MOD005489: International HRM and Change level 7

British Airways Case Study: 2017

Introduction

British Airways (BA) (2017) is one of the world's leading scheduled international passenger airlines, operating one of the most extensive airline route networks.

A BA Board was established by the United Kingdom government in 1972 to manage the two nationalised airline corporations, British Overseas Airways Corporation and British European Airways, and two smaller, regional airlines, Cambrian Airways, from Cardiff, and Northeast Airlines, from Newcastle upon Tyne. On 31 March 1974, all four companies were merged to form BA. After almost 13 years as a state company, BA was privatised in February 1987 as part of a wider privatisation plan by the Conservative government. The carrier soon expanded with the acquisition of British Caledonian in 1987, followed by Dan-Air in 1992 and British Midland International in 2012.

In July 2008 BA announced a merger plan with Iberia, another flag carrier airline in the Oneworld alliance, wherein each airline would retain its original brand. The agreement was confirmed in April 2010, and the European Commission and US Department of Transport permitted the merger and began to co-ordinate transatlantic routes with American Airlines. In October 2010 the alliance between BA, American Airlines and Iberia formally began operations. The alliance generates an estimated £230 million in annual cost-saving for BA, in addition to the £330 million saved by the merger with Iberia. This merger was finalised in January 2011, resulting in the International Airlines Group (IAG), the world's third-largest airline in terms of annual revenue and the second-largest airline group in Europe.

Strategic Report (BA Annual Report, 2016)

The Directors present their Strategic report for the year ended 31 December 2016.

British Airways Plc („British Airways‟, „BA‟ or „the Group‟) is the UK‟s largest international scheduled airline and one of the world‟s leading global premium airlines. The Group‟s principal place of business is London with significant presence at Heathrow, Gatwick and London City airports. Part of International Airlines Group (IAG) and together with joint business agreements, codeshare and franchise partners, British Airways operates one of the most extensive international scheduled airline networks. British Airways is a founding member of the oneworld alliance, whose member airlines serve more than 1,000 destinations to over 150 countries.

The Strategic report is presented in the following three sections:

  • Management review
  • Financial review
  • Principal risks and uncertainties

Management Review

Overview

  • Total revenue: £11,443 million, up 1.0% (2015: £11,333 million)
  • Operating profit before exceptional items: £1,473 million, up 16.5% (2015: £1,264 million)
  • Passengers: 44.5 million, up 2.8% (2015: 43.3 million)

In 2016 the Group operated in a challenging external environment, this included: low fuel prices and interest rates promoting the growth in market capacity and competition; uncertainty following the UK vote to leave the European Union (EU); terrorist attacks in key destination markets; and operational disruption due to adverse weather and air traffic controller strikes. During the year management action sought to mitigate where possible the impact of these challenges and the Group also directly benefited from a low fuel price compared to the prior year. As a result, the Group delivered a record pre-exceptional operating profit of £1,473 million (2015: £1,264 million) for the year, a 16.5% increase on last year. Due to Sterling‟s depreciation, the Group‟s revenues generated in overseas currencies benefited, but overall the impact of exchange was negative on the result.

During the year there has been significant change in the senior executive team, including the appointment of a new Chief Executive Officer and Chief Financial Officer. A new business plan, Plan4, has now been developed. The Company‟s new vision is: to be the airline of choice with personalised service, exceptional reliability, a digital mind-set and unique British style.

Network development and fleet

The Group continues to extend the network further, introducing 20 new flight destinations in 2016. These included new long-haul services to Tehran in Iran, San Jose in California, San Jose in Costa Rica and Lima in Peru, and short-haul flights to Porto in Portugal, Mahon in Menorca, Palermo in Sicily, Biarritz in France and Inverness in Scotland. A fourth London airport was added to the network, launching new flights from Stansted. In 2016 British Airways entered into a new joint business agreement with Qatar Airways, providing customers with better links between the UK and the Middle East, as well as destinations Qatar Airways serve beyond Doha. New codeshare agreements with Alaska Airlines and China Eastern Airlines during the year were also entered into.

The Group continues to modernise its fleet, introducing more fuel efficient new generation technologically advanced aircraft. The last two Airbus A380s entered service during the year taking the total number to twelve. In addition, eleven stretch Boeing 787-9s were added to the fleet. During the year the Group operated more than 290 aircraft, carrying customers to more than 200 destinations in over 80 countries.

Product and service development

Focusing on customer experience in a cost efficient manner is important to the success of the airline. The Group completed a programme to refresh the interior of 18 Boeing 747 aircraft which increased the number of seats in the Club World business cabin. The Group‟s first installation of WiFi on aircraft was completed in December 2016. British Airways continues to update and renovate the premium customer lounges at key airports, including refurbishing the First Lounge at Heathrow Terminal 5 and lounges at London Gatwick and Dubai. The Group announced an £88 million investment in lounges for Boston, San Francisco, Miami, Chicago, Houston and Seattle. During the year British Airways received the Consumer Superbrands title for a third year in a row, as well as the Business Superbrands title for the second consecutive year. British Airways announced a partnership with Marks and Spencer to start selling food on short haul services within the economy cabin from January 2017, enabling the airline to significantly improve product quality and choice for customers.

Operational performance

The peak summer season was operationally difficult, primarily due to factors outside of the airline‟s control. In particular, air traffic controller strikes in Europe, adverse weather conditions and airspace congestion led to punctuality decreasing by 1% to 77% in 2016 compared to the previous year. However, regularity (defined as the percentage of flights completed to flights scheduled, excluding flights cancelled for commercial reasons) continued to be above 99%. The Group also rolled out a new check-in and departure control system, FLY, in all stations across the globe during the year.

Cost focus

The Group continues to focus on reducing controllable costs by addressing legacy areas of the cost base. During 2016 an employee restructuring and transformation programme was announced related to initiatives developed to improve the overall efficiency and effectiveness of the Group. A charge of £124 million in respect of this programme was recognised for the year, presented as an exceptional item in the income statement.

Other significant matters

In 2016 BA was proud to partner with TeamGB and ParalympicsGB, providing the teams with flights to and from Rio de Janeiro for the Olympic and Paralympic Games. British Airways was honoured to celebrate Team GB‟s medallists‟ achievements with a special gold-nosed 747 charter for the return flights from Rio de Janeiro.

British Airways became the first airline to pledge support for the military and sign up to the UK Armed Forces Covenant. The Group recognises that it can play an important role in supporting the Armed Forces and their families and has committed to offering a 10 percent discount on all BA operated flights across BA‟s global network. Additionally, during 2016 BA reviewed and enhanced its policies and practices to ensure that no Modern Slavery is taking place within the business or the supply chains. British Airways continues to work with Comic Relief through our partner charity Flying Start, with the total amount raised now standing at more than £14 million.

Outlook

BA has set a solid foundation for the future, generating a £1,473 million pre-exceptional operating profit in 2016 (2015: £1,264 million). The Group has built a robust plan for the future, Plan4, which will build on this success. Plan4 targets a sustainable return on capital of 15 per cent, with a lease adjusted operating margin in the range of 12-15 per cent. Plan 4 is built around four key strategic pillars:

  • Customer – to invest and innovate where customers value it most
  • Operations – to be safe, reliable and responsible
  • Efficiency – to improve capital efficiency and have competitive costs
  • People – to unleash our true potential

To invest and innovate where customers value it most

In Plan4 the customer is at the beginning of everything that British Airways is going to do. The Group will make significant investment across all cabins, over the next five years, in order to enhance the customer experience. The programme to install Wi-Fi across the fleet will continue in 2017, with 90 per cent of long-haul aircraft complete by 2019. The first release of new British Airways app was launched in December, giving customers much more control of their journey, enabling them to rebook flights during periods of disruption, giving them more choice and more control. Further releases will be made through 2017.

In Club World, the ambition is to create an experience that exceeds that of key competitors. £400 million will be invested in Club World to transform food and drink offered to customers, delivering a step-change in service. Improve the „sleep offering‟ on key overnight flights by changing service routines and provide new bedding and amenities. On the ground, the First Wing in Terminal 5 will open in 2017, allowing First and Gold Executive Club members faster direct access to the lounges after check-in. The Group will also invest significantly in lounges at London Heathrow, Gatwick, New York JFK and Boston. Club Europe will also be reintroduced on UK domestic flights in 2017.

To be safe, reliable and responsible

Operational reliability will remain a key focus over the next five years. British Airways was again more reliable than its key competitors in 2016, with more on-time departures from London than EasyJet and Ryanair according to Civil Aviation Authority (CAA) data. External variables, such as air traffic control, will continue to have a significant effect on operations. From 2017, a new resilience plan aims to improve punctuality through a greater focus on aircraft turnaround and additional summer aircraft availability by re-timing retirements and planned maintenance. Baggage performance will also be improved, especially transfer baggage, through a new integrated baggage system and increased baggage capacity.

To improve capital efficiency and have competitive costs

Plan4 includes a programme of initiatives to reduce adjusted non-fuel unit costs over the next five years. Alongside the structural change programmes already announced, new technology will be utilised to increase efficiency and simplify the operations and head office. To improve the capital efficiency of the fleet, where possible, the number of seats will be increased.

To unleash British Airways’ true potential

Unleashing the true potential of our people is one of the strategic pillars of Plan4. This strategy will equip colleagues at all levels of the organisation with the skills necessary to deliver and exceed expectations consistently. Delivering high standards of customer service is fundamental to our success. These four pillars form the foundation of Plan4, focusing on the fundamental issues that must be addressed in order to succeed. This plan will help British Airways become a more agile and efficient company that can innovate and deliver for its customers competitively.

Industrial Relations at BA

BA staff are represented by a number of trade unions, pilots are represented by British Airline Pilots' Association (BALPA), cabin crew by British Airlines Stewards and Stewardesses Association(BASSA a branch of Unite), while other branches of Unite and the GMB Union represent other employees.

BA‟s, CEO Bob Ayling faced strike action by cabin crew over a £1 billion cost-cutting drive to return BA to profitability in 1997. This was the last time BA cabin crew would strike until 2009, although staff morale has reportedly been depressed since the early 2000‟s. In an effort to increase interaction between management, employees, and the unions, various conferences and workshops have taken place.

In 2005, strike action was taken by union members over a decision by Gate Gourmet (BA‟s catering company) not to renew the contracts of 670 workers and replace them with agency staff. It is estimated that this strike cost BA £30 million and caused disruption to 100,000 passengers. In October 2006, BA became involved in a civil rights dispute when a Christian employee was forbidden to wear a necklace bearing a religious symbol. BA's practice of forbidding religious symbols was publicly criticised by British politicians such as the former Home Secretary John Reid and the former Foreign Secretary Jack Straw.

Relations have been turbulent between BA and Unite. In 2007, cabin crew threatened strike action over salary changes to be imposed by BA management. The strike was called off at the last minute, causing an £80ml loss. In December 2009, a ballot for strike action over Christmas received a high level of support, but the action was blocked by a court injunction that deemed the ballot illegal. Negotiations failed to stop strike action in March 2009 when BA withdrew perks for strike participants.A further strike was announced for May 2010, British Airways again sought an injunction. Members of the Socialist Workers Party disrupted negotiations between BA management and Unite to prevent industrial action. Further disruption occurred when Derek Simpson, a Unite co-leader, was discovered to have leaked details of confidential negotiations online via Twitter.

After the 2010 dispute BA started recruiting new cabin crew on inferior terms. All new recruits at Heathrow are in a operation called Mixed Fleet, which now makes up 28 per cent of the cabin crew. Other Heathrow crew (contracts pre-2010) are in Eurofleet and Worldwide Fleet. Mixed Fleet staff are said to be unhappy about what their union, Unite, calls “poverty pay”. Len McCluskey, general secretary of Unite, stated that “new entrants to „mixed fleet‟ are paid a basic of £12,192 per annum”. BA insisting it‟s checked all the pay slips and the least anyone earned was £21,151 (basic salaries are supplemented by flying allowances).

Moreover, Unite state that safety is being jeopardised. Over two-thirds of cabin crew surveyed admit to reporting for duty when they were actually unfit to fly because they could not afford to be „off sick‟ and lose the allowances involved. Furthermore five out of six Mixed Fleet cabin crew reported that their financial circumstances since joining BA have caused “stress and depression”. Some staff have been “sleeping in cars between flights because they could not afford the petrol to get home” (Independent, 2017).

The strike reflects cabin crew's unhappiness with their current pay and a rejection of a new pay offer of 2% in the first year and 2.5% in years two and three - a rise that the union said would leave staff £20 a month better off after tax.

With UK inflation rates heading towards 2% in the last quarter of 2017 and 2.7% by 2020 the offer only keeps pace with inflation and does not offer a substantive improvement.

Closure of the Pension Scheme

British Airways proposes the closure of a major pension scheme, angering trade unions representing some workers who have already been on strike this year in a continuing dispute over pay.

British Airways, owned by International Consolidated Airlines Group (IAG), said it had to address “the significant and growing funding deficit faced by the New Airways Pension Scheme (NAPS)”, and that under new proposals it would close the scheme.

“We will be proposing BA new pension arrangements that will improve benefits for the majority of UK colleagues,” British Airways said in a statement, adding NAPS, which has some 17,000 BA staff members, would be closed to future accruals but the pension benefits already earned would be protected.

However trade unions Unite and GMB said in a joint statement that the move was a “bitter disappointment”, saying they had been working to explore options to keep the scheme open. “This announcement sadly confirms that our advice has gone unheeded and that we have been unable to convince British Airways that keeping the scheme open is the right thing to do, for both the company and its employees,” the unions said in a statement.

“Instead of certainty many will now face uncertainty as their retirement approaches.”

Separately Unite members of BA‟s “mixed-fleet” cabin crew that serves long and short-haul routes have been on strike several times this year, in a long-running dispute over pay and sanctions against those taking industrial action.

In August Unite said it would suspend strike action pending further talks aimed at resolving the dispute. (Reuters, 2017)

The Daily Telegraph (2017) reported that thousands of British Airways employees‟ retirements have been plunged into uncertainty as the carrier announced proposals to close its defined benefit scheme.

Unions blasted the move and expressed their “dismay and disappointment” at proposals from the British flag carrier to shut the New Airways Pension Scheme (NAPS) to future contributions from its existing 17,000 members. It had already been closed to new employees in 2003 and now 20,000 workers pay into the company‟s defined contribution scheme.

British Airways said the NAPS scheme‟s deficit hit £3.7bn in March this year and that it was the largest of all UK company pension black holes relative to the firm‟s overall value. The figure comes in spite of the fact the airline said it had paid £3.5bn into the scheme since 2003. It also said it was committed to pay between £300m-£450m a year into the NAPS scheme until 2027, something it had agreed to do back in 2015, regardless of whether new contributions from employees are stopped.

But it is understood from sources close to discussions between the airline and the unions, which kicked off at the start of the year that talks had focused on ways to make the scheme sustainable and had not touched on the possibility of it closing until BA‟s statement.

Unite and GMB said thousands of staff who had helped build the airline into a world class flag carrier “now face uncertainty in their retirement”. “Our team of financial analysts has worked tirelessly with the airline over the last few months to explore ways to keep the pension scheme open and secure it for the future,” the two unions said in a joint statement.

Talks between the airline and unions are set to start in the coming weeks. Potential solutions are likely to centre on the amount members are willing to contribute to the scheme on an ongoing basis or receive when they are in retirement.

Many defined benefit pension schemes are under pressure from increased life expectancy of members – meaning retirements need to be funded for longer–and record low interest rates. Pension schemes invest heavily in Government bonds, whose yields have fallen to historic lows in recent years and mean the money earned from these investments increasingly fails to cover the liabilities schemes face.

British Airways said if NAPS remained open to future accruals, the cost to the company of providing future benefits to the scheme‟s members could rise to 45pc of pensionable pay in 2018 – which it claimed was more than four times the typical employer contribution of UK airlines. Even if new payments into NAPS are stopped, British Airways said members would still receive what they were due in their retirement meaning payments from the scheme would likely continue for decades. NAPS was created in 1984 and offered members lower benefits in return for a lower contribution rate than its predecessor, the Airways Pension Scheme (APS).

British Airways lost a High Court battle against the trustees of APS in May after they pushed through a £12m discretionary payment in 2011 to make up for a change in the inflation link. The APS scheme was changed to track the lower Consumer Prices Index instead of the higher Retail Prices Index and the trustees used their powers to make a payment to account for the difference in rates. The airline challenged this but lost the court battle.

Informal Management Report

Over the last two decades, BA has undertaken major changes to attain greater organisational effectiveness, dramatically reduce costs and meet their l ong-term objectives to achieve a competitive advantage.

This has consequently led to BA experiencing challenges in many areas of their human resources management due to strategically remodelling their recruitment, selection and HR planning, remuneration packages and pensions; leading to unrest, demotivation and lower levels of customer satisfaction and employee engagement.

  1. Identify and analyse the challenges experienced by British Airways in their negotiations with Unite regarding the closure of the defined benefit pension scheme.
  2. Make recommendations as to how BA can effectively manage the changes to global staff contracts whilst at the same time enhancing employee engagement.

NB: It is expected that you will draw on and critique academic theories and models to support your ideas.

Assessment criteria

  • You must write this task as an individual management report, following the appropriate structure.
  • A bibliography/reference list containing at least 12 items that you have independently researched.
  • Marks will be awarded or deducted based on the range of vocabulary and technical accuracy (e.g. spelling, grammar) used in the assignment.

Points to consider:

  1. The cost of efficiency, in terms of cost-cutting and outsourcing
  2. Autocratic management style
  3. The difficulties of resources working towards the same vision
  4. The correlation between management performance and organisational objectives
  5. Company culture
  6. Resistance to change
  7. Rationale behind change
  8. Strategies for long-term positive organisational change
  9. The impact of the macro and micro environment