The Business Segmentation (figure 1) of mainline business shows the drag on business created by the poor performance in economy transfer markets. More than half of the value being destroyed is accounted for by long-haul to short-haul transfer passengers. Equivalent analysis of each segment by hub also highlights the difficulty created for British Airways by its split-hub operation, which is reflected in the poor performance of the Gatwick operation.
Fleet and Network Strategy
The new strategy aims to reduce our exposure to unprofitable market segments - short-haul and connecting leisure passengers - while strengthening our position in profitable markets which depend heavily on business travel to/from UK. British Airways is reducing aircraft size on key routes, cutting out excess capacity while maintaining frequency of service to key destinations. This fleet and network strategy is supported by investment in improved comfort and service to restore our competitive edge.
Changes in aircraft economics make this an attractive strategy for British Airways. Smaller 777s (initially ordered to serve thinner long-haul routes) now offer comparable unit costs to 747s and more efficient aircraft have been developed in the 100-150 seat range. This reduces the unit cost penalty of cutting capacity by fleet downsizing.
Fleet changes which are currently in train include:
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Longhaul: The older longhaul 747-100 and 747-200 fleet (22 in August 1999) will be replaced by 777s and 767s.
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Shorthaul: 767 (252 seats) fleet reduces from 22 to around10 and 757s (180 seats) from 53 to around 12 in August 2003. These aircraft will be replaced by Airbus aircraft from a mix of A320 (149 seats), A319 (126 seats) and A318 (108 seats).
At the same time, improvements in the way in which the fleet is deployed, with a series of changes designed to optimise the network and increase the appeal of the schedule to high value business passengers. Among the schedule improvements designed to achieve this are the cancellation of the worst performing routes, changes to the Heathrow short-haul network to focus on core business routes, less duplication between LHR and LGW, the transfer of thinner services to LGW and better co-ordination with CityFlyer at LGW.
Over the next two years, Gatwick will progressively move away from its current hub operation, to a niche point to point service focused on its local market. To implement this strategy the following changes will be progressively implemented:
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Longhaul: There will be a reduction from 43 to 20 destinations served with a consequential reduction of longhaul aircraft. The displaced services will, in most cases, be moved to Heathrow.
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Shorthaul: Shorthaul services will be timed to meet the requirements of the local point to point market. The number of destinations served will remain relatively constant, however the average size of aircraft will reduce as the requirement for transfer traffic to longhaul is limited.
Product and Service Improvements
Alongside this fleet and network strategy, a programme of product enhancements is being implemented to increase the attractiveness of British Airways to its core UK-based business customer base. These product changes include the introduction of the new "flying bed" for Club World on long-haul aircraft and the introduction of "World Traveller Plus" - a business/economy product. Configuration and product changes, particularly the new Club World "lounge in the sky" flat bed, also reduce the number of seats on offer, with reductions focused on the World Traveller cabins. Even after these changes, economy passengers (including World Traveller Plus), will still be over 80% of total passengers. British Airways remains committed to providing these economy passengers with excellent service and good value for money.
The net effect of these changes is a reduction in the number of seats available in the aircraft and ASKs flown over the next three years (down by at least 12% - depending on configuration changes). These capacity reductions are being accompanied by a sales strategy which reduces the volume of low-yielding transfer passengers and focuses more effectively on serving the market for direct travel to/from the UK.
British Airways is a "full service" airline. The success of its strategy therefore hinges on maintaining and enhancing the very high standards of customers service for which BA is renowned.
The initial response to these changes has been encouraging. BA's premium income has grown strongly and customer feedback on our product and service enhancements has been extremely positive. Reflecting the improved mix of passengers, we have seen a significant yield improvement leading to revenue projections running ahead of Budget in the first two quarters of the financial year 2000/01 and a recovery in profitability. We would expect these trends to continue over the next 2/3 years as we complete the implementation of our strategy.
