British Airways' CFO, Keith Williams

Imagine, for a moment, waking up to the news that one-third of your revenues
had disappeared down the toilet. Then throw in a pensions fund deficit that, at
more than £2bn, is about half the size of your company’s market cap. And for
good measure, provision £350m in your accounts to cover illegal and
anti-competitive behaviour. Then thank your lucky stars that you don’t ­operate
in the erratic world of Keith Williams, British Airways’ remarkably laid-back
CFO.

Considering BA’s recent history, you would expect Williams to be a gibbering
wreck. Fresh from a bruising encounter with competition authorities on both
sides of the Atlantic, however, he is anything but. And while he’s not swinging
from the chandeliers, he is certainly upbeat about the airline’s health.

“We’re through, what I call, the rebuilding of the company,” he says. “We set
ourselves certain financial targets with the financial markets and we’ve met or
exceeded those targets every year for the past five or six years.” And, make no
mistake, those five or six years have been ­turbulent to say the least.

Take yourself back to the autumn of 2001. When New York’s Twin Towers came
crashing down, so did the tender foundations of the airline industry. “In
November 2001, I got a phone call from The Sunday Times,” says
Williams. “The Sunday Times said: ‘BA, you’re going to be ­bankrupt in
three months on our figures, what have you got to say?’”

Happily for BA, The Sunday Times figures turned out to be wrong. But
if there were ever any doubt that the industry was in dire straits it was
compounded by the Iraq War of 2003. “The two taken together stressed the
company’s finances – we went down to junk bond status,” he says.

Mixed fortunes
So, for Williams, 2007 has been a year of mixed fortunes. On the one hand, both
Standard & Poor’s and Moody’s have returned BA’s stock to investment grade
on the back of the airline ­solving its pensions crisis as well as si
gnificantly reducing its debt pile. On the other, it was fined a total of £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,” says Williams. Quite.

In the immediate aftermath of 11 September 2001, when Williams was head of
treasury, BA was forced to return to the basics. “We ran the company a little
bit like a leveraged buyout,” he says. “Which was to go back to cash generation,
dispose of non-core businesses and rebuild the balance sheet of the company.”
Because the business can generate a lot of cash and because BA had only recently
been through a fleet renewal, it was able to reduce debt quickly – it fell from
£6.6bn to £1bn in just five years.

And it’s because of this that, despite the ­negative press and despite the
£270m fine (with more still to come from the EU and private cases, by the way),
Williams is confident and enthused. “We’re reaching the end of that journey and
the company is now embarking on a period of growth and investment to sustain us
into the future.”

Terminal optimism
And who wouldn’t be enthused? As this profile was being written, BA was taking
the first tentative steps into its new home at Heathrow’s Terminal 5. And,
perhaps more importantly, Williams can finally go shopping, loosen his grip on
budgets and raise some financing. “We’re in negotiation with Airbus and Boeing
today in terms of growing the fleet,” he says. A decision will be a announced
any day now.

Bizarrely, the need to invest in a new fleet of aircraft played a crucial
role in BA’s battle to solve its pensions crisis. “It was going to hold us back
from a major fleet reinvestment programme because, unconstrained, the pension
liability had the prospect of ever-increasing and bringing down the company, and
we’d be remiss to invest against that backdrop,” he says. “One of the
­conditions we set against reinvestment in fleet was to resolve the pensions
issue.”

Pensions takeoff
But it was no simple matter. BA’s New Airways Pensions Scheme has around 70,000
members and, historically, some very good terms – a throwback to the days of
nationalisation, perhaps. Those terms contributed to it falling into deficit in
1999, then descending further during 2003. “By the time we came to the last
valuation in 2006 it had grown to £2.1bn which actually made it, relative to
market cap, the biggest deficit in the FTSE-100,” he says. It explains why the
company has been described as a pension fund with an airline attached.

To solve the issue, BA agreed in February to increase its annual payment into
the fund by £55m to £280m for the next ten years. It would also contribute a
one-off payment of £800m and a further £150m over the next three years,
depending on the company’s financial performance.

Staff, meanwhile, accepted slightly more realistic expectations – including
changes to retirement age – which offered an immediate £400m reduction and
annual savings of £80m. “There are people who said to me that the solution is
obvious – it’s to renationalise.” Williams can at last afford a joke.

It’s BA’s history of being a nationalised ­company which, while offering some
benefits including brand recognition and staff loyalty, has perhaps hindered the
company in what has become a highly competitive industry. The growth of
no-frills airlines, the rise of Far-Eastern carriers, which enjoy a lower cost
base, and the success of business-only airlines are all taking significant
chunks out of BA’s business. “For the new entrants, they can see the cost base
of the legacy carriers and they can see where the opportunities arise,” he says.

Further investigation illustrates his point. While BA’s operating profits in
2006/07 reached £600m against revenues of £8.5bn, Ryanair achieved an operating
profit of euro 472m on revenues of euro 2.2bn – a margin of 21.1%. “Yes, and we’
re aspiring to 10%,” says Williams. “A Ryanair has a much lower cost base than a
British Airways.”

While BA will continue to differentiate itself from the budget airlines by
keeping the vast majority of its frills, such as free drinks and meals and more
generous baggage allowances, Williams’ pride doesn’t prevent him from admitting
that BA has learned as much from the new entrants as it has from BA, including
its model of selling tickets cheaply at first then ­raising prices as the flight
fills up – the exact opposite of how BA used to operate. “We’ve copied to some
degree the low-cost carriers,” he admits. “We make no secret of that – we’ve
copied the good things in their model.”

But make no mistake, it’s the profit margins that Williams really wants to
copy. And for more than one reason.

The last time British Airways paid a dividend was in July 2001, something
that has started to annoy investors. Not surprisingly, BA’s board has put a
dividend payment at the top of its list of priorities for 2008 and will do so
providing it gets over its self-imposed hurdle of a 10% operating margin (its
2006/07 margin was just 7.1%).

“Most people saw 10% as a real challenge for BA,” says Williams. “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 the other reason? “My bonus, and others,
is based on achieving that 10% margin,” he says. “In fact, it will need to be
more than 10% because the bonuses come out first.”

Not surprisingly, BA’s management has been extremely focused on achieving the
10% target. So much so that one gets the impression it has become something of a
burden – it’s often quoted, and has provided analysts and business journalists
with a clearly defined yardstick against which to measure the company’s future
success or failure. “It has certainly been a focus of the business for the past
five or six years,” says Williams. “We’ve changed a number of things in the
business, ­disposed of non-profitable businesses – a big one being BA Connect
last year which was a drag on profitability. So we’ve made a lot of the changes
to be able to put us in place for 10%.”

Williams has also looked to improve practices within the different business
units in the company. “What I say to the people in finance today is that the
game is changing over time because we do need reinvestment in the product. This
is a case of putting the tap on to the right level – and that’s a challenge for
finance over the next couple of years,” he says.

Handling budgets
While he is responsible for overall budgets, Williams is more than happy to hand
back autonomy for where the budget is spent to managers. The benefit, he claims,
is that the business can be far more flexible to issues the different units are
facing at a particular time, and he uses the example of baggage handling – that
ultimate bugbear – to make his point.

“We’ve got 7,445 people at Heathrow today and that’s the largest head count
we’ve ever had, but it’s the right thing to do to keep the operation going
because we’ve had a few operational problems, as you know,” he explains. “So it
wasn’t the right thing for me to manage the head count; it was the right thing
for me to manage the overall spend.”

He also took the decision to free BA from the clutches of Sarbanes-Oxley by
de-listing from the NYSE. “We were having to send out external audit teams into
suppliers to look at their systems to give us a certificate that the external
suppliers were compliant with Sarbanes-Oxley,” he says. “If you added it all up,
it was a £10m cost which I couldn’t justify for the shareholders.”

Another thing he would struggle to justify to shareholders is failing to pay
a dividend for the seventh straight year. So what if the unthinkable happens and
BA falls short? “I wouldn’t say it has to be an absolute measure of 10%,” he
concedes.
A little bit of pragmatism goes a long way.