CASE STUDY: British Airways

The enclosed case study on British Airways documents changes that have taken place in the company and airline industry over the past 25 years. The choice of case reflects a number of diverse strands within the economy and employment relations in Britain over this period. A one-time public sector company, formed through merger, privatised in the 1980s and seen by many commentators as one of the great successes of the privatisation era, started to experience difficulties in the 1990s as trading conditions become less favourable. The combined impact of recession and intensified competition as a result of European de-regulation led to important shifts in business strategy with contrasting implications for its staff, an approach that has, with some modifications, continued until the present day.

The case focuses specifically on changes in employment relations since privatisation in 1984. When reading it, you should think about the interactions between BA’s wider operating environment, its business strategy and its evolving approaches to employment relations and what the changes the company has introduced may mean for the employment relationships within BA.

British Airways Case

Background

British Airways was formed in the 1970s as the result of a merger between BOAC (British Overseas Airways Corporation) and BEA (British European Airways). Although the companies strengths appeared to complement one another the merger was hardly an unqualified success as two companies with very different traditions and cultures were never fully integrated into a coherent whole. The end result was a company with a ‘bureaucratic and militaristic’ culture, in public ownership and which by the late 1970s was experiencing some severe problems.

Customer perception of BA was generally poor, and the epithet ‘Bloody Awful’ often used as a description of what the initials stood for. Furthermore, it faced pressure from low-cost operators on its prized transatlantic routes from Laker Airways and People Express (both of which have long since collapsed), and from a combination of recession and rising fuel prices. The combination of these factors led to mounting financial losses by the early 1980s, recording a single year loss in 1981 of 140 millions pounds.

Predictably, the company responded by cutting costs, with staff cutbacks of 14,000 in 1981 and overall 22,000 in the early 1980s. These cutbacks were achieved with the help of generous redundancy packages but they did little to alleviate the deeper malaise afflicting the workforce. The cost-cutting exercise, though probably necessary, achieved little, with limited improvements in efficiency and productivity. Indeed, any improvements that did take place in performance were largely the result of favourable exchange rate movements.

Significantly, by 1983 BA, under pressure from the government to prepare itself for privatisation, began to realise that future changes needed to focus upon securing employees ‘positive involvement and support’ and relatedly, a more deep-rooted cultural change in the organisation. BA realised this would not be easy, publicly owned airlines had a history of strong unions and embedded practices and employment relations, in these respects BA was little different from other ‘flag carriers’.

Developments since Privatisation

It was increasingly appreciated with BA that it needed to ‘re-connect with customers’, and this required a different orientation from staff. A renewed focus on employee involvement followed and led to a number of initiatives directed at fostering a more dynamic, customer-focused and service-driven culture’. The emphasis of which was placed on ‘customer-contact staff’ through a range of initiatives beginning with Putting People First through to A Day in the Life in the mid 1980s, which underlined the benefits of collaborative working.

Alongside the comprehensive training and re-educative programmes went changes to management style, and moves towards a more flexible organisation structure. Although it is easy to be dismissive of some of these developments and to pass them off as ‘gimmicks’, in the 1980s BA became a role-model in the Management press for organisational and culture change, a company to be revered and emulated where at all possible. Here was an organisation that appeared to embody the customer service ethic more completely than most and that this was contributing to a dramatic turnaround in performance for the company. BA moved into profit and for much of the 1980s and early 1990s was one of the very few national airlines to consistently record profits. Its reputation with customers improved dramatically and when it chose in the mid 1990s to parade its achievements as the self styled ‘World’s favourite airline’, it could do so with some sense of justification, so great was the transformation. The performance also translated to the ‘bottom line’ as profit growth rose significantly compared both with previous years and with competitors. With the notable exception of KLM, few other national airlines were as consistently profitable as BA at this time, and to a large degree, since.

However the profit performance and the consistent ‘good news’ stories coming from the management and (in many cases) academic community, were the product of a unique set of circumstances. BA had benefited from a particularly favourable financial position at privatisation, hit on a specific formula for customer service that stole them a march on the competition in a market that was for much of the period relatively buoyant. This combination of factors unravelled in the early 1990s under the pressure of recession and latterly de-regulation of the European airline industry. Furthermore, other airlines found it relatively easy to copy BA’s focus on customer service, and like BA, increasingly came to focus this on particular market segments – business, first class and long haul operations. This new context for the industry, economic slowdown and increased competition, marked a return to old concerns, and as BA sought to instigate waves of job cuts in the 1990s older problems of industrial relations began to re-surface.

Developments 1995 – Present

In the 1980s and 1990s BA had become synonymous with customer service. Indeed, it had been almost a mantra among BA staff and managers, providing something very distinctive that differentiated BA from its main competitors. Acknowledging that its cost base – staff costs, global airline and operating out of Heathrow – would make it difficult to compete on price, BA had set out its stall to compete on different terms. To offer something that would set it apart as being distinctive, and difficult for other airlines to copy.

However, by the late 1990s against a backdrop of sluggish growth and increasing competition, the strategy changed. In 1999, it was clear that BA would concern itself more with differentiating its customer base, focusing on premium, high-yielding passengers (in First and Business Class), and on ‘point-to-point’ traffic. In 2000, the Chief Executive Bob Ayling left the company and was replaced by Rod Eddington who went about rationalising the company’s short-haul European operations, especially those that operated out of Gatwick that lost £310 million in 1999/2000. The company moved to cut out loss-making routes and reduce their reliance on Gatwick as a second hub.

In common with many other global airlines, BA suffered badly in the aftermath of 9/11. Shortly after, it announced 1,800 job losses followed by a further 5,200, with a message to the unions that further cuts were likely. In Eddington’s period as Chief Executive from 2000 to 2005, the company cut 14,000 jobs.

The context since the late 1990s has been one of a changed regulatory environment, particularly in Europe, that has pushed companies towards more aggressive cost-cutting measures (see below) often leading to severe industrial disruption. This has been a problem for all airlines, but particularly the national carriers in Europe, problems that have been compounded by the aftermath of the events of 9/11 and rising fuel prices in 2004/05. It is significant that in this increasingly competitive context, BA was accused and found guilty of price-fixing over fuel surcharges and fined £270 million in August 2007.

The general problems highlight the fact that the global airlines and national carriers are caught in the difficult position of trying to reconcile or find a balance between, irreconcilable objectives – improved service quality and lower costs. Both issues require some response in terms of how, if at all, labour is used.

For BA, the differentiation, ‘quality enhancement’ drive of the 1980s has more recently been focused mainly on First and Business Class customers, and in any event has been tempered by cost considerations. This can be seen in a form of ‘core/periphery’ approach adopted by BA, which has manifested itself in employment relations with different terms and conditions for those operating out of Heathrow, compared with British Airways Regional (BAR, Manchester, Birmingham) and Gatwick. It has also done much to outsource so called ‘non-core’ activities (e.g in-flight catering) and has franchised operations, where new routes can be exploited using labour at significantly lower costs. The Italian airline, Alitalia has also done this using non-Italian crew as ‘crews of convenience’ a policy first seen in shipping companies.

In 1995 BA franchised a number of its routes to the UK and Europe to GB Airways, and to BA Connect. BA Connect focused more on low cost and operated out of a number of regional UK airports including Gatwick, Birmingham and Manchester, but in March 2007, the franchise was sold to Flybe, although BA retains a 15% stake in Flybe. GB Airways, which operated franchised BA operations out of Gatwick was sold to easyJet in March 2008.

These Franchises were intended to give BA a ‘lower cost’ arm on short-haul flights operating out of the UK, but its foray into the low-cost market has been marred by problems. BA experimented with a dedicated low cost ‘arm’ when it set up ‘Go’ in the late 1990s but this was sold off to EasyJet in 2002. It is clear that while BA has decided that it cannot ignore the fast growing low cost segment of the market, it is unsure about what strategy to adopt to penetrate that market. It seems convinced of the need to protect its quality brand image, but neither wholly owned subsidiaries, nor franchisees appear to be effective in securing market share.

Currently BA is operating with two wholly owned subsidiary airlines, BA CityFlyer, a regional operator originally based at Gatwick now flies out of London City airport and which since 2007 has been fully incorporated within BA, and OpenSkies, which is due to begin flying in June 2008. BA OpenSkies is currently at the centre of a major employment relations dispute involving BA and BALPA (the Airline Pilots Association), it has been developed to capitalise on deregulation between the US and the European Union in March 2008 and is due to provide transatlantic flights between the US and Brussels, and the US and Paris. There are plans to extend the service to transatlantic flights to Frankfurt and Milan.

Employment Relations at BA

In the early 1980s as a company located within the public sector, BA had many of the characteristics of public sector employment relations more generally. It was highly unionised, at one point recognising 16 separate trade unions, among which was BALPA (British Airlines Pilots Association), a union with particular strategic influence within the industry. There was also a well-established industry-wide collective bargaining framework with BA as a key player on the employers’ side of the negotiating body, the National Joint Council for Civil Air Transport (NJCCAT), together with consultative forum at company level.

In many respects collective bargaining was complex, sectional and fragmented, and management’s approach to employment relations, ‘pragmatic and opportunistic’ (Blyton and Turnbull 1998). By the 1980s the new strategic focus of the company meant this approach had to change but BA was careful to maintain relations with the unions alongside an approach to culture change that was more individualistic. In effect the company operated dual-arrangements for the period – communicating and consulting with staff and unions – an approach that largely continues today. The period provided evidence of the company trying to ‘by-pass’ long established union-based communication channels, and in the 1990s much of BA’s employment relations strategy focused on the reorganisation of collective bargaining. The NJCCAT was abolished in 1996 but national level bargaining through five separate National Sector Panels for pilots, cabin crew, clerical grades, ground/support crew and management remained, although was redefined and reinforced (Blyton and Turnbull 2004: 97). Following a dispute with pilots in 1996, BA and BALPA negotiated a new ‘partnership’ agreement, and although the company sought a new more co-operative approach with other unions, unlike with the pilots, no formal agreement was signed. However, throughout the period employment relations difficulties never remained far from the surface. There was, and continues to be, a tension between exhortations to improved customer service on the one hand and cost cutting through contracting out and enforced bouts of redundancies on the other (see below), and the climate engendered by the latter has made it increasingly difficult to deliver the real benefits to customers that BA claims it is in business to provide.

To illustrate this point, in 1996, BA replaced Singapore Airlines as the World’s most profitable airline, but this was accompanied by further planned workforce reductions under its Business Efficiency Programme (BEP). This initiative created considerable disquiet within the airline, and the ‘market-led’ approach of BEP led to outsourcing of a number of activities as well as job cuts (Blyton and Turnbull 2004). The loss of 5,000 jobs in the company’s ‘backroom’ operations led to a strike by cabin crew staff in August 1997. The latter were aware of their potentially precarious position; average spending on cabin crew at BA at this time was 48% higher than at British Midland and 90% higher than at Virgin.

Problems have also surfaced in recent years over other staff issues. In the 1990s, disputes occurred involving baggage handlers, cabin crews, engineers and pilots, and more recently problems over the introduction of a new ‘swipe card clocking-in’ system (in 2003), estimated to have cost the company tens of millions of pounds. 2004 witnessed a strike over pay and long-standing concerns over staffing levels and in 2005 a dispute took place involving sympathy strike action by BA workers over the sacking of 670 workers at BA’s catering suppliers – Gate Gourmet, estimated to have cost the company £45 millions (www.guardianunlimited.co.uk). In 2005, the company introduced new regulations to cut absence levels, which at the time were estimated to be averaging 22 days per staff member a year, a measure that did not lead directly to strike action but substantially worsened an already tense employment relations climate. Threatened strike action took place in 2006, over changes to the pensions system, a threat repeated again in February of 2007 by members of the GMB who represent around 8,000 BA ground staff over proposed changes to pay and conditions and to policies on sick leave. In March 2008, BALPA announced strike action over BA’s decision to establish a new subsidiary airline OpenSkies, to take advantage of the new regulatory framework between the EU and the US (see above and below). This action was called off but a court case, planned for mid May, is due to consider aspects of the dispute.

The position of the unions within BA has meant that the company has continued to try and secure major changes through negotiation. These have often been difficult and protracted but have ultimately led in a number of cases to far-reaching changes in employment practices. For example, in the late 1990s negotiated changes with cabin crew involved agreement on a two-tier wage structure (lower rates for newer staff), a pay freeze and moves to greater functional flexibility. This agreement was significant for a number of reasons, first, it effectively created a two-tier workforce among cabin crew, those recruited before 1997, whose maximum pay at the time could rise to £26,600 per year, and those post-1997 whose pay operated with a ceiling of £15,748 per year. The agreement also included important concessions on flexibility, that staff would now be trained to work on four aircraft types rather than three, and an agreement on temporal flexibility, essentially to work on new shift systems.

It should be noted that at Heathrow unions and management have also negotiated two agreements, one for long-haul, the other for short-haul operation. Significantly separate unions were involved; BASSA (British Airline Stewards and Stewardesses Association) a part of the TGWU, is the main union representing cabin crew on short-haul operations, while Cabin Crew ’89, (a breakaway union from the TGWU) represents those on long-haul¹.

Despite its efforts, or perhaps in some cases, because of them, employment relations at BA retain the potential for serious disruption. Management style has toughened somewhat in recent years in the context of a more competitive operating environment. Even before the problems that followed the events of 9/11, the company’s renewed focus on cost cutting and route rationalisation were evident. Recent allegations surrounding excessive drinking (October 2000, and again of a drunk pilot in 2004), alongside continuing threats of (and actual) industrial action, remain symptomatic of low morale in the organisation.

Most recently (October 2009) BA revealed its plans to shed a further 1,700 jobs, to make further changes to working practices and to impose a two-year pay freeze for basic cabin crew. It also plans to hire any new cabin crew on inferior terms and conditions to those of existing staff. Furthermore, it has indicated that in the absence of an agreement with the recognised trade unions, BA will impose the changes on cabin crew from the 16 November.

It is important to stress that many of the difficulties that lie behind the company’s actions are not unique to BA. In many airlines, industrial or employment relations remain tense, particularly in Europe, and particularly among national ‘flag carriers’ where proposed changes have been most marked. Those with the most fractious industrial relations – Air France, Aer Lingus, TAP, Olympic, and Alitalia – are those with some of the biggest financial problems in the wake of the deregulation of the industry in Europe and the rise of the low cost operators. These remain state, part-state-owned, or newly privatised and retain a legacy of public sector employment relations – highly unionised, strongly procedural and often with a sense of public service – qualities that sit less easily in a context of a competitive de-regulated industry. For example, Air France experienced particular problems in the late 1990s as management initiatives within a highly complex public sector institutional framework met with significant organised resistance. One common problem for these and other airlines is the fact that service is delivered through people, and this ‘emotional labour’ is highly prized in delivering ‘added value’ for many airlines, but these same people are also the most vulnerable in the face of heightened competitive pressures and represent not only the largest component of cost but also the easiest cost to take out of an airline’s operations. In BA’s case employee costs made up almost 30% of total costs in 2006/7 (BA Annual Report and Accounts), the next largest costs were fuel, accounting for 24% of total costs. There is therefore an ongoing tension between service delivery quality and efficiency for airlines such as these that by the nature of their business cannot compete solely on cost terms. Furthermore, wholesale contracting out of cabin crews (as with some low cost operators) is not really an option where high levels of in-house training and employee loyalty are integral parts of the ‘customer service’ experience.

Open Skies

On 30 March 2008, the Open Skies policy between Europe (EU) and the USA came into force. Under the policy any EU airline can fly to the US from any EU airport, not just those from their home country. Furthermore, certain routes have now been opened up to competition. This raises particular issues for BA. The Heathrow to New York route is regarded as ‘the most lucrative route in global aviation’ (Guardian 31/03/08), and since the Open Skies policy was introduced Air France has begun flights to New York from Heathrow and Continental has reputedly paid £100 million for four Heathrow slots to fly out to New York. It has been estimated that the impact on BA’s profits and profit margin could be considerable (estimates that profits will fall by £270 millions and it’s profit margin cut from 7 to 4%). Given the heavy costs of operating out of Heathrow (estimated at £10 per passenger) BA is seeking to site a number of transatlantic flights to operate out of other EU airports – Brussels and Paris have been identified in the short-term, Frankfurt and Milan in the longer term. Many of these also operate with relatively high costs but BA has made it clear that it wishes to use lower cost crews that will effectively operate outside of their existing arrangements with UK-based staff. The particular issues have focused on the airline pilots, with BALPA arguing that although they have accepted ‘salaries will be lower because this is a ‘start-up airline’ (the figure they have identified is 25% lower)

At issue is the fact that BA won’t allow the two pilot groups to be as one. This leads us to believe that the BA management has a different objective. That objective is to divide the pilot workforce and push further new jobs generated by ‘deregulation’ through this ‘cheaper’ cost base’ (www.baplane-bapilot.org)

BALPA announced plans to take strike action in Easter 2008, but BA sought an injunction to prevent this taking place, arguing that the strike effectively constituted an action restricting their freedom to operate. In any event the union called off its planned action and entered talks with ACAS in February. The current position is that a court case involving the union and BA is due to take place in mid May. What is clear more generally is that relations between BA and a key group of employees have worsened significantly in the last eighteen months as this and the pensions issue (see below) have begun to impact on employment relations.

The Pensions Issue

One of the major areas of contention within the airline at the present time relates to pensions. In 2003 BA announced that in light of a major pensions deficit in the company it would shut its final salary scheme to all new employees (whereby pensions are linked to salaries in the final years of employment). At the time those who managed the scheme indicated that it was short of £928 millions, three years later the estimate was that this shortfall had reached £2.1 billion.

The pensions issue is a particularly contentious one for BA pilots, represented by the trade union, BALPA, where salaries can rise to more than £100,000 in the final years of their employment. Not surprisingly BALPA, which has around 2,500 members at BA threatened strike action if the final salary scheme was ‘watered down’ to a less generous ‘career average version’ (see above), a threat which was estimated to cost the company £80 millions. The union estimated that such a change would lead to some members facing a 36% cut in their eventual pension (BBC News online 09/02/06).

BA, the Future and Terminal 5

Of all the recent issues for BA, the one that the company had staked much of its reputation on was the introduction of Terminal 5 in March 2008. Ever since the appointment in 2005 of Willie Walsh from Aer Lingus as Chief Executive, it was clear that the intention was to use Terminal 5 as a means to bring in radical changes in working practices. Despite the very significant changes in the institutions of employment relations in the company, and in practices following negotiated agreements with the recognised unions (see above), the view held by Walsh and other senior figures in the company has been that outdated practices remain and that these could not be tolerated in the ‘state of the art’ environment promised by Terminal 5. As was noted above, Walsh’s predecessor as Chief Executive had brought about some significant changes, notably systematic reductions in the workforce totalling some 14,000 staff, with a further set of agreed staffing cuts totalling £300 million to follow his departure (Observer 9/10/2005) and these had helped to return the company to profitability in the wake of problems in 2002 and 2003 in the wake of 9/11 and the SARS epidemic.

However, Walsh’s arrival was significant in a number of respects for BA and for the future of employment relations in the company. Walsh came to BA with a reputation for cost-cutting, having cut the Aer Lingus workforce by a third in his time there. In November 2005 he announced (30 November 2005) cuts in management of 35% in the lead up to the opening of Terminal 5, equating to the loss of 600 management positions in the wake of the Gate Gourmet dispute.

Walsh made it clear that his principal concerns at BA were the transition to Terminal 5, and to achieve a 10% operating margin for BA by 2008. Terminal 5 has been seen by Walsh as critical to the future viability of the airline although as we have seen in light of the Open Skies policy between the EU and the USA, de-regulation may well reduce profit for BA and its operating margin, this is before any account is taken of the initial problems at Terminal 5. With a capacity of 80,000 passengers a day, Terminal 5 represents what Walsh describes as ‘a landmark opportunity’ on what is a quasi – Greenfield site to establish a set of new policies and procedures in a ‘state of the art’ complex. This would also permit a move away from what he sees as ‘restrictive practices’ that have prevented the effective use of staff resources for decades. In part he has made significant moves in this direction and through a series of negotiated agreements prior to the opening of Terminal 5 has secured significant new changes to working practices, particularly for those working in the baggage handling areas.

In light of the hoped for impact of Terminal 5 on employment relations the debacle that took place in the first few weeks after its opening on March 31^st caused considerable embarrassment to BA. Ongoing problems with the baggage system, computer systems, and continued cancelling of flights well into the third week of operation pointed to a lack of effective training and planning, and an absence of contingency arrangements in the event of problems, the costs of which have been variously estimated at between £16 million and £20 million. Two weeks after opening BA had cancelled 693 out of 5277 flights from Terminal 5 (approximately 13% of the total), and because of ongoing concerns about its ability to operate at full capacity (it is still only working at 50% of capacity), BA announced that the planned move of long-haul flights to Terminal 5 on the 30^th April would be delayed until June. The following is an extract from Will Hutton, writing in the Observer newspaper on the 30^th March 2008.

The problem is that airports, like power-plants, printing presses and car factories, are complex. It is not just about having up-to-date equipment…it is about having the organisational capability to run them continuously, a question of skill, employee engagement, management dexterity, and punctilious observation of the right process. This is neither BAA’s nor BA’s strength…..like most of the British private sector, they suffer from deeply ingrained biases against smart working. Any company that wants to improve what it is doing needs to invest in the skills of its employees……..British companies, BA included, almost always decide to improve capability on the hoof. One BA baggage handler said ‘there had been only four familiarisation days’ before Terminal 5 – a small city in scale – went live.

He added that

BA’s short-term shareholders permit the company no other option. BA needs to meet expectations and growing dividends and profits from owners who have no commitment to its long term future. There are City rumours that takeover predators are circling, with Emirates most frequently cited. Willy Walsh may have cut costs to the bone as morale has crashed – a recent staff survey revealed alarmingly that nearly 30% of staff claim they had been bullied – but he is trying to secure his airline’s independence.

In light of the reliance being placed on Terminal 5, the problems that have beset the operation in the first three weeks of its operation do not bode well for its future success nor for BA’s reputation as an airline of choice. Ironically, Hutton’s argument is that the failure of Terminal 5 is effectively one of people, and a lack of effective preparation and capability of those involved in delivering a smooth operating Terminal 5.

Note:

Terms and conditions in airlines are notoriously complex. For long haul it may not be unusual for staff to work 14-15 hour shifts, and rest periods and breaks between shifts have to be negotiated. It should also be remembered that international aviation law regulates hours of work and rest periods so any negotiations must take account of these. These issues apply to pilots and cabin crew, with BA long-haul pilots working significantly fewer hours per year than those in many short-haul airlines. Given that long-haul also involves time away from home, allowances when away also have to be negotiated as do other travel concessions

For short haul one of the issues relates to the number of flights per day, the arrangements of shifts and negotiation of hours. It is not uncommon in the industry for airlines to operate annual hours contracts, with flexibility as to how those hours are used either at management’s discretion or negotiated with recognised unions.

British Airways Case Study 5000 words

Developments since Privatisation

Developments 1995 – Present

Further Reading

Assignment 1