High flyer – BA's Keith Williams revisited

If the merger with Iberia goes through and these odds reflect the reality, we’ll be clinking glasses to Williams as CEO of the merged entity by the close of 2010 and the FD will be consolidating a stellar five-year ascension at BA against the toughest economic backdrop for generations. Whether he wants the job is another thing.

Pensions legacy
For now, that prospect will have to wait. Walsh and BA have a number of preconditions to get in place that can make or break the merger, one of particular concern to Williams being the satisfactory outcome to BA’s pension scheme review. An actuarial evaluation in 2009 assisted by PricewaterhouseCoopers concluded that BA was lugging around a pension deficit of £3.7bn, combining a provisional deficit of £2.7bn from its New Airways Pension Scheme (Naps) and a provisional deficit of £1bn in its Airways Pension Scheme (APS) – both closed to new members.

To put that in context, at the last valuation in 2006, the Naps deficit was £2.1bn while the APS was not in deficit: the current total provisional deficit is a cool £1.4bn more than BA’s current market capitalisation (it was equivalent to about half of market cap at the time Williams was interviewed by us). The company has already admitted the Pensions Regulator may question its technical provisions and find those it used to be lower than a level it deems appropriate, so the deficit may yet be revealed to be even bigger.

Iberia has been clear that it doesn’t want to inherit the inglorious title of ‘A Pension Scheme With An Airline Attached’, as BA has been referred to many times before, though the combination of the companies would just about avoid that by creating a business with a market cap of around £4bn.

Williams has to put a plan in place to fix the deficit by this June as determined by UK pensions law, but BA has already said explicitly that it can’t afford to increase contributions as it has been paying more into its schemes than the amount it has taken in profits. A very sticky sticking point indeed and one with no easy way out: Iberia has the right to terminate the merger if Williams doesn’t find a solution, which would throw BA straight back to square one.

Another fire Williams has been fighting is the financial collapse of JAL, Japan’s national carrier, amid its takeover talks with American and Delta airlines. It was placed in bankruptcy in mid-January, but BA needs JAL to keep operating because it relies on sharing its operations to service routes in Asia. It was Williams who, it reported, was dispatched to Tokyo late last year as the potential for a JAL bankruptcy intensified, to promote the idea of the American and Delta acquisition. A state-backed entity is to take charge of JAL.

Williams’s credentials on the financial side, while viewed against the backdrop of a company currently reporting an operating loss, are very strong and he is well respected for the work he has done at BA – first as treasurer (the role in which he joined the business) and, since 2006, as CFO. “Most people saw 10% as a real challenge for BA,” Williams told us in 2007, before it was in a position to think it a close reality. “That said, I think we’ve put in place all the right steps over the past couple of years to put us in a position to get 10%.” And he did.

His recent work on negotiations to keep JAL afloat provides a glimpse into his non-financial and communication skills. But anyone would be hard pressed to restore goodwill between the business and its shareholders, who with no dividend have seen no return on their investment, and its workforce, while crisis talks between BA and Unite splutter on and the union continues to poll members for more strike action. Its decision to get a High Court injunction on a 12-day strike over Christmas forced staff to work and came with some spiky war chants.

“There was never any need for a strike and we hope that Unite will take this opportunity to reflect before deciding its next step,” BA said of the ruling. “It has also become very clear that our customers do not believe that old-style trade union militancy is relevant to our efforts to move British Airways back toward profitability.”

Willie Walsh’s management style appears to be keeping the old command and control method alive. But Williams’s interview with us in 2007 gave us the impression that he might take a slightly different tack. He does call a spade a spade, though: he admitted to us in 2007 that BA’s pension scheme had grown so big in the last valuation, “[it] actually made it, relative to market cap, the biggest deficit in the FTSE-100. There are people who said to me that the solution is obvious: it’s to re-nationalise.” If only airlines could prove themselves as systemically vital to the economy as the banks had this might have happened already.

No frills
Of having taken out cost from its operations by way of going down the no-frills route, he said: “We’ve copied to some degree the low-cost carriers. We make no secret of that we’ve copied the good things in their model.” He was pragmatic on BA’s 10% margin ambitions in a way that Willie Walsh might blanch at, telling us: “I wouldn’t say it has to be an absolute measure of 10%”.

Perhaps what BA needs while it lives out its last months as a standalone company and when it becomes part of a merged entity is the continuity of an FD in post who knows the books, the business, the problems and the management. But one might imagine Williams is ready for more than playing second financial fiddle to TopCo’s group CFO, Iberia CFO Enrique Dupuy de Lôme. He can certainly speak honestly for BA’s modus operandi beyond its balance sheet and pension woes.

As he told us in 2007 after BA was fined £270m for conspiring to fix prices with Virgin: “We’ve done a lot of things right as a company, and there are some things we’ve done wrong. And sometimes the wrong overtakes the right.”