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High flyer – BA’s Keith Williams revisited

Medium

When British Airways CFO Keith Williams gave an exclusive interview to Financial Director in the autumn of 2007, the mood at the company was more upbeat than it had been for most of the new millennium thus far.

Concerted efforts to re-engineer the business to cope with the long-term effects of the attacks on the World Trade Center in New York on 11 September 2001 had been swiftly effected by the board, while Williams had moved to shore up BA’s huge pension scheme on which any investment in its fleet was contingent, get rid of underperforming functions and reduce its debts.

While the opening of Heathrow’s Terminal 5 in 2008 was a public relations disaster for chief executive Willie Walsh, Williams could bask in the glory of heading up a finance function that had reported record profits and, for the first time in the company’s history, a 10% profit margin.

To prepare the business to achieve this, Williams spent a lot of time focusing on the basics, as many businesses have spent the past two years refocusing on. “We ran the company a little bit like a leveraged buyout, which was to go back to cash generation, dispose of non-core businesses and rebuild the balance sheet of the company,” he told us.

Journey’s end
A couple of months after the terrorist attacks, Williams revealed that he had received a phone call from a journalist at The Sunday Times. “You’re going to be bankrupt in three months on our figures,” they asked him. “What have you got to say?”

He told us he wasn’t ruffled by that. “We’re reaching the end of that journey. The company is now embarking on a period of growth and investment to sustain us into the future.”

Famous last words. Life changed once again and irrevocably so for BA, its embattled CEO Walsh and for Williams. The solution, its decision to merge with Spanish carrier Iberia, is now well underway with the plan to present the transaction to both BA and Iberia’s shareholders no later than this November and to complete the deal by the end of the year. In the proposed structure, BA and Iberia are renamed as OpCos and come under the ownership of a new group holding structure, TopCo.

Walsh becomes CEO of TopCo while Williams has been designated CEO of BA’s OpCo and joins the six-person TopCo management board in that capacity. Iberia group CFO Enrique Dupuy de Lôme becomes TopCo’s group CFO and joins the management team of BA OpCo, while Williams joins Iberia OpCo’s team. The companies are to remain separate entities.

Most interestingly, there is now talk that Williams could replace Walsh as CEO of BA on a permanent basis. Bookies Paddy Power put him on as favourite for the job against 11 other names, including members of the company’s management team and Iberia’s chairman and CEO Antonio Vazquez in a special bet laid on at the beginning of the year.

His odds warmed up from 9/4 to 10/11 a week later, settling at 2/5 by the time this magazine went to press mid-January. “Seemingly informed punters have wasted no time backing Keith Williams for the top job,” Paddy Powers says.

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.”

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