If the Wright brothers were alive today Wilbur would have to fire Orville to reduce costs. This quip from Herb Kelleher is even more apt now than when the boss of Southwest Airlines said it some 15 years ago as the industry was going through another of its upheavals.
Over-capacity, tumbling passenger traffic, Luddite labour practices and sky-high costs are still dogging the airline industry and are behind the latest marriage between Willie Walsh's BA and its Spanish bride, Iberia. It may have taken the two nearly two years to consummate the union, but, this is one of those relationships driven by need rather than desire. That doesn't mean, though, that it doesn't make sense, and there's no doubt that this is a great deal for both parties. As results from Iberia on Friday showed, the new airline will lose more than £1bn this year, and there will be further losses for the next two years.
Nor are they the only ones flying close to the ground. British Midland (bmi) admitted earlier this week that it will run out of money if it doesn't get more funding by next year, and, as we report on page 79, the UK budget airline Flyglobespan is also perilously close to the brink..
That's why Walsh can't waste a second to get this marriage signed-off. But first he must make sure the problems around BA's £3bn-plus pension deficit – greater than its own market worth of £2.5bn – which has been ring-fenced from the Iberia tie-up, are dealt with as swiftly as possible. Iberia has reserved the right to walk away from the deal if the funding hole turns out to be bigger than the £3bn forecast. BA's pension trustees should have the result of their triennial review ready within the next few weeks which will provide the latest actuarial valuation of the deficit as of March this year. While some analysts are surprised that Walsh has gone ahead with Iberia without the formal backing of the trustees, I'm told negotiations are going well and he's hopeful that a deal can be agreed on the actual size of the deficit, as well as the amount of cash which BA will have to contribute annually to fund the deficit, by Christmas.
Walsh's second priority is to face up to the unions which, understandably, have said they won't back the merger unless assurances are given that there will be no compulsory job losses. So far, most of the planned cuts, to achieve the £400m or so of cost-savings, will be in IT, fleet maintenance and back-office, which are the less unionised areas. Even so, it's impossible for Walsh to give such cast-iron guarantees, but if he wants BA's notoriously awful labour relations to improve, then he should make the biggest of all efforts to work with the unions as closely as he can. And the unions should realise that if this deal doesn't fly then they may ground not just the Iberian deal but their own airline.
But Walsh – himself a pilot – must also choose his route carefully. As advertisers will tell him, he has to decide exactly what sort of airline the new BA-Iberia will be. A gold-plated premium airline service, complete with hot towels and cutlery, which the well off are happy to pay for, or a good mid-market carrier, though clearly above Ryanair or easyJet? With them you get what you expect. Not with BA anymore; it's as if it's suffering an identity crisis. Walsh needs to rediscover BA's image, as he gears up for the biggest deal of all – with American Airlines, which is still waiting on anti-trust clearance from the US authorities.
That's the plum catch, if they can pull it off, and the one that can bring scale to the industry. Otherwise, even Wilbur's job could be on the line.
Oh, leave them alone. Parker and Hampton know what they're doing
If you had to choose two directors to sit on the board of a company in which you were a big investor, you wouldn't go wrong in picking Sir John Parker, chairman of Anglo American, and Sir Philip Hampton, who is about to join Anglo's board.
Sir John is also chairman of National Grid, another big UK company, while Sir Philip is chairman of the government-owned Royal Bank of Scotland, having stood down as chairman of J Sainsbury to take on one of the most troubled jobs in corporate Britain. Both men have sharp intellects, enormous industrial experience and should be trusted to know how much Sir Philip can cope with.
That's why the fuss from institutional investors over Sir Philip taking on Anglo – because they fear he won't have time to dohis job at RBS properly – is so trivial. And I'm not sure whether the original protester ever meant his comments to have caused such a stir.
Are we really expected to think that Sir Philip would have taken on Anglo if he didn't believe he could devote either the time or the energy? He certainly doesn't need the money, as his RBS job earns him £750,000 plus a £1.5m option package. Nor can I imagine Sir John taking on Sir Philip if he didn't think he had time to do the work; the Anglo chairman is a hard taskmaster.
This latest skirmish tells us more about the state of the institutions. They were behind the curve in putting pressure on company boards when they really needed to make trouble – RBS under Sir Fred Goodwin and Lord Stevenson at HBOS, being good examples – and are now trying to catch up.
While their new-found diligence is worthy and will, I hope, continue, I'm afraid this looks like a case of shutting the boardroom doors after the asses have bolted, and all that.