Case Study British Airways: Responding to Low-Cost Airlines Ever since its creation nearly a century ago, the commercial airline industry has been prone to abrupt ups and downs. Yet, few of these periods of change have promised to transform air travel as thoroughly as the wave of increased competition, new entrants and aggressive price cutting now sweeping through the airline business in both Europe and America. A slew of new low-cost airlines is attacking big incumbent carriers, some of whom will probably not survive. The Economist, July 8, 2004 In the spring of 2006 Willie Walsh, the recently appointed CEO of British Airways plc (BA) and his senior management team faced choices about how to respond to the growing threat of low-cost shorthaul carriers who continued to capture market share in British Airway\"s markets in Europe, and domestically in the United Kingdom. While this problem had existed for many years following the liberalization of the European domestic airline market in 1990\"s, BA\"s previous attempts at finding an appropriate strategy to respond to profitable low-cost start ups such as Ryanair and easylet had not been successful . BA\"s options with respect to lowcost carriers seemed clear. Following 911, the option of getting out of short haul routes altogether to focus on its much more profitable longhaul routes had been debated. Robert Boyle who was the BA General Manager Network Development at that time states that the decision was to stay in short-haul for financial, practical and @2006 William D. Taylor John Molson School of Business October 2006. This case has been prepared for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. competitive reasons: We looked at the closure of our entire Gatwick operations; we looked at a retreat to long haul the socalled \"BOAC option"; we looked at further significant downsizing of the business and associated ,,s|ashing of the route network\Discount, or lowcost, airlines have become major players in North America, Europe and Asia. The concept which first emerged in the United States following deregulation in 1978 in its typical form has key elements: I limited services for passengers (no frills) I short haul routes, point to point I low fares I use of a singletype of aircraft I ticket sales through call centers (internet) I low cost work force and flexible work rules I low ground costs at secondary airports I fast turnarounds between flights While many budget airlines have come and gone, Southwest Airlines has grown to be the fourth largest airline in the US. Other airlines in this segment that have expanded rapidly include JetBIue, Frontier, and AirTran (formerly ValuJet). In the last six years, lowcost airlines have expanded capacity by over 40%, and currently these carriers have many orders for new planes. Despite this impressive growth, many argue that discount airlines now represent a mature business concept in the United States. The first response of network carriers in the United States to these new carriers has been to create their own offshoots: for example, Song by Delta, Lite by Continental, Ted by United. A second stage response has been to try to compete against low-cost carriers by lowering their own cost structures as best they can and matching fares on selected routes. Along with this strategy has been the recognition that low-cost carriers can provide feed to larger carrier\"s profitable long haul flights. The lowcost airline segment now has many variations including charter airlines that have become lowcost scheduled carriers in the holiday market, and regional carriers that have transformed their model. An important development in American lowcost airlines is that the leading discount airlines are moving upmarket. As the Economist has noted as lowcost carriers make this move upmarket they begin to compete and clash with network carriers that are moving downmarket. An assumption made by most airline analysts is that a lowcost business model will not work for scheduled long-haul flights. Service is more important on flights that last many hours and the cost advantages of quick turnarounds are less given the long amount of time these flights are in the air. This may be changing as demonstrated by the example of Emirates Airline flying out of Dubai with a very low cost structure. With the coming of even larger aircraft for long haul flights, such as the Airbus 380, the possibility of lowcost, long-haul carriers successfully gaining market share exists. Low-cost Carriers in Europe The creation of the European lowfare airline segment is much more recent than in the United States. Following liberalization of the European domestic airline market in 1997, many new carriers were launched, and now there are close to 60 carriers contesting the market with carriers entering or exiting the market on a regular basis. In 2006, it was estimated that low- cost carriers had obtained about 18% of the total intra European market in air passenger transport (See Exhibit 1). In Western Europe very high rates of penetration have occurred especially in the United Kingdom and Ireland. The two largest low-cost airlines are Ryanair and easyJet both of which have grown tremendously over the last ten years: Ryanair: Started in 1985 by Tony Ryan and the Ryan Family, Ryanair was Europe\"s first low cost carrier and is still the largest lowcost carrier in Europe. Starting with one plane it has grown into a large airline with over 100 planes, over 30 million passengers per year, and revenues of over 1.3 billion Euros. Ryanair borrowed from the successful Southwest Airlines model by flying into secondary airports to obtain very low costs. Its biggest operational base is London Stanstead Airport. Its rapid expansion really took place after the deregulation of the air industry in Europe in 1997. easyJet: Starting with only two leased Boeing 737\"s in 1985 at Luton Airport near London, easyJet has also grown very rapidly. Created by Greek Cypriot businessman, Stelios Haji loannou, it too has borrowed from the Southwest model by flying only one type of aircraft Boeing 737\"s. Recently, it has added Airbus 319\"s to its fleet. The growth of easyJet truly has been remarkable. In 1999, it flew about 3 million passengers while today it has over 30 million passengers. In 2005, easyJet had revenues of over 1.3 million British pounds. Exhibit 2 provides more statistics on these two airlines. Competition in the low-cost carrier market in Europe is brutal. The influx of new entrants and the over-capacity that exists (along with aggressive pricing that has led to price wars) have created intense competition. Airline analysts predict that a shakeout in the European segment is inevitable, and that the segment is also likely to see movements into new markets. Also, many foresee a dilution of the low-cost carrier business model as some carriers try to differentiate their offerings by flying to more expensive airports and adding some new services such as inflight gambling and movies (for a charge). On the other hand, the low-cost market is at a much earlier stage of its development in Europe. It is estimated that in the United States 850 jets fly lowcost routes while in the European Union, with twice the population, only 350 low-cost jets are flying. British Airways The origin of British Airways can be traced back to 1919 and the period just after WWI. Of its many predecessor companies, the most notable was BOAC (British Overseas Airlines Corporation) which was formed in 1939. BOAC was at the forefront of the transition to jet aircraft and had the distinction of making one of the first overseas jet flights to Johannesburg in 1952 and being the first airline to offer transatlanticjet flights in 1958. The airline acquired its first Boeing 747 in 1970 and had very rapid growth during the 1970\"s. In 1976, BOAC and BEA (British European Airlines) were brought together as British Airways (BA). In that year, BA with Air France also launched the world\"s first supersonic passenger service. Privatization In 1980, under the Margaret Thatcher, the British government began the long road to privatize BA by appointing Sir John King, who later became Lord King. It took until 1987 for this process to be finalized. Although BA initiated a campaign to be known as \"the World\"s Favourite Airline\" in 1983, during the 1980\"s survival was the major goal of the airline. Following privatization, the airline used its new found strategic autonomy to takeover British Caledonian in July, 1987 with the consequence and BA now flew out of Gatwick Airport as well as its historic hub at Heathrow Airport. Under Sir Colin Marshall, who served as CEO, and later as Chairman, British Airways during its first 10 years as a private company was quite successful. From 1987 until 1996 it became one of the world\"s most profitable airlines with profits before taxation climbing to a high of 728 million in 1996. The key to BA\"s strategies during these years was the development of an extensive global route network and the establishment of BA as one of the premier brands in the world. Integral to this strategy was the creation of BA\"s Club World business class product as part of the overall intent of making British Airways the world\"s favourite airline. Costs were also streamlined and the airline reduced its number of employees. During this period BA made several acquisitions and formed equity alliances with other carriers to gain access to feeder markets. In 1992, Deutsche BA was established as a German subsidiary and in 1993 BA purchased 25 % of US Air to have access to the critical US domestic market. This US Air stake was later sold when BA formed a partnership with American Airlines. It also purchased a 25% share of Qantas in the Asian/Pacific market. Along with other carriers BA formed the Oneworld Alliance in 1998. Turbulent Times and Recovery In 1999 and 2000, BA\"s profitability declined sharply, and in March 2000 the Board replaced CEO Bob Ayling, who had been appointed CEO in 1996, with Rod Eddington. Eddington undertook a number of measures to improve BA\"s performance. He vigorously pursued a strategy of lowering BA\"s cost structure, invested in an internal ebusiness infrastructure and took the airline through the 911 crisis, SARS, the Iraq War, and a period of rapidly rising fuel prices. Over the years certain elements of BA\"s strategy have remained constant. One element that has not changed is that BA has always supported its most profitable segment which is the premium longhaul business which its global route structure makes possible. What has also been constant is the protection of BA\"s privileged access to Heathrow Airport - one of the world\"s busiest and most important airports. As the former flagcarrierfor the United Kingdom, BA has grandfather rights with respect to landing rights and slots at Heathrow. A major part of BA\"s strategy had been to concentrate on its service offerings in all product segments. Another element of BA\"s strategy is its fleet which, for the most part, utilized Boeing Aircraft at least up until the late 1990\"s. With the exception of aircraft inherited when acquisitions were made, BA has stayed with Boeing aircraft although its current fleet now includes about 50 Airbus A319\"s and A320\"s. Exhibit 3 presents BA\"s fleet as of December 2005. The airline has always had a cargo business which in the last few years contributed just under 500 million of revenue. In an interview in Air Transport World in August 2005, outgoing CEO Rod Eddington expressed satisfaction that BA was in better shape than when he took over in 2000. Through restructuring and a rebuilding of its service product, BA has returned to profitability, and its debt has been reduced from 65 billion to 3 billion (See Exhibit 4). In 2004-2005 British Airways had about 49,500 employees with 86% of these employees based in the United Kingdom. The airline was entirely owned by private investors and 50% of its employees owned stock in the company. In September 2005, BA entered a new era with their new CEO Willie Walsh. Willie Walsh Willie Walsh has spent his entire career in aviation. Walsh joined Aer Lingus at 17 as a pilot trainee. A business administration graduate of Trinity College, Dublin he rose through the operations ranks to become chief pilot, and eventually switched to the commercial side when he took on the task of turning around, Futura, Aer Lingus\"s problem Spanish charter subsidiary, in the late 1990\"s. He returned to Aer Lingus as Chief Operating Officer in 2000 and became CEO in 2001 one month after the 911 tragedy. After taking over at Aer Lingus, Walsh lived up to his reputation of being a very focused leader who is intent on achieving what he wants. He was direct in declaring that his goal of having the airline be like a successful, no frills carrier. He cut costs by about 30 %, and he laid off one third of the Aer Lingus\"s employees. Walsh also took other actions consistent with a low-cost approach: he eliminated business class on short flights, reduced aircraft cleaning expenditures, and stopped catering service on shorthaul routes. The results for some industry analysts were like a miracle. Aer Lingus which many had thought would go bankrupt similar to Sabena and Swissair, both smaller European flag carriers, returned to profitability. The new Aer Lingus achieved an operating profit of 63.8 million Euros in 2002 after suffering a 35.3 million Euro loss in 2001. In 2003, the group had an 83 million Euro profit. When the appointment of Willie Walsh was announced the Chairman of BA, Mark Broughton, commented that in hiring Walsh BA had captured \"the very best person for the job!" The market seemed to agree that Walsh\"s expertise in lowcost airline management would help BA. The day of the announcement that he would be the new CEO of the airline, BA\"s shares closed up 1.63% higher. BA's Short Haul Strategy In reviewing BA's response to low-cost carriers it is important to understand the different product segments with which BA operates. Within passenger service BA offers both long-haul and short-haul services. It has four categories of service within long-haul including first, business class, premium economy and economy. Currently, it also has four categories of service within short-haul: Club Europe, Europe traveler, UK Domestic and BA Connect. The impact of low-cost carriers is felt directly in its short haul operations. The history of BA"s short-haul route offerings essentially begins in 1974 when BOAC and BEA (a short-haul carrier) were merged. Similar to BOAC, BEA (British European Airlines) had been formed by the British Government in 1946. By 1974 BEA was the largest domestic carrier in the United Kingdom and also offered flights to Europe and North Africa. Over the years, the BA domestic and European network expanded as BA made acqusitions and responded to growing demand for air transportation in its markets. At the same time franchise agreements were made to provide service in certain markets and to provide feed BA's long-haul flights. BA"s franchise agreement with CityFlyer is a good example of how these agreements worked, CityFlyer aircraft would be painted in full BA livery and its interiors and cabin layout conformed to BA's contemporary, standard two-class European product. Staff wear BA uniforms and all flights are operated with BA flight numbers. British Airways took over CityFlyer's marketing and handled all reservations. In other words, CityFlyer presented itself and traded as British Airways. By 1999, British Airways had ten franchise partner agreements. The fragmented and emergent nature of this BA's short-haul network is revealed in Exhibit 5 which shows the timeline of the major events and decisions that were made over the years. The importance of short-haul revenues to BA are revealed in Exhibit 6 indicating that by 1996 40 % of BA revenues by destination came from the UK and Europe, although only 4% of its large 728 million f operating profit (Exhibit 7) was generated from these routes. BA's Competitive Response The first major strategic move to respond to low-cost carriers was taken by BA in 1998 when it set up a no frills carrier named Go. This stand-alone subsidiary was set up to compete in the low-cost, no-frills market which was starting to grow very quickly. Operating from Stanstead Airport the new airline used leased Boeing 737's to fly first to Milan and Rome and then Copenhagen. During the late 1990"s BA also undertook a program to take a billion pounds of opertaing costs out of its entire network including European and UK operations. Along with these moves was a strategy to reorganize and restructure Euorpean and UK services to reduce fragmentation. In the UK, this involved strategic investments to take control of CityFlyer Express based at Gatwick and sale of BA"s French subsidiary Air Liberte. More moves to reduce fragmentation in the UK regional network took place in 2001-2002 with the merging of British RegionalAirlines Group, Brymon Airways, Manx Airlines and British Airways Regional to form CitiExpress. The benefit was that BA for the first time had a single business unit for all ot its UK operations. In 2003 BA aggressively responded to no-frills carriers by cutting fares on 180 short-haul routes. In the last five years, BA\"s strategy in the lowcost segment has been to protect its core business class market while learning from its lowcost rivals by offering deals on certain flights. Andrew Crawley, BA General Manger for Western Europe, has explained this approach: What is our response? We will strengthen and maintain our offering to the business market. It is a critical market for us. Club Europe and full fare economy passengers are highly profitable for British Airways, so we will strengthen and maintain our positioning on that. We will move shorthaul economy closer to the \"no frills\" model by keeping what we think is good about what we currently offer and using some learnings from what they have on offer too at the moment. Finally, cost efficiency improvements across the whole business -and some of the numbers that Rod showed this morning demonstrate some of the initiatives that will improve our unit cost across the whole business but specifically on the shorthaul piece will bring our unit cost down to enable us to compete profitably.2 By 2005, BA had improved financial performance in its shorthaul business from an estimated loss of about E 300 million in 2000 to breakeven. While this improved performance to a brea keven level was commendable, the threat from low-cost carriers had not gone away, and BA still faced real challenges in its short-haul business. British Airway's Choices: Fight or Flight The basic assumption about the strategic importance for BA of its shorthaul business was clear under Rod Eddington\"s leadership during the 2000 to 2005 period: Our shorthaul network is an intrinsic part of our overall network: its important to have a short-haul offerir'g to match to our long-haul offering- feeder represents a quarter and a third of our short-haul network. It will be many years before you will be able to fly from Newcastle to Hong Kong, from Edinburgh to Singapore. Also having a strong network offering to our customers large and small is very important; we still have farand awaythe most comprehensive network in and out of London. It is a key part of our ability to compete. But, those points in our network have to contribute to our network profitability. 2 Andrew Crawley, General Manager for Western Europe, British AinNays, Comments at the British AinNays Investor Day, 2002. That\"s why we no longer fly everywhere in Europe. We don\"t fly to Gdansk and Gothenburg and we fly more often to Brussels and Geneva.3 Those supporting BA\"s current approach to shorthaul services could point to the progress that the airline had made to reorganize and improve its network offerings. BA Connect had been formed to combine regional operations in one business unit to coordinate competitive strategy in short haul and significant improvements had been made in BA\"s cost structure and unprofitable units and routes had been eliminated Eddington noted in 2005 before Walsh took over: We have the right sort of exposure to short-haul. Short-haul capacity is now less than 20% of total ASK4. I worry about the performance of shorthaul performance financially. It is much improved. It's no longer burning a 300 million hole in our pocket. Last year we lost 60 million short-haul. But that included Deutsche BA write-off and some write-offs on aeroplanes, which we disposed of. So the shorthaul business is no longer the value destroyer that it was. But it's an essential path of our network. And we substantially reduced our exposure to short-haul. It's one of the reasons why we've come through the last 4 or 5 years, in the face of the trick from the no-frills carriers. That, and the fact that we've got a much better competitive response on the map. It wasn't just aero planes we invested in. We invested in infrastructure before. And that this is essential infrastructure, but it costs money.5 Important as well was BA\"s value proposition in its shorthaul services. Many of BA\"s clients were business people and it was believed that BA offered significant value over low-cost carriers with respect to seat selection, network connections, meals and lounge access. The value of these benefits varied across BA\"s shorthaul segments: UK regional, London operations and European shorthaul routes. BA had resources to compete. Its profit for 20052006 of over 700 million pounds was substantially larger than the earnings of easyJet or Ryanair. Many of the smaller European low cost carriers were under-financed and, while they could create temporary problems with disruptive pricing, they did not have the resources for the longterm. BA has an advertising budget of approximately 60 million pounds which could be used to communicate the superior value of BA\"s services and to push the BA brand. Senior managers of BA were aware that BA\"s customers take longer trips than customers of low-cost carriers. Ryanair passengers fly on average 750 km versus 3,000 km for BA customers. This could change in the future as low-cost 3 Rod Eddington, CEO British Ainivays, Interview with AirTransgort World, Aug 2005, Vol. 42, p. 24. 4 ASK (Available Seat Kilometers) 5 Rod Eddington, CEO British Airways, Conference call transcript British Airways Investor Day, March 10, 2005. carriers expand their route networks into destinations such as Morocco, Turkey and Croatia. This difference in profile was reflected in average revenue per ticket for BA and its competitors: Average European Fare per Customer jEurosj BA 114.00 easyJet 61.70 Ryanair 40.77 The expansion of the European Union in 2004 to include 10 more countries including Poland, Hungary and the Czech Republic presented excellent opportunities for BA as investments and projects grew in these new EU countries. At the same time, BA management was well aware that low-cost carriers were targeting these same new markets. Critics of BA\"s strategy argue that BA must be able to increase the number of passengers and have tight cost control if their strategy of attacking lowcost carriers "head to head" is to be effective. They wonder if this is possible in an airline where business class and premium customers are the dominant focus. A review of operating costs and margins (See Exhibit 8) shows that BA trails leading lowcost carriers with respect to operating margin. Both easyJet and Ryanair claim that 40 % of their customers are business customers. Recent moves by easyJet, in particular, show that low-cost carriers will be trying to attract business customers. Major lowcost carriersare purchasing new aircraftand they have solid cash balances to support any price wars. Their strategies are clear and focused: as Ryanair sales manager, Si nead Finn states. \"The lowest fare wins- when you offer the lowest fares, there\"s no one else to worry about".6 With respect to customer service, industry statistics indicate that Ryanair and easyJet have a better record than BA concerning on time arrivals and lost baggage. Recent performance indicators show that BA trails both lowcost carriers in both categories. Exhibit 9 presents these measures and shows BA is on time only 74% of the time, and that it loses 17.7 bags per 1000 bags handled a relatively poor performance. As Walsh and his senior team reviewed their options in the short-haul business, other issues were also of concern. BA faces significant challenges in labour negotiations with its unions in 2006 and BA had some very major pension funding issues to address. Similar to all airlines, BA was concerned about high oil prices, and it would need to replace its longhaul fleet in the near future as well. In March of 2008 BA was scheduled move into Terminal 5 at Heathrow. This new facility which will cost 4.2 billion would offer stateofthea rt facilities and the capacity to handle 30 million customers per year. It represented a great opportunity but also a threat if the transition was not handled in an efficient way. Competition from other full service network carriers, notably the Star Alliance Group and Skyteam were also of a major concern. Given these threats and stalled negotiations over transatlantic open skies, some believed that BA should divest its short-haul 5 Sinnad Finn, BA vs. budget airlines: Ba.com uppance for no-frills? 2005, Marketing Week, June 23: pg.28 business and concentrate on its long-haul competitive position where it had a competitive advantage. If on the other hand it stays in the shorthaul business, it must decide how it will compete with the low-cost carriers. References A cool hand on BA"'s control"s, Knight Ridder Business News, 2006, July 2. Analysts Report Ryanair, Davy European Transport and Leisure, March 28, 2006. BA vs. budget airlines: Ba.com uppance for no-frills? 2005, Marketing Week, June 23: pg.28. British Airways, Annual Reports, 1996-2006. British Airways, Transcript of Annual Investors Conference, 2006, 2005, 2003, 2202. Bucyk, Cathy, 2005, British Airways Chief Executive Rod Eddington, Air Transport World, August: pg. 24. EasyJet Annual Report and Accounts, 2005. EasyJet targets BA passengers, Travel Trace Gazette, 2006, June 16, p. 8. Industrious Times at British Airways and Ryanair, Strategic Direction, 2004, April p. 4. Low-cost Europe, Airfinance Journal, Dec. 2002/Jan. 2003, p. 22. Low-cost Airlines: Turbulent skies, 2004, The Economist, July 8. Ryanair Annual Report and Accounts, 2006. Stewart, Robb, 2006, BA Strategy: Wrong for the Long Haul?, Barron"s, April 24: pg. M16. Taking change on board, Marketing Week, 2006, May 4, p. 28. Webb, T. and Aris, B. United changes its tune with new low-cost airline, Sunday Business, 2003, Nov. 9, p1.\fExhibit 27 Key Statistics Ryanair and easyJet 2001-2005 Ryanair (reported in EUROS E) 2005 2004 2003 2002 2001 Passengers 27.6 23.13 15.73 11.1 8.1 (millions) Revenues 1,319 1,074.2 842.5 624 487 (millions {) Profit before 268 226 239.4 150.4 104.5 Tax (mil. E) Ryanair Fleet As of March 31, 2006 86 Boeing 737-800 Average Age - 2.4 years Source: Ryanair Annual Report and Accounts, 2006 easyJet (reported in British Pounds f) 2005 2004 2003 2002 2001 Passengers 29.6 24.3 20.3 11.4 7.1 ( millions) Revenues 1,341 1,091 931,8 551,8 356,9 (millions f) Profit before 67.9 62.2 51.5 71.6 40.1 Tax (mil. f) easyJet Fleet As of August, 2006 87 Airbus 391-100 (11 placed with easyJet Switzerland) 7 March 2006, exchange rates: One British Pound f = 1.743 USD Dollars $, One Euro E = 1.20 USD Dollars $32 Boeing 737-700 Average Age -2.4 years Source: EasyJet Annual Report and Accounts, 2005. Exhibit 3 British Airways Fleet As at March 31, 2006 Type Total 2005-2006 Average Hours Average Age Revenue Hours per aircraft (Years) Flown Boeing 747-400 57 275,548 13.25 11. Boeing 777 43 211,494 13.47 7.3 Boeing 767-300 21 71,664 .39 13.1 Boeing 757-200 13 33,363 7.03 11.5 Airbus 319 33 106.809 8.87 5.4 Airbus 320 27 79,340 8.24 8.7 Airbus 321 20,238 8.33 1.4 Boeing 737-300 5 16,929 9.28 16.7 Boeing 737-400 19 60,433 9.00 13.6 Boeing 737-500 9 28,157 8.39 13.5 Turboprops 8 18,777 5.99 8.6 Embraer RJ145 28 78,341 7.67 6.1 AvroRJ100 10 34,699 6.38 10.5 British Aero 146 4 10,019 6.41 15.1 Hired Aircraft 21,087 GROUP TOTAL 284 1,066,868 10.14 9.5 Source: British Airways Annual Report, 2005-2006. Exhibit 4 British Airways Key Statistics 1997-2006 To March 31Group 2002 1999 1998 results to Turnover 8,515 7,772 7,813 7,560 7,688 8,340 9,278 8,940 8,892 8,642 (Revenue) 1997 Operating 705 (110) profit Profit 620 513 415 135 (200) 150 275 580 before tax Attributable 451 377 251 72 (142) 67 206 460 profit year Basic EPS 12.1 6.7 (13.2) 19.5 44.7 55.7 per share K_ey statistics Airline p/RPK 6.67 6.37 operations yield Operating % 7.2 (1.3) 4.1 margin Net \"m debt/total capital ratio i 35.717 35,717 36,103 38,019 40,004 44,482 46,578 46,049 40,995 38,180 I ' 111,859 107,892 107 892 i 100,212 106,270 123,197 117,463 118,310 106,739 i 16,105 15.731 15,731 14,771 14,213 16,987 17,215 16,831 15,406 Group operating statistics Passengers carried Revenue passenger kilometers Revenue tonne kilometers Available m 23,106 22,565 22,565 21,859 21,328 22,848 25,196 25,840 25,114 22,403 20,542 tonne kilometers Passenger % 75.6 74.8 74.8 73.0 71.9 70.4 71.4 69.8 70.7 71.3 73.2 load factor Notes: British Airways changed to the IFRS (International Financial Reporting Standards) reporting basis for the year ended March 31, 006. Statistics for the year ended March 31, 2005 have been presented on both a GAAP and IFFG basis. m=millions, p=pence Source: British Airways, Annual Reports, Various Years. Exhibit 5 Timeline British Airways Short-haul Decisions 1946 British Government BEA to serves domestic and European routes 1974 BOAC and BEA are merged 1980 BA puts new fleet of Boeing 737-236s into service in Europe and 1982 Reorganization to create business: Intercontinental Division for long-haul routes, European Division for short-haul and UK domestics 1987 BA merges with British Caledonian and picks up that airlines commuter subsidiary 1992 British Airways Regional is formed to improve services to Scotland and other large UK markets Deutsche BA is created by BA and a German Bank consortium 1993 BA announces new marketing agreement with CityFlyer Express to increase feeder traffic at Gatwick Loganair enters franchise agreement with BA for service on Scottish routes BA announces new Club Europe brand for key European destinations 1996 BA purchases remaining 50.1% of its French partner TAT European Deutsche BA sells its turboprop activities to a French Company to concentrate its jet business 1997 British Airways Regional introduces first Embraer regional jets 1998 BA starts low-cost airline, named Go, its first no-frills venture with leased Boeing 737-300"s BA orders 59 aircraft in the Airbus 320 family 1999 Base Airlines of Holland becomes BA's tenth franchise partner BA announces f 50 million investment in Club Europe BA completes purchase of CityFlyer Express British Regional begins to fly into London City Airport 2000 British Airways announces the creation of first European, multi-airline, on-line travel agencyCityFlyer Express orders six new Avro RJ100 jets Following investments in Club Europe BA increases baggage allowance 2001 BA announces large cuts in many o its fares following changes in payment structures to travel agents BA announces new Value Pass which allows passengers to by full fare domestic and Club Europe e- tickets in bulk BA makes offer for all shares in one of its franchise partners British Regional Air Lines BRAL) as plan to better coordinate various short haul businesses and partners. 2002 British Airways sells it n-frills subsidiary, Go, for f100 million BA combines its two UK regional subsidiaries British Airways Regional and forms CitiExpress creating the second largest regional airline in Europe 2003 easyJet purchases Deutsche BA cuts European fares by up to 80% on 42 routes CitiExpress begins operation from London City airport and begins strategy to move to an all jet regional operation 2004 CitExpress is renamed BAConnect and with revamped service and lower fares at 14 airports Source: British Airways Archives and Museum Collection, http://www.bamuseum.com/museumhistory.html Exhibit 6 British Airways Turnover (Revenue) by Area of Original Sale 1996-2005 Millions f 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 Europe 5,097 4,940 4,903 5,402 6,054 5,898 5,936 5,632 5,458 5,029 The Americas 1,383 1,347 1,482 1,549 1,745 1,655 1,672 1,610 1,485 1415 Africa 751 717 733 789 783 687 624 618 617 546 Mid-East, India Far East/ 582 556 570 600 696 700 660 782 799 770 Australia/Asia Total Turnover | 7,813 |7,560 7,688 8,340 9,278 8,940 8,892 8,642 8,359 7,760European Turnover (Revenue) by Area of Original Sale 1996-2005 Millions f 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 UK 3,922 3,731 3,634 4,101 4,632 4,062 4,043 4,098 3,581 3,240 Contin.Europe 1,175 1,209 1,269 1,301 1,422 1,836 1,893 1,534 1,877 1,789 Total 5,097 4,940 4,903 5,402 6,054 5,898 5,936 5.632 5,458 5,029 Turnover (Revenue) by Area of Destination 1996-2005 Millions f 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 Europe 2,470 2,639 2,838 3,208 3,388 3,400 3,214 3,168 3,109 The Americas 2,884 2,767 2,763 2,863 3,450 3,253 3,272 3,073 2,861 2,449 Africa 1,412 1,253 1,201 1,262 1,304 1,220 1,133 1,118 1,134 1,074 Mid-East, India Far East/ 1,047 901 886 1,007 1,136 5 1,067 1,078 1,237 1,196 1,128 Australia/Asia Total Turnover | 7,813 |7,560 7,688 8,340 9,278 8,940 8,892 8,642 8,359 7,760 Source: British Airways Annual Report, 2005-2006. Exhibit 7 British Airways Operating Profit by Area of Destination 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 Europe (26) (60) (117) (244) (172) (310) (166) (127) (36) 26 The Americas 347 294 223 144 470 308 166 395 316 315 Africa 224 210 168 91 92 62 124 125 137 220 Mid-East, India Far East/ (5) (30) 21 (101) (10) 24 33 111 129 167 Australia/Asia Total Turnover 540 405 295 (110) 380 84 442 504 546 728Source: British Airways Annual Report, 20052006. Exhibit 8 Operating Margins Selected Airlines 2005 Revenue per Costs per Margin % Passenger! Euros! Passenger Ryanair 49 Southwes 72 (Euro) 7 40 66 332 British Airways 351 6 Air France 306 293 4 Lufthansa 352 341 3 easyJet 67 65 3 Jetblue 96 97 -1 Source: Ryanair, Various Firm Financial Reports Analysts Report Ryanair, Davy European Transport and Leisure, March 28, 2006 Exhibit 9 Customer Service Statistics Selected Airlines 2005 % on time Lost bags per 1000 % PAX completions Ryanair 90 .5 99.4 Air France 83 15 97.8 Lufthansa 82 16.3 98.7 easyJet 80 n/a na beria 78 15.3 98.8 British Airways 74 17.7 98.5 Source: AEA, Analysts Report Ryanair, Davy European Transport and Leisure, March 28, 2006