- or why we should be wary:

British Airways, on `Tightrope,'
Loses Sales to Virgin, Ryanair

Dec. 22 (Bloomberg) -- Andy Hunt, founder of U.S. vacation- home developer Clearsky Property Ltd., switched his nine flights a year between London and Florida to Virgin Atlantic Airways Ltd. after he tired of ``surly' service from British Airways Plc.

``I hated flying BA,' says Hunt, 49, who is based in Romsey in southern England. ``All you hear is whining about strikes, staff problems and passenger delays.'

British Airways, once Europe's biggest airline, is losing trans-Atlantic business travelers to Virgin Atlantic and passengers on flights within Europe to Ryanair Holdings Plc as unions fight efforts to cut costs. The defections have led London- based British Airways to three straight years of falling sales.

Service has declined as Chief Executive Officer Rod Eddington eliminated one in five jobs and cut costs by 869 million pounds ($1.67 billion) in the past three years. He plans to trim another 300 million pounds by the end of 2005, even after worker shortages in August left check-in desks understaffed, passengers stranded and caused 966 flights from London to be canceled as of Nov. 30.

Eddington, 54, may be sacrificing service in his attempt to become more productive, says Adam White, who helps manage about $12.8 billion for London-based First State Investments, a unit of Colonial First State Investment Management Australia Ltd.

``It feels like walking a tightrope between reducing the cost base and maintaining service standards you expect of BA,' says White, who sold his company's remaining British Airways shares in July. ``The extent to which they can cut costs to the bare bones is a concern.'

`Stepped Too Far'

British Airways Commercial Director Martin George acknowledged that the company has moved too fast in trying to reduce labor costs.

``When you go through a major cost-cutting initiative there are times when you do go too far,' says George, 42. ``There's no doubt that over the summer we stepped too far in the direction of cost cutting and we have taken immediate action to put that right.'

Shares of British Airways have fallen 7.8 percent this year to 224.75 pence, compared with the Bloomberg Europe Airlines Index decline of 4.4 percent and the 20 percent slide in the shares of Ryanair to 5.27 euros.

Airline stocks have dropped after crude oil rose to more than $50 a barrel this year in New York, driving up fuel expenses. Virgin Atlantic isn't publicly traded. British Airways since Nov. 1 has received buy ratings from five analysts and hold ratings from four.

Reduced Demand

The British Airways service disruptions follow three years of passenger defections for the carrier, which began flying more than 60 years before Dublin-based Ryanair and Crawley, England-based Virgin Atlantic. British Airways was founded in 1919 when predecessor Aircraft Transport & Travel made the world's first scheduled daily international flights, between London and Paris.

The U.K. government unified the carrier's forerunners under the British Airways name 30 years ago, and sold shares in the airline for the first time in 1987 in an offering in which investors wanted 11 times more shares than could be sold.

British Airways has yet to recover from the decline in trans- Atlantic travel demand following the Sept. 11 terrorist attacks in the U.S. British Airways carried 3.27 million passengers in August, 14 percent less than in August 2001.

Ryanair, which flies 209 routes within Europe, has more than doubled its passenger count in the same time to 2.14 million passengers in August this year. Virgin Atlantic, which doesn't report monthly figures, will carry more than 4 million passengers in 2004, returning to pre-Sept. 11 levels, spokeswoman Anna Burdsall says.

Declining Stature

British Airways has had seven straight years of losses on its home continent, starting in the year ended March 1998, the company says. British Airways declined to provide loss figures for its European routes.

The carrier was relegated to Europe's second-biggest airline by the merger in May of Paris-based Air France and Amstelveen, Netherlands-based KLM Royal Dutch Airlines NV, as measured by revenue passenger kilometers, the number of passengers multiplied by distance traveled.

Deutsche Lufthansa AG may overtake British Airways by adding routes and filling more seats; in the first 10 months of the year the German airline's 93.28 billion revenue passenger kilometers outpaced British Airways' 89.42 billion.

British Airways generates lower sales per employee than Ryanair or Virgin Atlantic. British Airways had 145,560 pounds in sales for each employee on revenue of 11.34 billion pounds in the year ended March 31, according to data compiled by Bloomberg.

More Jets, Costs

That trailed Virgin Atlantic's 181,429 pounds in revenue per worker on sales of 1.27 billion pounds, and lagged behind Ryanair's 324,120 pounds per worker from sales of 740 million pounds, Bloomberg data shows.

Virgin Atlantic and Ryanair have smaller fleets, reducing fixed costs. British Airways leads Virgin Atlantic and Ryanair in number of planes, with 287, and with more routes beyond Europe, with 70 flights.

Virgin Atlantic, a carrier founded 20 years ago with one plane flying between London Gatwick and Newark, New Jersey, now has 29 planes flying on 23 routes beyond Europe. Forty-three more planes are on order. Ryanair, founded in 1985, has 73 planes and flies only within Europe.

``British Airways can never get its costs as low as Ryanair,' says Shane Matthews, an analyst at Dublin-based NCB Stockbrokers Ltd., which holds British Airways shares. British Airways needs to shrink its labor costs in Europe, he says.

Battling Beds

Beyond cost challenges, British Airways is under siege in marketing. Virgin Atlantic is taking the carrier on in a battle of the beds. Virgin Atlantic, 51 percent-owned by Virgin Group Ltd. and 49 percent by Singapore Airlines Ltd., began offering televisions and bigger beds in June 2003 to its highest-paying customers.

Virgin Atlantic CEO Steve Ridgway, 53, says he is trying to lure business- and first-class travelers from British Airways, which was the first airline to offer flat beds in business class in July 2000.

Virgin offers a 22-inch-wide seat and a flat bed that is 33 inches at its widest point and 82 inches long. The in-flight screen is 10.4 inches. British Airways' ``Club World' package provides both a bed and seat that are 22 inches wide and a flat bed 72 inches long, with an 8.4-inch in-flight screen.

Lower Fares

Virgin Group Chairman Richard Branson, 54, in announcing Virgin Atlantic's latest aircraft order on Aug. 5, pledged to use the Airbus SAS planes to boost competition with British Airways.

``Within the next five to seven years, we will fill in the gaps so people know that where BA flies they can fly Virgin Atlantic,' Branson said.

Ryanair, Europe's largest low-cost airline, has reduced fares by cutting costs. Ryanair charges 36.86 pounds, including fees and taxes, for a return flight from London Stansted to Dublin for the weekend of Jan. 7, leaving on Friday afternoon and returning on Sunday evening. British Airways flights at similar times from London Gatwick cost 119.60 pounds.

British Airways is undercut on price for overseas flights by Virgin Atlantic, which has return trips from London to Miami on Jan. 14 for a week, including all charges, for 310.20 pounds, less than British Airways flights starting at 381.40 pounds.

`Lost a Lot'

Ryanair has reduced costs by hiring other companies to take over such tasks as baggage handling. It has also cut expenses by removing reclining chairs and seat pockets, and shortened plane turnaround times to 25 minutes to boost flying hours.

British Airways doesn't keep track of its turnaround times for its planes, instead reducing the amount of time that aircraft spend on the ground, spokesman Jay Merritt says.

``Ryanair's low cost structure has forced BA to slash their prices on short-haul routes,' says Ryanair CEO Michael O'Leary, 43. ``But they are still two to three times higher than Ryanair.'

British Airways has sold more tickets through the Internet to cut travel agent fees to try to reduce costs on European flights. Fuel expenses alone at British Airways rose 12 percent to 271 million pounds in the three months ended Sept. 30 from the year- earlier quarter.

Cutting More Jobs

Eddington has pulled back from some plans to reduce costs. In August, British Airways averted strikes threatened by the Transport and General Workers Union and the GMB, which represents such trade workers as janitors and baggage handlers, by dropping an attempt to tie bonuses to good attendance. Workers at British Airways take an average of 17 sick days a year, more than double the national average of seven days.

British Airways agreed to give 20,000 employees, including baggage handlers and check-in workers, a pay raise equal to inflation and an unconditional bonus of 1,000 pounds. The carrier is still negotiating with cabin-crew workers.

After the pay dispute was resolved, a shortage of British Airways personnel at Europe's busiest airport, Heathrow, left thousands of passengers stranded overnight because the airline eliminated too many jobs.

The London-based Transport and General Workers Union, which represents more than 20,000 of the airline's workforce of 47,000, opposes further cost reductions on the grounds that employees have already helped the airline trim expenses.

`Tough Job'

``In the light of higher profits and falling debt, our members across all the operations will view critically any fresh proposals for cost savings in any areas,' says Brendan Gold, the union's national secretary for aviation in London.

Cost reductions by British Airways boosted its profit in the quarter ended Sept. 30 by 26 percent to 123 million pounds. Revenue climbed 2.2 percent to 2.03 billion pounds.

Eddington considered his role at British Airways to be his last executive job, he said on July 20 after the airline's annual shareholder meeting. He made the comments after British Airways named former British American Tobacco Plc Chairman Martin Broughton, 57, as the airline's chairman, replacing Colin Marshall in July.

``My focus is on the next 12 months,' Eddington, a native Australian and former Rhodes scholar who became CEO of British Airways in April 2000, told journalists. ``This is a tough job -- 24 hours a day, seven days a week.'

Succession

Eddington and British Airways declined to comment further on the CEO's plans.

Two British Airways executives who have been promoted in the past few years are potential CEO candidates. John Rishton, 46, was appointed chief financial officer in May 2001 and oversaw cost reductions.

Commercial Director George, 42, became responsible in July for all sales and commercial aspects of the business. In the three months ended Sept. 30, George cut sales costs by 18 percent from a year earlier, more than any other part of the carrier.

Candidates to replace Eddington may include Willie Walsh, CEO of Aer Lingus Group Plc, because he plans to leave Ireland's state- owned airline in May. Walsh, 42, would only say he has received inquiries from airlines that he wouldn't name.

As British Airways battles rising costs and falling fares, customers like Hunt aren't likely to return.

``On a Virgin flight the experience is totally different -- you feel welcome, part of something,' Hunt says. ``I won't go back to British Airways.'