Putting a premium on yields

IFW: Are you happy with your revenue, volumes and yield in 2009? 

Gunning: Revenues were down 25%, if you strip out the benefits we gained from exchange rates. If you take exchange rates into account, revenues were down 18%, and about 2% of that was down to volume declines and 16% to yield (commercial revenue per cargo tonne kilometre). 

I’m pleased we managed to get close to 2008 levels and were just 2% down on volume. The first half of the year was really very difficult, so the recover that far in the second half was great. And our capacity was down just over 4% in the year, so our load factors overall were actually slightly up. 

The volume part of the story is encouraging, but the real challenge, and issue for us as a business and the industry as a whole, is the yield decline. Our yields were down 16.4% for the year and that will be a real area of concentration for the rest of 2010 for us. 

IFW: Have yields improved this year? 

Gunning: Yields have recovered to some to degree from the trough we saw last August-September, but they are still not up to the levels they are used to be, and I would still argue that they are still not at a sustainable level. 

There are things that we are going to do to try and help that situation from a BAWC perspective. One of the things we have been doing since the summer of 2009 is putting a heavy emphasis on our premium products, because they have a far higher yield than general freight products. 

We re-launched our temperature-sensitive products last year and created a separate contribution centre for our premium products, and that will be an area of emphasis for us. I think what our customers see, and what we see, is that premium products are some of the most important growth sectors in the air freight world. If you look at any sort of industry forecast going out several years, things like express and temperature-controlled products have a very positive future. 

If you can deliver the right levels of service and operational performance, shippers are prepared to pay more for them. It’s good for them and it’s good for us. And we have had real success with that: the revenue for our premium products was actually up 1% in 2009, and our volumes were up by about 3%. So we are very encouraged by that. 

IFW: Would bringing back too much capacity into the market affect BAWC’s yields? 

Gunning: We are trying to make sure we are careful with the amount of capacity we bring back in. We only plan to reintroduce 1-2% this year, which is a pretty modest increase. 

IFW: Will you bring back more capacity than that if volumes suddenly increase? 

Gunning: I’d never say never to increasing capacity by more than that, but to the best of my forecasting abilities I would say 1-2%, and you’ve got to hope that the rest of the industry is similarly responsible in its approach. 

Izzard: We are flexible enough to respond. If halfway through the year we see an immense bounce-back and we need to put more capacity in, we have the options of back-up aircraft and freighter providers. 

IFW: Do you expect a double-dip recession? 

Gunning: I’m not anticipating a double-dip recession, but it is undoubtedly a risk. The problem is that the more you talk about, the more chance there is that it will happen. 

We’ve done a lot of work over the last 12 months in re-structuring our cost base to make it far more volume variable. So if it does happen, I think we will be in much better shape to deal with it.
Similarly, by being very measured by the amount of capacity you put in the market, I think you are exposing yourself less as well. 

Izzard: It is also important to note that the double-dip talk has mainly been about affecting Europe. But we have a certain level of network breadth around the world, we are not just a UK carrier. 

The majority of our revenue comes from overseas. We have a strong US operation and a strong Asian operation. India is strong, Africa is strong and our tie-up with Iberia means Latin America becomes a great opportunity. So we have good access to a lot of the real emerging markets. 

From a financial risk-management perspective, I think we have a good breadth around the world in terms of currency, markets and exposure. 

IFW: What are your expectations for the coming peak season? 

Gunning: I’m quite optimistic. One barometer we would use to get a feel for it is bookings on our three long-haul freighters, which predominately serve the Chinese and Indian markets. At the moment demand is pretty strong, so everything I see at the moment makes me think we should be in for a pretty decent peak. 

But, given what we have experienced over the last 12 months, you have to be a bit cautious about sticking your neck out and being too positive, but I think it will be a decent peak season. 

IFW: What are your thoughts on the plans to cancel the third runway at Heathrow, and introduce a per-plane tax instead of the per-passenger tax? 

Gunning: If I look at this from British Airways as a whole, I’d say I’m disappointed that the possibility of a third runway at Heathrow seems to have reduced somewhat. I don’t think that is good for British industry. 

With regards to the per-plane tax, from a BAWC perspective, I think that will really only have an incremental impact on us, in as much as we only run three long-haul freighters. But I’d like to see the detail before I give a decent opinion. We’ve got the headlines, but as with a lot of these things, the devil is in the detail. 

Izzard: We’ve been very supportive and aware of the emissions trading scheme coming through across Europe and our previous statements have said that we understand the scheme’s mechanism; we support it and we think it is an appropriate way to tax the industry. A per-plane tax on top of, or instead of, that, just does not seem to make as much sense to us.