Cabin Pressure

By Adam Smith / Harmondsworth

No one could accuse Willie Walsh of being downbeat in the face of adversity. "Being the ceo is great," says the boss of British Airways with a chuckle. "You get all the credit. And you get to blame other people when things go wrong." He's joking. He has to be, for if he lived by this credo, he would have been pointing his finger nonstop in recent months.

A squabble with cabin-crew employees in January over pay and working conditions triggered flight cancellations that set BA back $150 million. In July a report by the Association of European Airlines put the firm near the bottom of the region's carriers for punctuality. In a ranking of lost luggage, BA performed worse than any other airline that provided data, losing 75% more bags than Air France and Lufthansa.

Even worse, Britain's Office of Fair Trading (OFT) and the U.S. Department of Justice fined BA more than $500 million in August for price fixing. Ten current and former BA executives face the possibility of criminal prosecution in the U.S. All this comes just as access to the transatlantic market out of Heathrow Airport--now restricted to BA and a few other carriers--is about to be blown wide open.

But don't confuse this with a crisis. Really. These ignominies, significant though they may be, risk overshadowing the real progress that the 45-year-old Dubliner has made at BA since taking over in 2005 as its youngest ever boss. The scale of the challenge of running BA, Europe's third largest airline, after his four years as boss of the Irish carrier Aer Lingus "was easy," says Walsh. "I just multiplied everything by 10." That applied to problems too. When he arrived, the company's pension fund was short by almost $3 billion, more than the shortfall at any other major British firm. And the payroll for BA's 46,000 employees sucked up a bloated 30% of its costs.

Fired up by the math, Walsh (a former Aer Lingus pilot who landed the top job there in 2001) quickly got to work cutting the figures down to size. On his first Monday at BA, he set about reaching a deal with trade unions to rub out the pension's deficit over the next decade through one-off cash injections and changes to employee benefits. Two months later, "Slasher," as Walsh was known while rescuing the Irish carrier from the brink, cut hundreds of senior managers. Soon afterward, he unveiled a blueprint for shrinking BA's costs by close to $1 billion, partly through further job cuts. With fewer bills to pay, BA looks set next year to hit its target operating margin of 10%, its highest ever.

The price-fixing penalties wiped at least some of the gloss off all that. According to the OFT, scheming with rival Virgin over the level of fuel surcharges started months before Walsh took control. As soon as the OFT informed BA in mid-2006 that it was investigating the company, the airline cooperated with the investigations. (Virgin, whose legal team first contacted the OFT about the scheming once it got wind of the problem, should escape any fine as a result.) Still, it's hardly reassuring that staff at BA thought it a smart idea to collude with the company's fiercest rival. Is there a problem with values at the carrier? "That wasn't anything that was in the dna" of the company, says Walsh. "I've stressed this significantly at every opportunity internally: We're not going to tolerate that sort of behavior."

Dealings with the trade unions are less clear-cut. Settling the dustup with the Transport and General Workers' Union early in the year at least averted the even bigger losses that a cabin-crew walkout would have triggered. But the ugly dispute left both parties admitting that a fresh start was necessary. That will take a while. The roots of January's squabble were buried in agreements drawn up in the '90s. Walsh acknowledges, "You don't change the way you do business with long-established trade-union relationships overnight."

There are signs, though, that change is under way. While his predecessors kept union negotiations at arm's length, union leaders say Walsh's direct negotiation with his counterpart helped speed up a resolution. Ahead of BA's move next year into the new $8.5 billion Heathrow Terminal 5, the airline persuaded thousands of ground staff to agree to change their practices. Such deals, Walsh says, are "evidence of securing agreement without hassle, without friction."

The opening of T5, as the new terminal is known, should help tackle another of BA's weaknesses: its much criticized hub. "BA has a fundamental challenge none of its European peers suffer from," says Chris Avery, an airline analyst at JPMorgan in London. "Heathrow is stretched to its limits." Conceived for 45 million passengers a year, it sees almost 70 million annually endure its crowded terminals and snaking lines. Airlines wait longer for gates to clear, and creaking baggage-handling equipment is prone to breakdowns. Though it can't ease runway congestion--Heathrow's "Achilles' heel," says Avery--T5 can make BA look better. Currently split between two of Heathrow's outdated terminals, BA will house virtually all its operations under one roof next spring.

For all the challenges of the past couple of years, BA is facing perhaps its biggest test yet of the Walsh era. The airline's shares have plunged almost a third since February, owing partly to worries that liberalization of the transatlantic market next year will cut into its profits. Under current rules, only BA, Virgin, American Airlines and United Airlines can fly to and from the U.S. via Heathrow. For BA, that restricted access has been a gold mine. In the wake of 9/11, BA "rightly used the cartel of Heathrow to the U.S. to generate a large proportion of recovery in profits," says Nick van den Brul, an airline analyst at BNP Paribas in London.

But under the Open Skies agreement, drawn up by Washington and Brussels, starting early next year any E.U. airline will have the right to fly to any city in the U.S., and vice versa. With U.S. rivals Delta and Continental expected to invade Heathrow next year, "BA's business-class fare is going to be under considerable pressure," says JPMorgan's Avery.

Walsh will have to push hard into other markets to compensate for this hit. Next summer BA plans to launch a new service between the U.S. and major business centers in Continental Europe, flying reconfigured 757s from its existing fleet. While Walsh is guarded about the details, "getting a new airline up and running in a little over 12 months," as he sees it, "is a great test of how quickly we can respond." And if things take off, he's even promising to share the acclaim.