'I've had a lot of luck ... all of it bad'

British Airways' Rod Eddington talks to Jason Nissé about that strike, and other elephants in his rowing boat

After what must have been the worst three months of his, or indeed, most people's, business careers, Rod Eddington went on holiday for a week earlier this month. "I was out of the office for seven days," British Airways' Australian chief executive recollects. "During those seven days we had to withdraw our services from Saudi Arabia, we had the electricity blackout in the States, and there was renewed speculation about alliance activity with Swissair and KLM. I spent a lot of time on the phone."

This "holiday" came at the end of one of the toughest periods in BA's recent history. The wildcat strike by the airline's ground staff at Heathrow caught the company on the hop just as the summer rush was starting. Flights were cancelled. Passengers were stranded. And when Eddington stood up in front of the City to announce BA's first-quarter figures at the end of July (a depressing £45m loss), he had to admit that the dispute had cost Britain's flag carrier £40m.

The strike was settled after BA agreed to extra payments for staff to accept a swipe card clocking-in system, but it showed the hair trigger that can set off industrial relations disputes in an industry where every major carrier is trying to cut costs. This was BA's first major dispute since the cabin crew crisis in 1997, when the then chief executive, Bob Ayling, threatened to sue the strikers, while across Europe BA's competitors have been hit by strike after strike.

However, Eddington is angry about how the dispute blew up. And though some of this anger might be directed at the unions, who appeared to let their own internal politics get in the way of sensible negotiations, he saves a lot of his ire for his own managers, blaming "bad management".

In his first major interview since the strike, Eddington told The Independent on Sunday that the strike had brought a review of procedures within BA. "What did we as a management do? What could we have done to prevent the dispute? How could we have handled it better? And although it was a wildcat strike and we were blindsided by it, how could we have coped better and dealt with the alternatives for our customers better? And there's a big piece of work going on in this area at the moment."

BA has another industrial relations hurdle coming up this week, when its engineers vote on similar changes to working practices. But as the unions are recommending a deal, BA should not suffer a repeat of the check-in staff problems.

Under Eddington, BA has shed 11,000 jobs, and is due to cut 2,000 more. Up until the check-in strike, the shake-up had gone smoothly. But there are fears, which Eddington refuses to allay, that there might be more cutbacks. The "Future Size & Shape" project, as it was known, was essentially based on BA as it was in early 2001. But external factors have made the prospects for BA much worse since then.

"I've been here three years," Eddington says. "And almost as soon as I arrived we had the accident with the Air France Concorde [which led to the entire Concorde fleet being grounded]. Then we had foot and mouth, which was devastating for tourism. Then we had 9/11. Then Sars. Then the Gulf War. In those three years, the airline industry collectively has lost more money than it's ever made."

The question is: what will be the long- term effect of all of this? Eddington admits that the emergence of the low-cost carriers Ryanair and easyJet has fundamentally harmed short-haul revenues, with many business travellers now going on the cheap to the Continent. The internet has led to increased transparency of prices, which again pushes fares down in all areas of the business. And a lot of firms are now insisting that their executives take economy flights, even for long-haul trips. While quipping that "yields have been declining for the last 40 years", Eddington admits: "Part of the revenue picture has changed irreversibly. But it is difficult to quantify how much."

BA is probably further ahead in restructuring itself than its main competitors. Logically the industry - which, according to legendary investor Warren Buffett, has never made an acceptable return on capital for shareholders - should be consolidating. But the nearest big airlines appear to get to merging is striking alliances - typically "code sharing" deals such as the BA-led OneWorld alliance, Air France's SkyTeam or the Star Alliance, which includes United Airlines and Air Canada.

"Aero-politics prevent airlines consolidating in a conventional way. Governments appear to be in favour of consolidating so long as their airline is the consolidator. So alliances are a pre-cursor to a sort of halfway house."

BA has also pursued bilateral agreements with airlines, known in the trade as "immunised" arrangements, which are approved by regulators upfront. It has a deal with Qantas, which is being reviewed by competition authorities, and it tried to strike one with American Airlines, but the price demanded by US regulators in terms of BA giving up take-off and landing slots at Heathrow was too high. BA and Iberia have applied to the EC for an immunised deal and others could well follow, notably Swiss, the airline that emerged from the ashes of Swissair.

However, the willingness of governments other than Britain's to give state aid in some form or other to airlines has prevented "rational business" prevailing. Eddington is particularly unhappy about Washington's aid for its airlines, post-9/11: "The US government has put so much money into aviation. It's outrageous and extraordinary." However, he is an optimist. "The law of economics will ultimately prevail, but in this industry it will take a lot longer." Much also depends on the recovery in business travel and on better economic conditions. Eddington has cautioned not to expect any upturn for a year at least.

Meanwhile, BA has some rather large internal issues to deal with. "The way I see it, there are two elephants in BA's rowing boat," says Eddington. "One of them is the pension, the other is the debt. The debt's come down from just over £7bn to just under £5bn in the last two years. The pension is a major priority for our company and our people, and it will be October before we know how that will affect us."

BA is in the midst of an actuarial valuation of its two pensions funds, expected to show a deficit of up to £1.5bn. This will mean BA could be forced to pay anything up to £100m a year to replenish the fund, something it can ill afford. What BA needs is for the stock market to recover and solve this problem. But good fortune and BA don't tend to be friends. "I've had a lot of luck over the past three years," Eddington jokes. "All of it bad."