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British Airways | International Airlines Group (UK)

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British Airways remains one of the world's busiest airlines, but the entire industry was savaged in the late 1990s and early 2000s by a seemingly endless series of obstacles. BA suffered its fair share of the industry's problems as well as several all its own. In 2001, BA was overtaken by Lufthansa in numbers of international passengers carried, forcing it to drop its claim to be The World's Favourite Airline. It now ranks 5th by international passengers. In the mean time the group has soldiered on with a series of no-holds-barred cost-cutting exercises, shedding around 13,000 staff between 2000 and 2004, and even dropping its loss-making flagship service Concorde in order to regain profitability. That led to a significant improvement in performance for several years before a new set of problems engulfed the airline in 2008, resulting in its worst financial results for more than two decades. In 2009, BA announced outline terms for a proposed merger with its Spanish counterpart Iberia. This news was overshadowed by renewed disputes with cabin crew which led to extended walkouts during Spring 2010. However, the merger went ahead regardless, with the creation of umbrella company International Airlines Group.

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Brands & Activities

Following their merger at the end of 2010, British Airways and Iberia are now the two main brands within International Airlines Group. They retain their separate identities within the group. British Airways is the biggest airline in the UK, while Iberia is the national airline of Spain, and the biggest carrier between Europe and Latin America. IAG is the #3 airline group in Europe by revenues (behind Air France-KLM and Lufthansa) and #6 in the world.

Further deals have followed the Iberia merger. At the end of 2011, the group agreed terms for the acquisition of a third brand, rival UK carrier BMI, which was being sold off by owner Lufthansa. BA initially contracted to pay £172.5m for the smaller company. (A lower offer from Virgin Atlantic was dismissed by the German airline). However, that price was conditional on Lufthansa offloading the low-cost bmibaby satellite prior to completion. The German company was unable to find a buyer, so it fell to IAG to shut down the subsidiary brand and a considerably lower price tag for the whole deal was negotiated. The BMI business was absorbed into BA and no longer exists in its own right. In 2013, the group also snapped up Spanish low-cost airline Vueling for €113m, and subsequently absorbed rival carrier Clickair.

In 2015, IAG also secured the go-ahead to acquire Aer Lingus, the national airline of the Republic of Ireland, following protracted and politically charged negotiations with the Irish government. All cargo operations of BA and Iberia were combined and now operate as IAG Cargo. It is the world's #7 freight carrier.

Combined passenger numbers from all IAG's airlines were 100.68m individuals in 2016, up 14% on the year before. Its total fleet numbered 548 aircraft at the end of that year, flying direct to 279 destinations, and to many more via codeshare partners. The group doesn't break out precise numbers by all its individual airlines, but BA carried 44.5m passengers in 2016, and Aer Lingus around 12m. Total Revenue Passenger Kilometres - the industry's most widely used comparative metric - were 243.5bn for the group as a whole. BA accounted for 145.2bn, Iberia 51.1bn, Vueling 28.0bn and Aer Lingus 19.2bn.

The world's airlines have been forced to deal with a relentless catalogue of problems since the late 1990s. First came the economic turbulence in Asia which decimated business travel in that region. It was followed by savage competition on pricing between the main carriers over transatlantic flights. Then the horror of the World Trade Center attacks, and the long series of security alerts which followed in their wake; also foot and mouth disease, SARS and other fears of contagious illness; wars in Afghanistan and Iraq; and soaring fuel prices, although much of the damage from this was eventually passed on to passengers in the form of surcharges. More recently, all European airlines were affected by the fallout from Iceland's volcanic ash cloud in Spring 2010. In addition, corporate customers, the main source of profit for all international carriers and especially BA, have slashed their business travel budgets, and passenger levels fell by close to 20% between 2000 and 2010.

Several airlines failed to withstand the pressure and went bust; others survived only through government intervention. British Airways is still in business, but it has had a very rough ride indeed, made worse by its own unique problems. The spectacular own goals of the 1980s and early 1990s (such as "dirty tricks" campaigns against competitors, and expensive but unpopular rebranding exercises) are largely a thing of the past. Yet the company is still susceptible to regular labour disputes as it attempts to dismantle old-fashioned working practices which stand in the way of productivity. It was also forced to scrap its flagship Concorde service after 27 years. Much admired, the supersonic service had nevertheless become technically outdated and far too expensive to run at a profit. The company is also still capable of committing the occasional spectacular gaffe of its own devising. One example was its precipitate move into Heathrow Airport's new Terminal Five without adequate pre-launch testing, a decision which led to disastrous technical problems and thousands of lost or delayed bags.

The creation of IAG was the culmination of several years of jockeying for position against rival carriers, as the industry consolidated to withstand the changes in demand. BA had owned an investment holding of 13% in Iberia for several years and in 2003 was granted permission by EU antitrust regulators to strengthen that relationship with the creation of a commercial alliance. This allowed the two airlines to combine sales operations and route networks, and also co-ordinate capacity and pricing. Negotiations for a full merger gathered pace in 2008, and the outline terms for a merger were announced in November 2009, whereby BA and Iberia would each become separate operating divisions of an umbrella entity, and owned 55/45 by each company's respective shareholders. That deal completed at the end of 2010. There were also talks regarding a merger with Qantas of Australia (another longtime partner) towards the end of 2008, but these fizzled out because of Australian regulations barring control of the airline by a foreign investor.

For several years, BA had canvassed regulators for permission to form a similar partnership with American Airlines. Two applications for antitrust immunity in 1997 and 2001 were denied unless accompanied by significant reductions in landing slots, making such a plan unworkable. The two companies filed a third application in 2008 to cover a three-way joint venture between BA, American and Iberia. After almost two years of consideration, that proposal was given a tentative green light in early 2010. BA and AA were obliged to surrender four pairs of landing slots at Heathrow, rather than the 16 previously demanded. The acquisition of BMI added a further 42 slots at Heathrow.

BA already dominates both the UK's main international airports. It now carries around 54% of passengers passing through Heathrow and 30% at Gatwick. In 2008, the group moved its main operational base to the new Terminal 5 at Heathrow, although the launch of services there was severely disrupted by problems with baggage handling systems. Also that year, the group launched a separately branded all-business class service, OpenSkies, flying between Paris and New York. The group added further landing slots in Paris for the service with the acquisition of all-business carrier L'Avion. In 2017, the group announced the launch of a new low-cost longhaul carrier, named Level. This flies from Iberia's Barcelona hub to destinations in the US, Argentina and the Dominican Republic. Prices start at just €99 one-way. The service will be rolled out to other European cities if it proves popular with customers.

BA and Iberia have marketing partnerships with a number of other airlines, primarily through the OneWorld Alliance. Membership of this group has changed several times since formation in 1999. In addition to BA its remaining founder members are American Airlines, Qantas and Cathay Pacific. Other founder partners have left, and been replaced by Iberia, Finnair, Japan Airlines, Lan, Royal Jordanian and S7 of Russia. Malaysia Airlines and Airberlin joined in 2012 and Qatar Airways at the end of 2013. Brazil's TAM and Sri Lankan Airlines were new members in 2014. The partners offer a seamless global network of over 1,010 scheduled destinations in 154 countries. They also pool their passenger marketing and share flight codes (effectively flight numbers), as well as ticketing and reservations operations on some routes. However, OneWorld is now the smallest of the main three alliances, with 21% share of traffic between the US and Europe. Rivals Star Alliance and Skyteam have 35% and 28% share respectively.

Qatar Airways strengthened its bond with IAG in 2015 by acquiring an initial 10% stake in the group, and had raised this to 15% by May 2016. It said it will continue to increase its holding over time "within allowable limits". Currently non-EU investors are prevented from owning more than 49% of EU airlines.

Air Miles was for many years British Airways' long-established incentive marketing business, offering a frequent flyer scheme as well as promotional partnerships with a wide variety of retailers and service providers, allowing consumers to collect points in exchange for free flights. Towards the end of 2011, the scheme was restructured and rebranded under the new name of Avios.

In 2001, the group's tour operator business BA Holidays was transferred briefly into Accoladia, a joint venture with Thomas Cook. However the partnership was dissolved in 2003, and BA Holidays was returned to the main group. BA is also one of the biggest shareholders (with 9%) in online travel portal Opodo, co-owned with eight other European airlines. Until February 2006, the group also held a large minority holding in the London Eye tourist attraction and was its main sponsor.

Financials

For the year ending March 2009, BA reported a 3% increase in revenues to just under £9.0bn. After record performance in 2008 in which pretax profits soared by more than 50% to £992m, the group plunged into the red with a loss of £401m, the worst result in more than two decades as a public company. The company blamed reduced passenger and cargo demand as well as soaring fuel costs totalling more than £3bn. Passenger numbers fell 4% to 33.1m, down from a peak of 46.6m in 2000.

In an attempt to reduce continuing losses, BA announced a number of new developments during 2009. During the summer, it asked staff to take unpaid leave or effectively work for free for a limited period in order to reduce costs. In October it also introduced a new set of additional charges for customers wishing to reserve specific seats on any flights. However a reduction in cabin crew staffing levels proved exceptionally unpopular with BA's highly unionised employees. A call to strike was supported by a huge majority of members, with the result that the airline came perilously close to being grounded altogether for the entire Christmas 2009 holiday period. Just days before the strike was due to commence, a British court ruled that the vote was invalid because it included staff who had already agreed to take voluntary redundancy. Following a new vote, the union was given the mandate for new extended walkouts in Spring 2010 which caused the cancellation of hundreds of flights. This dispute rumbled on for another year before finally being resolved with an agreement in May 2011.

As a result of the continuing economic uncertainty, BA's revenues for the year ending March 2010 plunged by 11%, or £1bn, to just under £8.0bn. However, the actions taken to reduce costs resulted in an increase in pretax losses by only £130,000 to £531m. That included a £43m cost relating to the first wave of strikes by cabin crew. This was followed in Spring of 2010 by further strikes as well as the cancellation of all flights during part of April because of the volcanic ash cloud. The creation of IAG prompted a change of financial year, so BA reported a shortened set of accounts for the remaining nine months of 2010. Revenues were £6.7bn, and the company reported a pretax profit of £157m. For the full calendar year 2010, BA carried almost 30.6m passengers. Of this total, 26.3m were on international flights, placing BA as the #6 airline in that segment. Iberia was approximately two-thirds the size of British Airways prior to the merger. It reported revenues of €4.6bn for the full year 2010, and a pretax profit of €95m. Passenger numbers were approximately 20m.

IAG reported its first full year's trading for calendar 2011, with result snow stated in Euros rather than Sterling. Combined revenues were €16.34bn with a net profit of €555m. However, performance for 2012 was undermined by the impact of Spain's struggling economy on Iberia. Revenues rose 11% to €18.12bn, but the group reported net losses of €885m. British Airways contributed an operating profit of €347m, offset by a €351m operating loss at Iberia.

Performance since then has been aided considerably by the decline in oil prices, and the resulting effect on fuel costs. Revenues for 2014 were €20.17bn, of which 88% was generated by passengers. Pretax profits more than tripled to €828m, with a net profit after tax rebates of over €1bn.

Revenues peaked in 2015 at €22.86bn, before slipping back in 2016 to €22.57bn. However, net profit hit a new high in 2016 of €1.95bn, up 28% on the year before. The group's two most significant cost items - salalries and fuel - were both down year-on-year. British Airways contributed external revenues of £11.07bn in Sterling (or €13.9m), up 1% on the year before, with operating profit up 18% to £1.47bn. Iberia generated revenues of €4.23bn, down 2%, though operating profit rose strongly to €271m. Vueling added revenues of €2.07bn and operating profit of €60m, while Aer Lingus contributed a first full-year contribution of €1.77bn and operating profit of €233m. The combined group generates almost 35% of revenues in the UK, 16% in Spain, and almost another 16% in the US.

Background

British Airways' roots lie in the early days of civil aviation following the First World War. The first international air service was launched in 1919 by Aircraft Transport and Travel Limited, later Daimler Airways. Its maiden flight delivered one passenger and a cargo of newspapers, cream and grouse to Le Bourget in France. Other companies set up to compete, offering flights to France and Belgium, but these independent businesses began to face stiff competition from government-owned airlines in continental Europe. In 1924, Britain's four main air companies - Daimler, Instone, Handley Page and British Air Marine Navigation Company - merged to form Imperial Airways. Gradually flights ventured further afield than Europe. By the 1930s, Imperial was flying as far as India, Egypt and South Africa. The company's partnership with Australia's Qantas began in 1935 when the two teamed up to provide flights between the UK and Australia (with a stopover in Singapore).

The same year, Imperial got its first domestic competitor when another group of independent carriers allied to form a company named British Airways. In 1939, the British government ordered the merger of Imperial Airways and British Airways to form a nationalised BOAC (British Overseas Airways Corporation). After the Second War BOAC took responsibility for intercontinental flights, while spin-off airline BEA (British European Airways) flew to Europe. The arrival of passenger jets in the 1950s allowed BOAC rapidly to expand its already growing international network. As flying times and costs fell over the course of the 1960s, the package holiday business took off, targeting a mass market. BEA launched its own charter airline, BEA Airtours (later Caledonian Airways) to handle this rapidly growing market.

In 1967, another government study proposed the re-merger of BOAC and BEA, and the formation of a second national airline out of the clutch of new operators who had grown up to serve the package boom. As a result, British Caledonian was launched in 1970, while BOAC and BEA were finally combined four years later as British Airways. The merger did not go smoothly, and the company was plagued by severe financial and labour problems in its first years. The launch of Concorde in 1976, a partnership with Air France, was one of the few successes of the period, though it was itself a hugely expensive operation. By the early 1980s, BA was chalking up a deficit of £540m.

In order to help stem the company's financial problems, the government finally decided to privatise BA in 1980, although it took another seven years of restructuring before the shares were finally floated in February 1987. British Airways acquired British Caledonian four months later, the first of a series of aggressive moves designed to win the newly liberated airline a global market. In 1989, BA also attempted to gain control of USAir and Belgium's Sabena. The first acquisition was blocked by rival US airlines (BA had to settle for a 25% stake, later sold) and the second deal foundered at the negotiating table.

In 1991, the company began to develop its international network through a series of deals. Over the course of two busy years, a co-operation arrangement was signed with Ireland's Aer Lingus, the company launched German subsidiary Deutsche BA, acquired failed package firm Dan-Air, and bought 50% of French-based TAT European Airlines (the other 50% was bought in 1997). BA also launched its Air Miles marketing and rewards scheme. In 1992, British Airways Regional was launched and BA became the Australian government's partner in Qantas, buying a 25% stake. The rest of the merged Qantas and Australian Airlines was floated in 1995. More damagingly, the airline spent a great deal of time and money defending (and eventually losing) a libel action brought by Richard Branson's Virgin Atlantic, which claimed British Airways had mounted a "dirty tricks" campaign designed to hinder the upstart carrier's transatlantic business.

In 1993, BA rescued another failed operator, Brymon European Airways, and began a series of franchise deals with other regional operators, including Comair of South Africa, SunAir and Maersk of Denmark, City Flyer Express, British Mediterranean, GB Airways and Loganair. Under the franchise arrangement, these airlines adopted BA's livery and branding in return for marketing and management support. Charter flight subsidiary Caledonian Airways was sold in 1995. In late 1998, BA bought out City Flyer for £75m, strengthening its hold on Gatwick airport.

In anticipation of a further deregulation of global airspace, an alliance with American Airlines was first proposed in 1996, and this led to the launch two years later of the OneWorld marketing partnership in response to a similar scheme, the Star Alliance, operated by United Airlines and Lufthansa with SAS, Brazil's Varig, Thai Airways and Air Canada. OneWorld brought together AA and BA with partners Canadian Airlines, Cathay Pacific Airways, and Qantas. The airlines agreed to promote each other's services to their passengers as preferred partners, combining timetables and frequent flyer incentives programs. In 1999, BA and American teamed up to buy a stake in Spain's Iberia airline, then being partially privatised by the Spanish government. BA took a 9% stake backed by AA's 1% at a cost of £212m. The Spanish airline also became part of the OneWorld alliance. However OneWorld suffered a severe blow in mid-year when US regulators denied AA and BA anti-trust immunity, effectively ruling out any closer form of joint venture.

This was only the latest of a growing number of problems. Shortly after the "dirty tricks" row with Virgin, the company made a bid to present a more international image by spending £60m on a major rebranding exercise. This included replacing the Union Jack on its aircraft tailfins with more artistic symbols representing its different destinations. It proved another PR disaster, as press, staff and even Prime Minister Margaret Thatcher expressed their dislike of the new designs. Finally the airline was forced to repaint its fleet and restore the Union Jack. A year later, a three-week strike by BA cabin staff in summer 1997 created turmoil at Heathrow airport, costing £125m in cancelled flights and leading to morale problems which ran on for several years. At the same time, competitive pressure on BA ramped up dramatically, as UK share was threatened by new "no frills" airlines Easyjet and Ryanair. BA launched its own low cost airline, Go Fly, in 1998. The war between airlines to keep market share led to heavy discounting, and this hurt most in the highly profitable business market. Meanwhile economic problems in the Far East led to a huge drop in Asian passengers. This created a 61% slide in profits for the year to 1999, the company's worst result since the early 1990s.

In response BA spent £200m to tempt back business customers, upgrading its Club World business class on long-haul flights with beds, improved entertainment, phones and fax facilities. At the same time it made further cuts, shedding up to 2,000 staff, as well as loss-making routes worldwide. Yet there appeared to be no end to new problems for the company. Later that year, Lufthansa, BA's strongest competitor in international flights, announced plans to take a 20% stake in British Midland, BA's main domestic rival. The year climaxed with an embarrassment for BA when the London Eye, a giant ferris wheel erected on the River Thames and sponsored by the group, failed safety tests. The attraction was to have been opened to the public on New Year's Eve, as part of London's millennium celebrations. Instead the opening was postponed until February 2000.

By the beginning of 2000, CEO Robert Ayling's position had become increasingly precarious. With the prospect of another poor year's performance to report, the BA board asked him to resign in March 2000. In fact financial results were not as catastrophic as had been feared, thanks to sizeable profits on the sale of non-core assets. Net pre-tax profits crept in at just £5m. New CEO Rod Eddington announced another cost-cutting programme in Spring 2000, including the sale of loss making French subsidiary Air Liberte. He also began moves to sell the group's no-frills subsidiary Go. (After several months of negotiations with different partners, Go was sold to management in June 2001, and acquired a year later by Easyjet.). BA then entered merger negotiations with Dutch national carrier KLM, but these stalled on disagreements over price. (KLM was later acquired by Air France). At the same time Concorde, one of the group's more profitable operations, was grounded for a year following an Air France crash.

The high cost of maintaining BA's second base at Gatwick airport as well as a number of unprofitable flight routes to Europe forced yet another round of cuts and job losses in 2000 and 2001. A fresh set of problems beset the company in September 2001, following the World Trade Center terrorist attacks. A preliminary suspension of flights, followed by huge drops in passenger numbers as travellers took the decision not to fly, led to a crisis for all airlines. The impact was clear in BA's financial results for the year to 2002, its worst in more than a decade. The group reported a pre-tax loss of £200m, despite £145m of gains from disposals including the sale of Go. (In 2001, the group had reported a pre-tax profit of £150m). However the loss was lower than investors had feared.

BA announced yet more job cuts, and said it would also reduce capacity by up to 30% over three years. As a result of the heightened competition from rivals, BA and AA also renewed their attempts to broaden their OneWorld alliance into a closer affiliation. The US Department of Transportation finally responded in 2001 with a tentative green light, but on condition that both carriers give up a significant number of their existing flights from London. Fearing that the competitive advantage of closer partnership would be outweighed by the loss of these slots, AA and BA once again abandoned their plans. In a further sign of the times, the once profitable flagship Concorde service was finally cancelled altogether in 2003 following the downturn in business.

In summer 2003, BA faced new labour problems when staff at Heathrow airport mounted unofficial strikes over new management systems. The strikes coincided with the start of the holiday season, causing delays of up to four days for some travellers, with potentially damaging results on BA's public image. Although that situation was eventually resolved, the spectre of strike action emerged once more the following year, although an actual walkout was averted. In summer 2005, baggage handlers went on strike in protest over the sacking of 800 workers at an entirely separate company which produced inflight meals for BA. That action led to the cancellation of around 500 flights to and from Heathrow, causing delays to more than 100,000 passengers.

A year later, BA's traditional summer troubles started in June, when the airline came under investigation by competition regulators in the US and UK for colluding with rivals to fix an agreed rate for fuel price surcharges on transatlantic flights. The investigation was initiated after Virgin Atlantic, also involved in the fixing cartel, confessed its involvement in return for more lenient punishment. Commercial director Martin George was suspended pending the outcome of the investigation, and later resigned from the group. BA was fined a combined total of £270m by the UK's Office of Fair Trading and the US Department of Justice, and together with Virgin settled a class action suit brought in the US by agreeing to split another $204m among all passengers who had bought tickets. (George and three other defendants were tried on charges of price-fixing in 2010. That enormously expensive case collapsed a few days after it opened as a result of the publication of new evidence, and the four BA executives were exonerated of any guilt.) Soon afterwards, heightened security alerts on all passenger flights during the summer generated substantial additional costs.

The airline continues to wrestle with a series of staff-related rows. In 2006, BA was forced to deal with considerable negative coverage as a result of its misjudged disciplinary treatment of a check-in clerk who refused to abide with company policy regarding the wearing of religious symbols (in this case a small cross). In January 2007, a long-running row with cabin crew staff over the excessive numbers of sick days reported (still approximately two-thirds higher than the national average) led to an announcement of industrial action, including three strikes during January and February. The action was called off less than a day before the first strike after hours of intense negotiation led to a last-minute deal. During the summer the company then suffered weeks of disruption to baggage handling as a result of a severe backlog caused by a terror alert. The threat of strike action re-emerged in early 2008 when BA's pilots threatened to strike over the company's plans to employ a separate workforce for its new OpenSkies subsidiary.

Before that issue was resolved, a new public relations disaster was created by the airline's over-ambitious hard launch of the new Terminal Five at London's Heathrow Airport. Despite the promise that the new terminal offered revolutionary baggage handling technology designed to create a smoother and more efficient service, the system broke down repeatedly in its first two weeks of operation, leading to the cancellation of more than 600 flights in ten days and a backlog of around 20,000 lost or delayed items of luggage. BA subsequently two senior members of its executive committee over the fiasco.

British Airways' advertising has long been a cause celebre in the UK, the object of intense interest within the industry despite a comparatively small budget. Upon the creation of British Airways in the early 1970s, the advertising account was placed with the local office of FCB, which had previously managed BOAC, one of the two airlines from which was formed. It was FCB which coined the catchphrase "We'll take more care of you".

However, the increasingly serious financial predicament in which the airline found itself by the early 1980s meant that a more dramatic solution was required. In 1982, to coincide with the privatisation of the previously state-owned airline, BA's account was moved to Saatchi & Saatchi. It was widely rumoured that this appointment was a "reward" to Saatchi's for getting Margaret Thatcher elected as Prime Minister. Saatchi reinvented BA with a lavish special effects-driven ad in which the entire island of Manhattan appeared to have been transported by BA to London. A series of similarly extravagant commercials followed, sealing BA's reputation as "the world's favourite airline", the new catchphrase invented by Saatchi.

The ousting of Maurice and Charles Saatchi from the agency they had created prompted British Airways to move with them to M&C Saatchi in 1985. Maurice Saatchi later acknowledged that the BA business represented a relatively small amount of the agency's revenues but more than half its reputation. The arrival of BA's new CEO Willie Walsh in 2005 prompted another review, and the advertising account shifted to Bartle Bogle Hegarty, who have continued to deliver high quality, creatively led advertising for the airline. The need to reduce costs led to another review in 2013, but BBH kept the business.

Last full revision 5th December 2017

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