Tough days ahead for Walsh and BA

 

Results last week from British Airways were watched very keenly indeed in the Gulf, where there has been persistent, but always comprehensibly denied talk of some kind of corporate deal involving one of the region's big carriers and BA.

This time, however, some airline executives were just as interested in their future job prospects, as in the possibility of some international mergers and acquisitions.

The conclusion is that it is about as good as it is going to get for Willie Walsh, the Irish chief executive of BA, still the UK's national carrier even though it ceased being "the world's favourite airline" some years ago.

Walsh has managed what some, especially in the City of London, thought was nearly impossible – getting the airline to achieve a 10 per cent profit margin, which it did quite comfortably in its record figures last week. Profits at £875m – a 45 per cent rise over last year – enabled the airline to pay a dividend for the first time since the dark days of 2001.

In a year that saw the first signs of a weakening in the market for business-class executive travel due to the sub-prime crisis and resulting credit crunch, that is a great achievement for the chief executive. Against the backdrop of rising oil prices – against which BA was only partially hedged – it makes the result look all the better.

So despite the fiasco of the ill-advised move to Terminal 5 and the torrents of bad publicity that produced, as well as the dispiriting blows to British Airways' corporate morale brought about by the ritual dismissal of two executives for their part in the disaster, Walsh can look back with satisfaction on the financial year.

At the same time, he also made a major deposit in the bank of PR goodwill by declining to take up a substantial bonus entitled to him when he hit that margin target. Walsh was on a possible payout of one full year's pay – or £700,000 – for hitting all his targets, of which the 10 per cent margin was the most significant. The fact that BA missed other targets – on punctuality and customer satisfaction – meant that he would "only" have got around £550,000 in any case. Other BA employees share a bonus of £34 million, so it's been a good year for them, too.

The sight of a captain of industry giving up cash because of a corporate failure is so rare that it got huge applause in London, where they are far more used to criticising "fat cat" executives for "rewards for failure." Walsh deserves the praise.

But things will get distinctly tougher for BA from here on, and there is a sense in which the airline's growth will actually be contracting as it pulls out of loss-making winter routes.

This year's fuel bill, and next's, will reflect the full reality of oil heading into the $200 per barrel stratosphere, and the prolonged effects of the US-led recession. Suddenly all those investment bankers and corporate executives will find less reason to visit London or Paris, and spend more time on the telephone conference call. Those healthy transatlantic margins will quickly fall away.

Walsh has been in the job since 2005, and despite the T5 debacle, can be credited with having done a good job to bring it back to current levels of profitability. He will probably go on to finish the five years that was intended when he took over from Sir Rod Eddington, and try his best to steer BA through what some analysts believe could be two years of profit decline from this current high point. We will see how good his piloting skills are when he tries to get BA down in the teeth of a recession – the difference between a soft and hard landing in this situation could easily cost Walsh his job.

The BA board, conscious of the fact that Walsh might need a speedy exit, will have already begun the task of looking for his successor, and the headhunters have been instructed to look for suitable candidates to understudy him for the next couple of years – but be ready to be parachuted in should the need be urgent.

One candidate already being discussed in airline circles is James Hogan, chief executive of the UAE's very own Etihad. He has been in that job for two years, and by 2010, Hogan could be just be the right man at the right time for British Airways – if he is up for the challenge.

 

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