Staff that are uncaring at best and rude at worst; the record for lost luggage in Europe; not being able to use millions of accumulated airmiles; insisting Heathrow airport operator BAA is to blame for any problems at that facility; business and first class not at the same standard as Asian airlines such as Singapore Airlines; constant strike threats… these are only a handful of the complaints from the business customers who make up British Airways’ (BA) main source of profitability.

But BA chief executive Willie Walsh, sporting his usual hairstyle – a one-inch stubbly cut – sounds unrepentant. Although he says you have to listen when people complain, he argues that “there is a balance to be achieved between profitability and the customer experience”.

The problem, as far as the airline’s customers are concerned, is that the pendulum has swung too far in favour of the bottom line. And this state of affairs could backfire on BA if executives with premier, gold and silver cards choose its competitors such as business-only airlines, private jet companies, Asian airlines and even those like Lufthansa, which only a few years ago had a much worse reputation.

Enhanced experience

“I would argue in many areas we’ve enhanced the customer experience while getting rid of waste,” insists 45-year-old Mr Walsh – known even to receptionists at BA’s headquarters near Heathrow as Willie – citing online check-in. He also points to investment in business cabins and a fleet overhaul.

The latter is the nub of the matter. The airline estimates its capital expenditure as more than £2bn for 2007–2009, including short-haul fleet renewal. It does not include an estimated spend of £10bn – list prices before the discounts for large orders – on long-haul fleet expansion and renewal.

Aircraft producers Airbus and Boeing are currently falling over themselves to get the contract for one of the biggest wide-bodied fleets in the world. BA already ordered four new Boeing 777-200 extended range aircraft in March.

Improving margins

As a result, the airline is intent on achieving its goal for operating margins of 10% – up from 5.4% in 2004 – for the March 2008 financial year. This is to finish repairing a balance sheet that suffered in the downturn after the 9/11 terrorist attacks in the US, one that can take on that sort of spending. “It’s a challenge. I believe we can achieve it. Never in the history of BA [has it been achieved],” says Mr Walsh, a compact, intense man who wears his security badge around his neck.

On a normal day in the office, Mr Walsh tends not to wear a tie, rather like representatives of private equity – an ever-expanding industry that has just got involved in its first major airline with the takeover of Australian airline Qantas.

“I don’t believe it means private equity will be interested in BA,” says Mr Walsh, noting that what a private equity investor would have done at the British airline, such as disposing of non-core assets, is exactly what BA has done in the past few years while operating as a listed company. In March, for instance, the airline sold BA Connect, its loss-making UK regional operations.

Criticism unfair

What private equity would have done on the personnel front is another question. Mr Walsh takes issue with BA staff being called uncaring: he says it is “unfair” and insists that they take great pride in working for the airline.

That supportive attitude in the face of all evidence to the contrary is to be expected from a chief executive who is intent on bringing BA’s unions kicking and screaming into the 21st century. (An example of a working practice: a 2007 threat of strike action on the back of a revised sick leave policy under which average annual sick days were cut from an astounding 22 to 12.)

“Heathrow is one of the last union strongholds for collective action and old-fashioned practices,” says Chris Avery, aviation analyst at JPMorgan Chase. “Willie is a tough manager, but there is an inherent difficulty in changing work practices in a business where there are alternatives in the event of a strike – other airlines.”

Mr Walsh, who started his career as a pilot at Aer Lingus and moved up to become CEO, has had no time to fly his own small plane in the past 10 years. He does, though, fly on BA.

Surely he fears that disgruntled staff in the galley spit in his food before serving him?

“No. Never. They love me,” he says, blushing strongly.

Mr Avery gives Mr Walsh credit for dealing with what he says was the biggest threat to the airline – a pension deficit of £2.1bn – without a major strike. Dublin-born Mr Walsh negotiated with unions and trustees, and agreed a funding plan that will eliminate the deficit over the next 10 years.

Those negotiating skills were honed in very different roles at Aer Lingus: as a union organiser in his 20s and subsequently when he ascended from chief operating officer in 2000 to take over as CEO in October 2001, only a few weeks after 9/11, and found himself dealing with banks as the airline escaped from bankruptcy by a whisker.

His direct involvement in union negotiations, with “sleeves rolled up”, according to an associate, is one of his strengths. But it is a high-risk strategy because there is no higher authority to mediate – no ‘good cop, bad cop’ game possible – if he fails.

Mr Walsh, whose 1992 MBA from Ireland’s Trinity College was in financial services – he argued, as did many banks, that technology would make branch banking dispensable – may be talking to his banks about major funding quite soon if there is any truth to the market rumours of BA bidding for Iberia. BA has a 10% stake in the Spanish airline, part of its One World alliance. Investment bank UBS is advising BA on its options.

Is Mr Walsh going for an Iberia takeover?

“You don’t expect me to answer that!” he exclaims. He then talks about the need for consolidation in the industry on a worldwide basis, not just in Europe, while also pointing out that the experience of Swissair, which went on an expansion spree, went bust and re-emerged as Swiss International Airlines, should be taken into account.

“Consolidation is about making you better, not bigger,” says the married father of one. “We will look carefully at what we can do with the stake in Iberia and we will see what happens in the next weeks.”

Just as big a challenge is the medium-term impact of the March ‘open skies’ treaty agreed between the EU and the US. The UK’s Civil Aviation Authority expects it to lead to 10% reductions in transatlantic business fares over the next five years – BA’s most profitable routes – as new entrants to the market increase competition.

Efficiency gains

The airline posted net income of £451m in the financial year to March 2006. This will rise to an estimated £781m in 2009, according to Morgan Stanley, as efficiency gains from its March 2008 move to Terminal 5, a BA-only state-of-the-art building at Heathrow, kick in.

Mr Walsh believes the customer experience will be transformed on the back of this. But the airline is stuck with the busiest and most overstretched airport in the world as its hub. Heathrow serves about 68 million passengers a year, more than 50% greater than the 45 million for which it was designed, according to Stephen Nelson, chief executive of BAA. It has only two runways.

The addition of Terminal 5 will not solve that problem. So Mr Walsh and Mr Nelson, among others, are lobbying for another runway – a difficult task as the environmental lobby in the UK goes mainstream and misunderstandings about the effect of the industry abound. Worldwide aviation produces only 1.6% of greenhouse gas emissions, according to the Stern report.

One analyst describes Mr Walsh as a “small bull”. He does not take offence at this because he prides himself on his determination.

And that is something he will need aplenty when he is lobbying the government – and dealing with disgruntled customers.

Karina Robinson is the senior editor of The Banker. This article is adapted from her monthly column.