Will BA win its latest labour battle?

Yet again, BA finds itself – very publicly – in dispute with its workforce.  This time though, it feels different; not necessarily in terms of the outcome, but in the potential long term ramifications.

The details of this dispute are well covered elsewhere but in a nutshell relate to BA’s response to the coronavirus pandemic, it’s decision to make up to 12,000 employees redundant and its negotiating strategy with the unions.  What has proved the flashpoint is a belief that BA will ultimately make its entire workforce redundant and hire back those that it needs on revised terms and conditions (i.e. lower pay).

The wider context is important to note. BA has had an unsettled workforce for some time with its pilots on strike last year and with the mixed fleet strike in 2017.  This dispute can be traced back to 2010, when BA cabin crew went on strike in protest at terms and conditions for a new mixed fleet crew. This strike was ultimately unsuccessful, but meant all new cabin crew hired from that point on were in a separate labour pool known as the “Mixed Fleet.”  As a consequence, frustration has been brewing for some time.

Before exploring further, here at an Englishman In Flight, our thoughts go out to all the BA employees currently living with this uncertain future and facing potential income reductions. It’s a horrible situation and we hope that as many people come through it unscathed as possible. It’s easy to get into the detail of this and lose sight that this will impact people’s livelihoods.

So why is BA taking this approach?

There is no question that BA will have to adjust its workforce as a result of the coronavirus pandemic.  Most airline executives have stated in the last few weeks that they don’t expect the industry to get back to 2019 levels of demand until 2022 at the earliest. No business can carry excess labour for that length of time, especially with such uncertain timeframes. In addition, future business travel is uncertain. 51%  of CEOs think business travel will never return to pre-Covid levels. With business the profit engine of BA, this only underlines the gravity of the current demand environment.

The UK Government has also exacerbated the situation. The UK is the biggest developed nation to not offer a specific airline bailout. Air France, KLM, Lufthansa as well as the airlines in America have all benefited from government support beyond wage subsidiaries. The government has made it clear that it will only intervene as a last resort.

BA have wanted to have its cabin crew on the same pay and conditions and reduce the overall cost of labour for a long time. Undoubtedly, they see this as a unique opportunity to push this through. In doing so, this will lower the cost base and allow them to more effectively compete on price and increase operational profit.

Should BA be doing this?

This is the heart of the matter. 

Let’s look at the legalities first. The UK Parliament Transport Select Committee has in a recent report labelled BA a “disgrace” for taking this course of action, arguing that it’s against the spirit of the furlough scheme that BA have been leveraging. This is a weak argument in this author’s view, as there is nothing in the legislation that prevents this and indeed, an argument can be made that if you know you no longer need the workers, then continuing to leave the government to pick up the tab is morally wrong.  Furlough or no furlough, it is a poor indictment on the legal protection offered to employed workers in the UK that there is no restriction on a company terminating employment contracts and rehiring on poorer terms and conditions. Legislation to resolve this is making its way through Parliament, but will likely come too late for BA employees. To put it succinctly, nothing BA is proposing is (currently) illegal.

What about values?

BA and its parent company IAG clearly believe they have a moral duty to their shareholders. If you are a shareholder in IAG then the last few years have been wildly successful (doubling between July 2014 & July 2018) and there can be no argument that BA has done a fine job increasing shareholder value. BA would argue that failing to reduce costs would reduce shareholder value.  You only have to take a look at the troubles in Air France/KLM and Lufthansa group to see that this is true.

But should BA be considering other stakeholders (e.g. employees, customers, etc)? Last year, the Business Roundtable group announced with 181 CEOs that companies should be the benefit of all stakeholders, not just shareholders. Post Coronavirus, this is an idea that will only gain traction, but whilst BA is innovative in many areas, labour relations and company purpose are not their strengths. With no activist shareholders present, there is little pressure on BA to not pursue a solely financial objective. BA would argue that in taking these steps, they are preserving employment for the remaining workforce – not a wholly insignificant task at 30,000 employees. There is a lot of truth to this statement, but it leaves a fundamental question: how will this approach affect the remaining 30,000 employees and what will be the overall impact on the airline?

The culture at BA has been recently described as toxic. Research shows that employee engagement levels have a direct impact on a company’s financial performance (evidence).  This is true of the airline industry as much as any other. A recent example: a large US airline that undertook a survey of its workforce and found the most disengaged workers were the baggage handlers working in its hub; incidentally, they also had the highest rate of lost baggage. If BA is successful in this dispute, it’s likely to deepen the toxicity of their current culture. Evidence of this can already be seen with BA employees publicly agitated at their company, voicing their anger on social media. This outward frustration is likely to impact in-flight service. What happens on the inside of an organisation impacts what happens on the outside. BA’s in-flight service already suffers from a lack of consistency – some days it’s exceptional and other days it’s non-existent. It would be interesting to see if the Gold Card awards to staff takes a dip over the next year or so.  Is this going to drive passengers away?

This is, I believe, the ultimate judgment call that BA is making. It is gambling that it will be able to reduce its cost base but keep the associated long- term benefit.  Undoubtedly, there will be a short term hit in terms of reputation. But BA has been here before, very recently, with pilot strikes, the removal of complimentary catering on short haul flights, and very public IT failures. Each time, BA has come through unscathed in terms of its financial performance.  Is this time likely to be any different?

In the medium and longer term, I don’t believe so. The majority of passengers will continue to book on price (especially with a recession looming).  The fundamentals that put BA in such a strong position – the number of slots at Heathrow, its JV with American, loyalty programme and lack of a competitor at significant scale within the UK – look to remain unchanged.  Even when BA has competition on city pairs, it can compete on both price and network. Sadly, the employees that will be impacted will have few options. All other possible employers are struggling and not in a position to be able to hire away, even if you were willing to give up seniority. If you want to continue flying long-haul as a pilot based in the UK, BA will be your only option.

So will it be a slam dunk for BA and the changes they are trying to push through?

On the face of things, it appears so.  With limited flights currently in rotation and half the fleet in storage, going on strike will have a minimal impact in causing passenger disruption so the crew will have little leverage.  

Despite the efforts of the unions, some members of the BA executive club, and employees on social media, this campaign has yet to cut through at scale with the general population. With all airlines making reductions, and pain being felt in many other industries, this story will struggle to stand out. Soon it will be overtaken by good news stories once flights resume and quarantine restrictions are lifted.

That said, success for BA is likely to come at a cost.  With relations already rock bottom between the government and BA, they are unlikely to grow better anytime soon. This could impact BA in various different areas such as increased aviation taxes, increased regulation on emissions and reducing carbon footprint, legislation forcing increased regional/domestic connections at the expense of lucrative transatlantic flights, tighter labour legislation, as well as increased demands in the event of any future JV/anti-trust applications.

In addition, a disengaged workforce will drag BA down over time. It will undoubtedly increase attrition and will impact its reputation as an employer in the market, making it less and less an employer of choice (in stark contrast with Easyjet’s campaign to recruit more female pilots). BA could find itself ultimately having to increase pay to compensate.

So what can be done?

Attempts to force BA to change tack have centered around two options (in addition to the media campaign and pressure) – calls to remove slots from BA at Heathrow and calls to nationalise BA and carve it out of IAG.  Both of these are misguided.  Like most committees of MPs or Senators, grandstanding often gets in the way of understanding industry detail. In this case, the Transport Select Committee’s call to remove slots from BA was quickly shot down when the government confirmed it has no power to do this. Any attempt to do so would quickly be met with a legal challenge. BA’s slot allocation of 52% at Heathrow is key to its success, but the only way to change it is to press on with building the third runway and increase options for competitors to enter or grow market share.  (No surprise, that BA has always opposed the third runway, nominally on the grounds of cost).

The second option, advocated by some pilots, has been to effectively nationalise BA and remove it from IAG. Aside from the merits or otherwise of nationalising an industry this is a non-starter particularly with the current government which is ideologically opposed to industry. With public funds more stretched than ever, this is a non-starter.

What has surprised me is that there has not been more focus on getting BA to receive a government bailout. Whilst this is not without its challenges (least of which, BA doesn’t actually want one), if BA were to receive a bailout, conditions could be inserted about maintaining existing terms and conditions.  A government bailout is the one chance government have to dramatically impact an airline as has been shown by France’s bailout of Air France and associated reduction in domestic flying and carbon footprint.  Rather than putting pressure on BA and IAG, which is well versed in ignoring it, a better use of time would be to lobby the government and the Treasury to put together a specific aviation package and use this unique opportunity to shape the direction of the UK airline industry for the years to come.  

As it stands today, there is little chance of that happening. BA will likely be able to steer through the changes it wants, though it will take some hits along the way in the form of in increased employee disengagement and regulatory challenges. Hopefully for the employees, the impact will remain contained and a recovery will not be far around the corner.