

Lufthansa                           38.5

BA                                  36.6

Air France                          33.5

Source: International Air Transport Association



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