By Shane McGinley
Willie Walsh has always been one of the most outspoken chief executives in the aviation industry but now having steered British Airways and Iberia back into the black, the Irishman is proving there is metal behind his words
The airline industry is known for its larger than life characters, with the trinity of Ryanair’s Michael O’Leary, International Airlines Group CEO and former British Airways boss Willie Walsh and Virgin Atlantic billionaire Sir Richard Branson famous for their headline-grabbing antics and constant battles.
As Arabian Business lands at London Heathrow Airport to meet Walsh, the Irishman is once again in the headlines, joining the likes of Bill Gates, Oprah Winfrey and hundreds of celebrities in agreeing to take up the ‘Ice Bucket Challenge’ to raise money for research into motor neuron disease.
Nominated by his compatriot, O’Leary — who stirred things up by stating that his rivals couldn’t freeze their fares so they should freeze themselves — Walsh used the opportunity to once again have a dig at Branson, declaring he was going to nominate “the man who effectively owns and controls the Virgin transatlantic business… That’s right, Richard, this is for you”.
While at first it looked like Branson was next to go under the bucket, Walsh put the boot in by following it up with the punchline: “Richard Anderson, the CEO of Delta”. And with that he removed his expensive jacket and four lucky crew members doused their boss in icy, cold water.
Walsh and Branson have a longstanding, bitter rivalry. Back in late 2012 Walsh wagered a “knee in the groin” as part of a bet with Branson that the Virgin Atlantic brand would be gone in five years.
Branson had originally bet £1m ($1.62m) but Walsh said he didn’t have that sort of money to throw about while £1m would be nothing to “the billionaire banker”, so instead he suggested something “as painful to him as it might be to me”.
Walsh followed it up by questioning the impact Branson has really had on the industry: “I just don’t see that the guy has anything that stands out in terms of what he has achieved in the industry… I’ve said it publicly, I don’t respect him in the way I respect other people in the industry, and that’s a personal view,” he told The Telegraph in no uncertain terms.
So is the 52-year-old worried he’ll have to invest in a codpiece in the near future and does he really think Delta’s purchase of a 49 percent stake in Virgin Atlantic will eventually spell the end of Branson’s beloved brand?
“Ah yeah, I’ve won that. In effect Delta own [Virgin Atlantic] and it is effectively controlled by Delta and that is what we have been saying. I say things sometimes just to wind Branson up. The investment by Delta in Virgin actually makes a better competitor but a more rational competitor,” Walsh says defiantly as we sit in his office on the sidelines of Heathrow’s congested runways.
Walsh may question Branson’s standing in the aviation sector, but his own place in the industry is certainly not in doubt. The Trinity College-educated Dubliner joined Irish flag carrier Aer Lingus as a cadet pilot when he was just 17 and quickly rose up through the ranks to become CEO in 2001. Implementing wide-ranging job cuts and restructuring, he turned around the beleaguered airline and his success soon saw him snapped up by British Airways in 2005 and appointed its CEO at just 43.
Battling an economic downturn, volcanic ash clouds and trade union strikes, he masterminded the merger of the British carrier with Spain’s Iberia in January 2011, resulting in the creation of International Consolidated Airlines Group (IAG), the third biggest airline company in Europe and the seventh-largest in the world.
The Spanish gamble has so far paid off: 2013 saw IAG move into the black with a profit before tax of €227m ($293m), up from a loss of nearly €1bn in 2012. The most recent second-quarter figures bode even better news.
“In the quarter, we made an operating profit of €380m which is up from €245m last year,” Walsh says. “This performance shows that we are making further solid progress. Our disciplined approach to capacity continues and we will make reductions where it makes sense as we go through the year.
“All of our airlines had their highest second quarter operating result since 2007. British Airways’ operating profit was €332m in the quarter, up from €247m last year, while Iberia made an operating profit of €16m, compared to an operating loss of €35m last year. Vueling’s operating profit was €30m, up from €27m last year.”
Overall, IAG made an operating profit of €230m in the first six months of 2013, compared to an operating loss of €33m in the same period last year, motivating Walsh to raise his profit targets for 2015 even higher.
“We have set ourselves a target of achieving profit of €1.8bn next year and we are targeting that level of profitability as we have significant capital expenditure in terms of fleet renewal and we want to reinstate a dividend statement. We want to get this business where it is delivering returns consistently so we can reward our shareholders.”
IAG had originally set a profit target of €1.6bn for 2015 but savings from integrating Barcelona-based budget carrier Vueling, which it took control of last year, improved margins at BA and a recovery at Iberia.
With the three airlines in the black and cash in the bank, Walsh is aiming to expand the group and is looking around for more potential partners to come under the IAG umbrella.
“It is our ambition and it is the reason we created IAG,” Walsh says. “When we merged BA and Iberia we were clear that we did not see that as the end. If we did we would have had a very different structure in place. We felt that we needed to have the flexibility to add other airlines to it.
“We felt what Air France/KLM did was a mistake, as if you call the company Air France/KLM it is unmanageable if you add more [airlines] and it sends a certain message if you do that.
“Lufthansa Group, we also felt was a mistake as it sounds Lufthansa-driven. We went with a very neutral bland name as then you can grow it. We have structured the company [so] it is scalable.”
In addition to Vueling, British Midlands International (BMI) was bought from Lufthansa in 2012 and was integrated into the BA brand. However, Walsh says while he is open to new deals he is not actively talking to any potential new players at the moment. “We have turned down several [potential partners]… We felt they weren’t going to add any value,” he says. “We’re not talking to anyone at the moment but we do all the time look at what is going on.”
While he declines to name any of the suitors he has spurned, one possible candidate he admits he was talking to was Portugal’s TAP.
“We did look at a number of airlines, for example TAP in Portugal we were actively looking at,” Walsh says. “What appealed to us there at first glance was getting into Latin America, principally Brazil and their network in Africa. We did have some informal discussions but in the end we concluded it wouldn’t generate sufficient additional value for our shareholders and decided not to pursue it.
“We have been approached about a number of other airlines in Europe where we have looked at them and concluded they need restructuring. While we have a track record for restructuring it is not principally what we want to do.
“We are conscious of the fact with competition laws that there are some deals we could do relatively easily but which might impact on another deal. What will it mean if we wanted to acquire another entity? Would we create a major competition issue for ourselves?
“It is fascinating, interesting and really frustrating. There are some entities we would like to pursue but we can’t because of competition control.”
Ownership issues and competition are something of a bugbear for Walsh and, as a result, he sympathises with the boss of UAE flag carrier Etihad Airways, James Hogan, and his bid to get the acquisition of minority stakes in a series of European airlines rubberstamped by regulators.
“I have no issue with Etihad investing in these airlines; from a principle point of view I would say I’m fine with it,” Walsh says. “My view is very simple, I believe ownership and control restrictions should be removed, I think [they’re] nonsense and I have argued for as long as I have been a CEO.
“I argued it at Aer Lingus that we shouldn’t have ownership and control restrictions in the airline industry and I have consistently argued that position while I have been at British Airways and IAG.”
Swiss authorities last month warned that a plan by the Abu Dhabi airline to buy a third of Switzerland's Darwin Airline and rebrand it as Etihad Regional did not meet legal requirements to be approved.
While Etihad said it was comfortable with the review by Switzerland’s Federal Office of Civil Aviation (FOCA) concerning an agreement to acquire 33.3 percent of Darwin Airline, the real test will be whether it gets the green light for its $751 million deal to buy a 49 percent stake in Italian flag carrier Alitalia.
The Swiss announcement is part of a wider probe by the European Commission into Etihad’s investments in European airlines, which includes Switzerland’s Darwin Airline, Air Serbia, Ireland’s Aer Lingus and Germany’s Air Berlin.
The regulation at the centre of the current European Commission investigation is Article 4 of Regulation No 1008/2008, which states that a condition of obtaining and maintaining an operating license in the EU is that a member state and/or nationals of the member state own more than 50 percent of the airline and effectively control it.
“The thing I would say is, while the rules exist the rules should be applied,” Walsh says. “I think actually applying the rules might well accelerate a move to get rid of these restrictions.
“It is ridiculous. Our industry would benefit from the removal of these restrictions and I can’t understand why they still apply. They may have had a role 50 years ago and I can understand that at a period in time countries felt that they needed to have a national flag carrier to ensure connectivity. I don’t think you need that today.”
Walsh points to the example of Malév Hungarian Airlines, the Hungarian flag carrier which operated a fleet of 22 aircraft to around 50 cities before it went bust in February 2012. Within six days of its collapse, Malév’s base airport at Budapest had recovered over 60 percent of its traffic as rival carriers flooded back into the market.
“The evidence is quite clear that where you’ve had former carriers and former flag carriers that have failed the market will replace the capacity that disappeared and replace it almost overnight,” Walsh says, adding to his argument that ownership regulation is irrelevant in the modern aviation world.
“A better way would be to just remove the regulation, then you don’t need the regulators to assess whether somebody has effective control because it shouldn’t matter. And, really, does it matter whether Etihad controls Alitalia? I can’t understand why it would matter.”
Walsh also has a headache over constraints placed on BA by the lack of space at Heathrow as the London government and a whole multitude of UK interest groups argue over expanding the world’s busiest airport and the merits of adding a third runway.
IAG currently has 431 aircraft in its fleet, with another 139 on order and an option on 282. With constraints on Heathrow slots, would Walsh be keen to achieve growth by pushing planemakers Airbus and Boeing to build aircraft even bigger than the superjumbo A380?
“The A380, in our configuration, we have 469 seats, which is probably as big as we would want. It works for us on certain routes but it would be far too big an aircraft on some destinations we service. Frequency is a critical issue for business travellers,” Walsh says.
“Where we operate the A380 there is high volume demand. The best example we give is Hong Kong where we used to have three 747s departing within 60 minutes. Now, instead of having three 747s we have two A380s… same capacity and it is cheaper and it then frees up a slot at Heathrow, which we can then use for expansion.”
While Walsh may not want to go bigger, he says he would be keen to see the development of quieter aircraft, something Heathrow residents would no doubt be glad to hear. “Particularly here at Heathrow noise is an issue,” he says. “The A380 are much quieter relative to the aircraft they are replacing. Going forward, the challenge is that in many cases there is a trade off in noise performance and fuel performance. We have to decide globally what is more important.
“The A380 is an aircraft that has been made quieter but at the expense of the environment. Noise for us is a critical issue and it is one of the factors that is always on our agenda when we are considering what aircraft to buy. The good news is that all the ones being developed today are significantly quieter than the ones they are replacing.”
Of course, one of the main rivals operating the A380 is Emirates Airline. While the Dubai carrier may have joined forces with BA’s old partner Qantas in Australia, Walsh reveals that there is no animosity and he actually approached Emirates president Tim Clark about the Gulf carrier joining the oneworld airline alliance, of which he is chairman.
“I was very keen for oneworld to embrace one of the Middle East’s big three. If I’m honest not everybody was enthusiastic about it but we eventually got to a point where everybody agreed it was the right thing to do,” Walsh says.
“I spoke to Tim Clark to understand whether he was interested in joining an alliance. He had always said publically, clearly and unequivocally that he was not interested in an alliance and I believed that was the case, but I met with him and just checked whether that continued to be the situation. I admire Tim and I have great respect for him and what Emirates has done.”
Some of the big players in oneworld, besides BA and Iberia, are American Airlines, Cathay Pacific, Japan Airlines, Qantas, Royal Jordanian and Malaysia Airlines, but Walsh says Clark was clear he was not interested in joining.
“Tim is very clear that he doesn’t need to be in a formal alliance and he would prefer to be able to work with airlines in various regions on a selective basis rather than committing himself and working for them,” Walsh says. “You could argue that they have sufficient scale that they don’t need to be in an alliance.”
In October 2013, Qatar Airways joined oneworld and became the first Gulf carrier to be part of one of the three main aviation alliances.
“In the case of Qatar and Etihad, it was clear that there was an interest from both of them in joining an alliance and Qatar we felt was a better fit for us,” Walsh says.
“Will Etihad join the SkyTeam alliance, given the relationships they have now with so many of the SkyTeam players? It would be strange if they didn’t because they are working with Air France/KLM and Alitalia,” he adds.
While Walsh speculates on whether Etihad might join SkyTeam and what European authorities should do about the Abu Dhabi carrier’s minority stakes in European airlines, one thing he is clear on is the recent rumours that the airline is being bankrolled by subsidies from the Abu Dhabi government.
“I think their business model is very smart and absolutely fine from my point of view. I don’t buy into this artificial support that some airline CEOs claim they have. I don’t see any evidence of that and we are happy to compete with them and co-exist,” he says.
In the Middle East, Walsh predicts growth will be about 13-14 percent going forward into 2015, and while BA won’t be expanding in any large way in the region he does eventually see room for Iberia to make its debut in the Gulf.
“At some stage. What you see at the moment is a number of carriers from the Middle East flying into Spain in both Barcelona and Madrid. At some stage in the future it is inevitable we will offer our services in that direction but the [focus] of Iberia is on Latin America as it is the natural flow and natural relationship,” he says.
“Our ambition extends beyond Latin America but first we had to fix the business and make sure that business is solid and delivering the returns that we need and then we will look to grow to the east where Iberia has traditionally not had a presence.”
As our allotted half-hour runs into more than an hour, we can’t let the busy aviation boss go without finding out if the iconic Concorde super jet will ever make a reappearance over the Atlantic or even land in Dubai at some point in the future.
“No, it was a fantastic aircraft and it had its moment in history, it is one everybody will remember fondly but that’s it,” he says.
So while Concorde may be consigned to history forever, it seems British Airways and IAG have a glorious future ahead of them under Walsh’s watch. Let’s just hope Branson doesn’t come knocking in 2017 looking to call in his bet.
British Airways’ expansion into the fast-growing Chinese market is being hampered by the UK government’s restrictive visa regime, IAG boss
Willie Walsh complains.
“We are keen to serve China as it is a focus for us. The problem we have is we have a very restrictive visa regime in the UK. The UK government make it difficult for people to get visas.
“China is a market everybody wants to serve. We launched Chengdu at the end of last year so we fly Hong Kong, Beijing and Shanghai. There are a number of other secondary cities we would like to serve too.
“It is the big complaint I get when I travel around the world… the hassle of getting the visa, the cost of getting the visa and the air passenger duty.”
While the visa restrictions on Chinese passengers travelling to London means BA’s organic growth in the world’s second biggest economy has been curtailed, it is able to offer flights to up to 25 Chinese cities through its membership of the oneworld aviation alliance.
Recent International Air Transport Association (IATA) passenger figures for July showed that international passenger demand rose by 5.5 percent compared to the same month in 2013. In the Asia Pacific region, airlines benefitted from an improved economic environment, with demand growth slightly above the global average at 5.6 percent.
IATA said the biggest factor affecting demand developments was the response of the Chinese economy to stimulus measures which saw year-on-year GDP growth reach 7.5 percent during the course of the month.
Cyber attacks on planes?
In the second film in the Die Hard series, Bruce Willis’ character John McClane tries to fight terrorists who tap into a plane’s operating systems and hold an airport to ransom. With the recent spate of cyber hackings and terrorists in Syria targeting websites and stock markets as part of the campaign, is this a likely scenario in the future?
“I don’t think that is a risk today and I think the industry has been very aware of that as a potential risk,” IAG CEO Willie Walsh says.
“We don’t always disclose what it is we do and why we do things and that is the right way from a security point of view.
“I am convinced that our industry is safe and the procedures we have in place have been tested and yes there will be mistakes and we will learn and we will learn and adapt, but the idea that we should throw away everything we have and years and years of very good work because of one incident would be wrong.”