BA cost cuts may have gone too far

The chief executive of British Airways, Ron Eddington, spent last weekend helping out at Heathrow's check-in desks following a week of chaos at the airline.

Staff shortages, bad weather and management incompetence led to several delayed and cancelled flights, thousands of disgruntled passengers and the worst publicity imaginable for the self-styled "world's favourite airline".

It seems that BA's operations managers were unable to work out that an unanticipated exodus of staff earlier in 2004 might combine with one of the busiest travel weeks of the year - the run-up to the August bank holiday - to produce one or two technical difficulties.

BA has lots of problems and some, like air-traffic control, are not of its making. But the state of its labour relations is entirely its own responsibility. The last-minute avoidance of a damaging strike by baggage handlers came as a huge relief, but the decision by BA to offer bonuses to staff who took less than 10 days' sick leave per year revealed a weird relationship with its workforce.

BA staff, previously not known for their poor health, apparently average 17 days' sick leave per year. More than one commentator has pointed out that BA's staff shortages, so apparent over the course of the last week, would not be nearly so acute if its existing employees merely turned up for work.

BA has cut a lot of costs: 13,000 jobs have gone, with more redundancies in the pipeline. Mismanagement of this process has led to the shortage of ground staff and the need for senior executives like Eddington to muck in. The CEO is clearly not amused: an inquiry into the debacle is being held and the press is full of stories about how the jobs of at least three senior customer services and operations directors are on the line.

Anyone who travels regularly on BA can recount their own horror stories. Most people know that the carrier is really two separate lines of business. On the one hand, we have the short-haul flights, competing with the low-cost carriers, not least in the race to the bottom in terms of customer service. It is a mystery to many people how the quality of BA cabin crew can vary so dramatically from flight to flight, how service standards seem to be often absent and always random in their delivery.

Long-haul fights are usually a different matter, particularly for the business traveller. BA pioneered the use of completely flat beds in business class, making a huge difference for anyone flying to Asia (in particular) or North America. Cabin crew are invariably attentive and efficient.

It is tempting to argue that you get what you pay for, but it is not clear that BA competes with the low-cost carriers on price: it seems to have achieved EasyJet service standards without the low fares. Again, this suggests management failings.

If you reward managers for cutting costs, then they will cut costs until somebody tells them to stop. Eventually, costs can be slashed past the point where damage to the core business is threatened. There are plenty of examples; some of Britain's high-street banks have managed to do it, with service standards that have fractured the relationship with the customer.

Managers will generally head in the direction indicated by their incentives. BA's managers, I suspect, were simply doing what they were told: reduce headcount. It may seem a simple idea, but it seems to not to have occurred to anybody to point out that minimum staffing levels do exist; some check-in staff are needed, no matter how many self-service terminals are introduced. The notion that August can, with predictable regularity, be quite busy doesn't seem to have made much impact.

Perhaps BA is just too big and, as such, is fundamentally unmanageable. There are voices which argue that short-haul should be given up to Ryanair and EasyJet, and the airline should concentrate on transcontinental business travel. Whatever the merits of this line of thought, it is clear that BA needs a radical rethink of its relationship with its customer base.

If managers don't know what to make of BA, it is clear that outsiders are equally clueless. The share price richly rewarded investors last year, but has been very disappointing in 2004. Its five-year performance speaks volumes: a roller-coaster ride with the price currently less than half what it is was at its peak.