On his first day at work he'll fly right into turbulence

Terminal Five, tough competition and a need to cut costs all promise storm clouds for BA's new chief. But the big issue for Willie Walsh, writes Gavin Hinks, is whether he can sweet-talk the unions
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But looming much larger than all that is the question of how the former pilot and Aer Lingus chief executive will deal with BA's industrial-relations problems. These have led to another summer of discontent at the carrier, with the latest outbreak, the wildcat strike in support of workers at the catering firm Gate Gourmet, bringing flights to a standstill and costing the company an estimated £40m.

"Willie Walsh comes across as unprepossessing, but I think that underneath he knows exactly what he's doing at BA," says one analyst. "The big question is whether he can achieve it all without industrial action. The devil is in the detail, and the devil works at Heathrow."

Certainly Sir Rod Eddington, the out- going chief executive (in more ways than one), might have felt his staff were sometimes possessed. He was hailed for cutting costs by shedding 14,000 jobs without resorting to compulsory redundancy. He was also cheered for hacking back debt by 60 per cent and for raising pre-tax profits from £5m, when he arrived, to £415m this year. But, in spite of these achievements, he found harmonious union relations elusive. The Gate Gourmet debacle that grounded the BA fleet in August wasn't his first stumbling block. Two years ago, 2,000 check-in staff walked out over a new clocking-in system. Last summer, a strike was narrowly averted after a scheme was unveiled linking bonuses to attendance.

The City will watch carefully how the new man deals with the unions. Analysts cite the "archaic" working practices at BA, "reminiscent of the Seventies", as the main cause of friction but also point to the new terminal, T5, as a possible flashpoint for future industrial conflict. Due to open in 2008, it will be more highly mechanised than the existing terminals and this will entail big changes in working practices as many of the current roles and tasks become redundant. That means hard union negotiations ahead for Walsh.

Analysts sound a note of caution here, lest Walsh should think he can drive the unions into agreement. "Progress needs to be very slow and measured. Industrial relations in the transport industry are very brittle and an over-robust approach can end in tears," warns Chris Avery, transport analyst at JPMorgan.

Given that some commentators have interpreted the Gate Gourmet action as unions laying down a marker ahead of the T5 negotiations, the warning is resonant.

So, is Walsh the man to get a grip on the unions at Heathrow? Analysts have been meeting him since he arrived at BA in May to work on the handover from Sir Rod, and believe that they have found a man who is "down to earth and no-nonsense".

He comes with a reputation for being able to see through swingeing cuts. When he became the Aer Lingus chief executive in 2001, it was in time to complete a plan to shed 2,500 jobs at Ireland's national carrier. The Irish unions were not happy, but Walsh avoided a major confrontation by using considerable personal skills as well as by offering attractive redundancy packages.

"He's interested in you personally. He asks how you're doing, and when he deals with you, he's straightforward and people become friendly with him. I think the unions developed an element of respect for him," says one Dublin observer of Walsh's work at Aer Lingus. He also notes that, being a former pilot, Walsh knows how the unions work from the other side - he speaks their language, as an analyst puts it.

Walsh's approach paid off. The cuts were made and operating profits at Aer Lingus rose from €63m (£43m) in 2002 to €107m in 2004, the last year for which figures are available.

But there is a difference. The Aer Lingus unions were faced with the choice of co-operating or seeing the airline go out of business. With BA, one of the most financially secure major airlines in the world, such dire consequences are unlikely to prey on the minds of Heathrow union officials when they sit down to talk about reform of working practices and BA's continuing efforts to cut employee costs by £300m a year. While debt still stands at £2.9bn, it is at its lowest point for 12 years.

Tensions are inevitable, even though the GMB union, at least, says it understands that change is necessary. For their tolerance of lost jobs, the union officials will want a quid pro quo, and that is likely to be higher wages. BA said last week that talks were under way but at a very early stage, because it does not yet know how many staff will be needed in the new terminal.

But this state of affairs has some analysts fretting over whether Walsh can continue to make savings in the run-up to the T5 move. "Our main concern with the BA story is the lack of room for manoeuvre on cost savings," says a research note from Deutsche Bank. "We believe that the operational imperative to get ready for Terminal Five could make it harder for BA to deliver targeted £300m employee cost savings and make further cost cuts."

T5, industrial relations and cost cutting aren't the only potential causes of turbulence for Walsh, for he still has the tricky job of developing revenues. Competition remains tough, while Deutsche Bank has raised concerns over BA's statement that there are no big product initiatives in the pipeline. Walsh's task is not helped by the US airlines, which Sir Rod accused of operating from behind a protectionist wall, buoyed up by billions of dollars in public subsidies and loan guarantees.

Revenues would be boosted if Walsh could turn around the losses made by BA short-haul flights from Gatwick. The current loss stands at £26m, and that is down from £300m, but as one analyst says: "It is still a loss. The question is, will they ever make a profit at Gatwick, and if they can't, they have to decide what to do."

This could be one of the first things the Irishman tries to resolve, and it could give him a quick win, if he gets the strategy right.

Another route to increasing revenues is acquisitions and mergers, following reports in the press that BA chairman Martin Broughton has a buying spree on his agenda. BA already owns 9 per cent of Iberia, the Spanish airline, and flirted with KLM in 2003 before the Dutch national carrier opted for Air France instead. US airline managers have recently signalled their desire for the removal of regulatory bars in order to forge acquisitions, but for the time being the hurdles in both America and Europe remain considerable.

Yet analysts still see a deal as a possibility, even though some say it won't be at the top of Walsh's to-do list. One goes so far as to speculate that Walsh could take a closer look at the relationship with Iberia, or maybe consider an even more radical deal.

And if that weren't enough to be going on with, it is also believed that Walsh will have to decide what to do with BA's fleet of planes - stick with what it has or invest in new equipment, perhaps even the recently unveiled Airbus A380, the world's largest passenger plane. That could mean a spending commitment running to millions.

Despite the many decisions to be made, there is hope in the City that Walsh can get on with developing BA rather than having to cope with industrial strife or the damage inflicted on the industry by 9/11, war in Iraq and the Sars virus - the crises that beset his predecessor. It's no wonder that one analyst believes: "This could be more interesting than watching Sir Rod."