IAG's first group order. What it really means.

IAG's confirmation of an order for 20 A320neo aircraft to replace 19 older A319s is worth very careful reading,- especially by BA's staff. The deal breaks new ground for the company and its portfolio of airlines/brands.

For the first time the order is not 100% company specific. It's IAG's.

The statement, which follows briefings to staff a few weeks ago on the need to improve shorthaul profitability, is the next step in getting costs down closer to those of the low cost operators with whom BA is forced to compete on price as well as quality.

It reads: "These aircraft are intended for British Airways' fleet but only if the airline can make a profitable return from its short haul business. If it can't make a profitable return on short haul, IAG will reallocate these aircraft elsewhere in the group."

In other words, if sufficient improvements can not be gained or agreed by the unions, the aircraft and their routes will be transfered to IAG's growing low cost carrier Vueling .They will then operate them as a BA codeshare. That's what has happened to Iberia in Spain so it is reasonable to assume that the same recipe would be employed in the UK.

Short haul accounts for 73% of BA's operational activity. External factors which undermine its profitability include Heathrow's shortened day caused by the night jet bans and restrictions and the need to build holding time into the schedule on each and every round trip. Internal or self inflicted factors include Heathrow being being treated differently from all other airports on the network. Union agreements contain stipulations on Minimum Base Turnaround. The pilots'deal is different from that of the cabin crew. As result the aircraft and crews don't stay together through London. Once they reach Heathrow the aircraft, pilots and cabin crew all go their separate ways . They continue on different flights,- or go home. It makes rostering a nightmare and means that on days of weather or other disruption the shorthaul operation substantially falls apart and there are numerous cancellations. Some of these are down the the lack of a complete crew and others are inserted to protect the next day. The resultant immediate costs and loss of future business because customers are unhappy is enormous. The time spent sitting out the Minimum Base Turnaround also mean that crew run out of hours before they could complete the homeward sector. The result is more nightstops and more crew. That's a lot of money. Nor do BA's cabin crew clean the aircraft during the turnarounds. This means these are longer and more expensive than they need to be. Many BA crews don't put a lot of effort,- sometimes none at all,- into on board Duty Free sales either.


Then there are Heathrow's night jet restrictions. When added to the one hour time difference between UK and Europe they make large number of expensive nightstops on the continent inevitable. All these things make it very dificult to meet the company's stated aim of 12% return on revenue. The possibility of  Vueling progressively moving into BA's less profitable short haul activity is therefore very real . BA's staff and unions need fully understand the situation and react positively. Any old fashioned behaviour won't deliver the answer they want.

Making money on short haul has been a constant problem for legacy airlines. In BA's case it was no different for BEA before the 1972 merger. Much short haul revenue is to do with network contribution, something with which many finance people struggle. The geographical position of London and the airline's superior range of North Atlantic destinations and frequencies makes the British capital and the airline very competitive west of Europe. Its less advantageous location and BA's substantial pruning of its Far East, Asian and African networks over the past 15 years has undermined its position of both the as a global hub and hubmaster. Much of that role has slid eastwards to Turkey and the Gulf  and their airlines. The process is ongoing.

The Walsh/IAG view of airline economics appears to be that increased profitabilty comes primarily from cost savings,- of which there are certainly many potential sources in the group despite work already done in BA over at least two decades. Rightly or wrongly, that rather than expansion of the network or overall business, is the perceived gold mine.

 BA has one of the best and most flexible fleet replacement programmes in the world. 777-300ERs, 787-8,-9 and -10,  A350-900s and -1000s and a handful of A380s are on order. Each of them though is so far a direct replacement  for a 747, 777 or 767. There is no plan to increase the number of  long haul hulls in the fleet in the forseable future. That's not exciting  growth-filled stuff. IAG would argue that restricting production, pushing up yields for what is available and cutting costs is the only way to achieve the magical and  historically elusive 12% return. That could even be true. It may be the objective that isn't sustainable against the strategic downsides. Critics would say that in a growing market this tourniquet means managing relative decline, which will fuel competitors' growth and risk an accelerating downward spiral. The company has claimed that the lack of Heathrow slots limits its long haul growth. This is simply not true yet.  There are plenty which BA uses for non strategic and marginal short haul destinations or frequencies. What IAG really appears to lack are the aircraft and the real will to grow the long haul business. BA has chosen to be primarily a Europe/UK/USA carrier and it has no nostalgic feelings about its once much wider global role.

Against this background, the pressure on BA to deliver lower short haul costs is really on. The A320neo is the carrot and Vueling is the stick. IAG, the owner of both airlines will make the call. They will do it without emotion.