Saturday, 14 November 2009

Take Off or Landing?

It's taken two years and arguably when it all started it seemed like a good idea, but the merger between BA and Iberia Airways has finally been agreed. Willie Walsh, CEO of BA, has hailed it as 'Good news for passengers'.

In the last 18 months of intense European travel, the two airlines I personally rate the worst for service are BA and Iberian so it could be said this the merger of two airlines who have lost their way and have resorted to the old adage of 'two heads are better than one'. Both companies made whacking great losses, with BA clocking up £292m in the last six months and Iberia €182m in the last nine months as they competed to be the airline who could clock up the most losses in the shortest time - it looks like a dead heat. The interesting thing is that passenger numbers are similar with BA at 33m and Iberian at 28m yet BA operate 246 aircraft to Iberian's 174 which suggests a disparity on loads. Also, the overlap on destinations means that both airlines get benefits but that creates a problem - how do you drive the kinds of savings you need to get any benefit and keep the same number of routes operating?

This is the real problem - the estimated £358m of savings nowhere near covers the combined loss and it is not clear how the savings will come about. The new headquarters will be in London and Walsh will be the new CEO - none of the news so far is actually very encouraging.

Ryan Air sees this as 'Two drunks propping themselves up' and for once they are spot on and not being loony. On the face of this it is exactly that - two airlines who had run out of ideas and strategy think that combining two worthless strategies and ailing businesses, led by donkeys, will actually solve their problems. It really is a merger devoid of inspirations, carved out of a desire first dreamt up in better days. While big can be beautiful, the merged companies are going to spend the next two years arguing over cuts and who does what as the industry emerges from recession. A really clever move by two companies that have hit the recession with no real idea what the core strengths of their airlines are.

Walsh's only victory seems to be that BA will be the dominant company with the HQ in London and 55% of the shares owned - and he is CEO which seems to be a sad indictment of the combined management talent of the two companies. BA has been particularly rudderless and idealess during this recession with an emphasis on lack of strategy and daft ideas on cost cutting, while their low cost competitors have thrived. As fuel prices came down to help costs, BA fared worse than before and the underlying profitability of the business is virtually broken. BA and Iberian are caught in the no man's land of European airline strategy and the combination of the position does not actually help them with such poor leadership at the top. No wonder the staff look to the HQ and ponder what will happen next.

One thing is for certain, two huge clouds hang over this merer long before they try to get any strategic or operational benefit - 1) the impending action by a once loyal staff against the suicidal efforts to cut costs and dumb-down jobs and 2) the enormous hole in BA's pension pot. The latter may yet scupper the deal while the former will blight it at every step because it is an issue that will only grow as the combined airline will strive for even greater cuts and efficiencies.

On thing is for certain, the worst news is that Willie Walsh has won the top job. It's the equivalent of asking a passenger to fly the plane.

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