Frills and spills

ALONGSIDE “rip-off” energy companies, Sir Philip Green and anyone who thinks that a hard Brexit is not brilliant news, Britain’s tabloid newspapers have a new hate figure: British Airways (BA). Britain’s flag-carrier prides itself as a premium airline, a cut above budget operations such as easyJet and Ryanair. But now BA is trimming the frills too, leaving its frequent flyers irate. The Sun has renamed the airline “British Bareways”. Yet although BA is copping plenty of criticism, its strategy looks a sound one.

The kerfuffle stems from BA’s efforts to cut costs. It recently got rid of free food and drink in economy class on most short-haul flights (instead it is selling sandwiches and Percy Pig sweets from Marks & Spencer, another company beloved by Middle England). First-class passengers are horrified by reports that they will have to make do without flowers in the loos or an extra starter before their meals. Next year it plans to squeeze 20% more seats into some of its aircraft. Reports of planes grounded owing to lack of toilet paper have done little to dispel BA’s bargain-basement image.

But the no-frills approach is well suited to the times. As the British economy slows in 2017-18, demand for air travel is likely to drop. Last year airline fares fell by more than 2%. Demand on some routes is weak because of fears of terrorism. And budget airlines are still expanding their fleets aggressively. This means that BA will have to “change to compete on price, or shrink,” warns Mark Simpson, an aviation analyst at Goodbody, a stockbroker.

Alex Cruz, BA’s aptly named boss who took over in April last year, seems to be the right man for the job: he was previously chief executive of Vueling and Clickair, two low-cost airlines. As he explained to investors last November, BA ultimately intends to cut its headline fares. This will allow it to compete better against the likes of easyJet and Ryanair. So far, the ploy seems to be working. While the FTSE 100, Britain’s main share index, has inched up over the past three months, the share price of International Airlines Group (IAG), of which BA is the largest part, has jumped by a fifth.

The worry is that customers will protest against the withdrawal of their free Bloody Marys by switching to other airlines. But two big factors are in BA’s favour. The first is its frequent-flyer programme, which has over 7m members (the airline carries 45m or so passengers a year). Many members are fiercely loyal because points accumulated by flying with BA can be spent on other things.

The second is BA’s unique position in Britain’s airline market. Even if quality declines, on short-haul routes BA’s monied clientele have few swankier alternatives. IAG has a 56% market share at Heathrow, Britain’s best-connected airport. No other grouping of premium airlines offers so many routes from Britain to Europe. And so, like the ice-cream seller in the economic thought experiment credited to Harold Hotelling, BA has an incentive to cut corners on service, snatching budget airlines’ customers while losing none of its own.

Which explains why the penny-pinching is likely to continue. Flag-carriers were left behind in the 1990s by the rise of no-frills airlines in the short-haul market. Now Willie Walsh, IAG’s boss, wants to lead the low-cost revolution in long-haul. BA is running cheap flights in competition with Norwegian, a pioneer in cheap long-haul, from Gatwick airport, near London. In March IAG launched Level, a low-cost airline, in Barcelona, to fight off Norwegian’s new hub there which is expected to open in June. And gossips in the City of London predict that IAG will eventually snap up its budget rival. “British Bareways” looks like an increasingly appropriate label.