"Big airlines are being challenged and have to respond intelligently and the survivors will be those who respond quickly"

The first time Rod Eddington came to the UK in the mid-70s, it was as a Rhodes Scholar from Western Australia. And when he returned in 2000 after a 20-year gap, it was as the British Airways CEO. But the top job at the English airline has been anything but easy. Last fiscal BA reported its biggest ever loss since it was privatised 15 years ago. And although the first quarter pre-tax earnings of the current fiscal were surprisingly good, the worst isn't behind BA yet. In Delhi recently on a two-day trip, the cricket-loving Eddington-last year he won over arch-rival Richard Branson of Virgin by singlehandedly winning a match for Branson's team-spoke to BT's R. Sukumar and R. Sridharan on the turmoil BA and the airline industry is going through. Excerpts:

It's been a year since the 9-11 attacks. Everybody knows that the airline industry has been badly affected since, but just how fundamental and long-term is the impact?

I think full service network airlines like British Airways and United Airlines have all had to face some real challenges. Some of those challenges are a function of 11th September, some of them aren't. If you look at the US economy, it started to come off in the beginning of March 2001. So we were beginning to see some economic softening, particularly in North America, even before the attacks. What are the challenges that are a function of 9-11? The enhanced security arrangements, which are additional expenses in our business and those arrangements, particularly in the USA, deterred a lot of our customers from flying.

Your first quarter earnings were surprisingly good. But a lot of it came from cost-cutting. Going forward, can you sustain this kind of earnings?

If you take the first quarter earnings, the key pieces were-revenue down 10 per cent, costs down 14 per cent. We could still post that earning not because our topline recovered, but because we were able to move quickly to take out some key parts from our cost base. We grounded some aircraft, we took a range of jobs out of our business, we worked very hard to try and avoid compulsory redundancies. And that has improved our operating margins. So, basically it's built around cost savings because we know it will be some time before revenues come back.

How long is that going to be?

Good question. But nobody knows, including me. What we have said is that we will assume that revenues remain soft for the rest of the financial year. So we are not banking on revenue recovery for the rest of the financial year.

If you look at the market per se, low-cost airlines are eating into the marketshare of bigger airlines like yours. What is your response to this?

We at BA have done a number of things to respond. First, we have changed our pricing and distribution process. Airline pricing used to be extremely complicated. We've simplified our pricing structures, and that has given us a lot of business online. That's unashamedly a learning from the no-frills players. Also we've worked hard to take costs out of our business. We know that, as full service network carriers, we can never get down to their levels of pricing-in part because we have lounges, we provide meals. But we have to narrow the gap. We've got to simplify our business. The other thing that we have done is to stop flying to places that don't contribute to profitability.

The low-cost carriers are not only eating into your market, but unlike their bigger rivals, are also profitable. Does it mean that the days of bigger airlines are over?

No, it doesn't. But what it says is that the big airlines are being challenged and they have to respond intelligently and the survivors will be those who respond quickly. I have no doubt that in Europe, there are too many full service network carriers. If you look at Europe, every country wanted to have its own international airline. So there are too many full service network airlines. At some stage, there has to be a consolidation. Certainly, there will be fewer players in the game and those in the game will be bigger. How long will it take for the consolidation? I don't know because the market will determine that. But it's clear that there are too many players in the game.

"Open skies mean different things to different people. Governments don't embrace open skies as long as they own the national carrier because it sometimes changes the competitive dynamics"

If you look at the US, consolidation doesn't always work out for the better.

I would argue that the process of consolidation (in the US) isn't finished yet. Because still there are too many airlines in America. Let me give you an example of another industry. I worked in Korea in 1998. In Korea, there were four or five companies that tried to become global car manufacturers. You had Daewoo, Hyundai, and Kia who said we will become global car manufacturers. At that point there were 20-30 global car manufacturers. How many are there now? Many many fewer. And how did that work? Any industry in order to rationalise will have to consolidate. We have to see how the airline business in Europe gets consolidated.

Looking at the US market again, you have the no-frills airlines and in the last couple of years you've had corporate-oriented chartered airlines that are at the premium end of the segment. Aren't the mainstream airlines getting squeezed between the two ends of the market?

There are a couple of reasons why the corporate airlines have done so well in the US. One, after 9-11 a lot of customers feel that by flying in a corporate jet their security is really assured and guaranteed. Two, there are so many small airports in the US, so you can get from anywhere to anywhere with a relatively small airfield, and corporate jets can often do that. The other thing is that there is no significant bad news in the US since September 11. The US government threw some $5 billion at the carriers. The big carriers got $300 million to $800 million for nothing. So they have been able to keep going. But the market hasn't cleared. You have too many players offering too much capacity. They are in big trouble and they would be the first to admit it.

You have been a vocal advocate of open skies. What's your vision of an open skies market?

Open skies mean different things to different people. Governments don't embrace open skies as long as they own the national carrier because it changes the competitive dynamics sometimes. Countries that embrace open skies in the broadest sense are those who've got out of the business of owning airlines. The trick is how do you have an open skies regime and have genuine access to the other guy's market. That's the challenge. Open skies firstly are part of the ownership regime where the airlines are controlled by the market rather than the governments and where the traffic rights can be relaxed. There is easy entry and exit. I think there is a role for governments in the airline industry but it is in safety regulation and the like and not in the ownership and driving of commercial decisions. Some countries are there, some are taking time. I always have been a pragmatist on the issue. But I have no doubt that ultimately the airlines belong to the private sector and not to the public sector.

"You've always got to ask the question: Would a foreign airline partner be welcome? If you are not welcome, then there's no point in going into any investment"

You have a huge back-office operation in India. Do you plan to commercialise it and offer services to others in the future, like what GE has done with its back office here in India?

Our priority would always be delivering services to our own business. I think there are opportunities to leverage what you do here, sometime in the future. But for now our strength is that we are an airline and a successful airline.

You have said that you want to double the number of weekly flights from India over the next five years. That would mean you are pretty happy with the Indian market...

I have always believed that India is an extraordinary country. So large and diversified that there are substantially unrealised tourist opportunities. The question is how can we grow our business intelligently here? If you think about it, we've got one flight every day between London and Delhi whereas we have eight or nine flights from London to New York every day. I think it's a market that's only just beginning to show what it is capable of, and the challenge for us will be to participate in the growth in an intelligent way, not just in the front end of the aircraft, but at the back end as well-not just in Delhi and Mumbai, but get into other key gateways also.

Going back to the question of consolidation, would BA participate only in markets like Europe or also look at places like India where Air India is to be privatised?

At the first instance, you should always look at your own backyard. So when consolidation happens in Europe, the first priority for BA will be to make sure that we are a consolidator and not a consolidatee. The challenge for us always will be, when we look at other opportunities is, what is the capital requirement and what is the capital we have? One of the challenges for BA when I arrived was that we had 6.5 billion pounds of debt on our balance sheets. It's now less than 6 billion pounds. My priority is to conserve capital, not spend.

But hypothetically speaking, if any consortium in India made a bid for Air India would BA be interested in becoming a strategic investor?

The key issue is, when the Indian government does decide to privatise Air India, what is the best combination of investment to make Air India work? The first question is which of the key entities in India will be a key investor in Air India? That's where I would start. I would see who's got the management expertise in India and the capital to ensure that the privatisation is a success. Now if that group wants a foreign airline partner, we could come in the process. But you've always got to ask the question: would that foreign airline partner be welcome? If you are not welcome, then there is no point in going into any investment.