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Tuesday, 23 May, 2000, 10:52 GMT 11:52 UK
Has BA turned the corner?
BA needs to find more international alliances
BA needs to find more international alliances
British Airways has released its worst set of results since it was privatised 17 years ago.

But despite its huge losses, its share price has improved as investors bet that the company has now turned the corner.

Are they right? And does BA have the right strategy to survive in the increasingly competitive world of international airlines?

Bob Ayling failed to cut costs fast enough
Bob Ayling failed to cut costs fast enough

Despite the change in management, BA is sticking to its strategy of increasing the number of highly profitable business class passengers at the expense of its economy class business.

It is offering improved amenities, including sleeper seats, in an attempt to lure more of the high-paying customers.

It plans to offer more frequent flights to popular destinations, using smaller planes like the Boeing 777 which has more comfortable accomodation.

There is some evidence that this strategy is improving profit margins at BA. Passenger yields increased by more than 3% in each of the last two quarters.

However, it is vulnerable to some losses it cannot control.

The higher cost of fuel - due to higher oil prices - has added substantially to BA's burden.

So has the high pound. BA receives much of its income in dollars or euros, but it has to pay its staff in sterling.

High risk strategy

BA's strategy contains a number of other risks.

The airline must continue to cut costs, which will probably mean a reduction of around 10% in staffing levels. Yet attempts to cut staff, and reduce their pay, have led to damaging strikes in the past.

The new boss, Rod Eddington, must manage staff relations more successfully than his predecessor if change is to come.

And BA must respond to the new, low-cost airlines and international alliances that are threatening its traditional business.

In Europe, BA has responded by setting up its own low-cost subsidiary, Go - but that company has yet to make a profit.

And on its Trans-Continental routes, BA's plans to create a global alliance with American Airlines have been blocked by competition authorities.

That has left the way open for rival alliances, notably the partnership between United and Lufthansa called the Star Alliance, to gain ground.

Link to KLM?

BA badly needs another international partner, but talk of a merger with Dutch airline KLM was denied earlier this week.

A merger with KLM would help solve another of BA's problems - congestion at Heathrow.

The world's busiest international airport is running out of terminal and runway space, and the delay over the creation of BA's Terminal 5 has not helped.

A link to Schipol Airport would help ease the problems of attracting connecting traffic through Heathrow, and add much-needed capacity for expansion.

But BA is still a victim of its earlier success.

Its most popular routes - across the Atlantic to North America - have become over-crowded with rivals who are squeezing prices right down.

Many of its European routes are no longer profitable, and it lacks capacity on some of the key long-range routes to Asia.

The airline business is notoriously cyclical, and BA is hoping for a swift return to profitability over the summer selling season.

But it will take years to implement its new strategy - and BA must make those changes before the next slowdown if it is to prosper.

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See also:

01 Feb 00 | Business
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