In my last post I discussed the decline of British Airways – no longer the “World’s Favourite Airline”. Heathrow, neither in its own opinion nor anyone else’s, has never been the world’s favourite airport. Its owner, BAA, presided over a disastrous holiday season in the snowy run-up to Christmas. Hundreds of flights cancelled. Travellers stranded in terminals for days on end. Inadequate information on the status of flights. Airlines blaming BAA and vice versa. As the crisis unfolded, we learned that Heathrow didn’t have enough de-icing fluid or snow ploughs. It was not prepared for an event that happens every 20 years or so. Gatwick Airport, on the other hand, took less than a day to clear their runway, and although flights were severely disrupted for 24 hours, passengers suffered far less pain than at Heathrow.
On the 23rd of December, BAA announced that they had commissioned an external inquiry into “what went wrong at Heathrow”. Meanwhile Colin Matthews, the BAA Chief Executive, announced that he would be foregoing his annual bonus. I don’t doubt that the experts appointed to the committee will come up with some interesting conclusions and recommendations. Among them will probably be “buy more de-icer and snow ploughs”.
What they are unlikely to conclude is that in order to deliver “shareholder value” in the form of increased profits, BAA failed to provide for an event that, though rare, had the potential to cause great disruption and economic damage to its customers. One could also ask who BAA considers its customers – the flying public or the airlines. Either way, don’t be surprised if lawsuits follow both from the airlines and travellers who fail to get satisfaction from other sources.
The committee is also unlikely to identify weak regulation on the part of the UK Civil Aviation Authority as one of the root causes. Why did the regulator not insist that every airport operator met minimum standards of preparedness for such events? If disaster recovery is not within its supervisory remit, why not?
And on the matter of Mr Matthews’s bonus, is the committee likely to observe that as in many other sectors, not least banking, the BAA executive reward structure was geared to delivering short-term financial results at the expense of long-term sustainability? True, BAA is investing heavily in new and upgraded terminals at Heathrow. But in its annual presentation of results for 2009, the company also boasts of increased turnover (8.3%), increased EBITDA – earnings before interest, depreciation and amortisation – (17.1%) and reduced underlying adjusted operating costs (-1.7%). To you and me, that means higher profits and reduced costs.
It’s interesting to note that the cost reductions include an 8% decrease in general expenses over the previous financial year. Although snow-clearing equipment would show up as capital expenditure and therefore affect the profit-and-loss account as depreciation, de-icing supplies would almost certainly be included as an expense. The difference in financial terms would be that all the cost of de-icing fluid would affect the profit for the year, whereas only a percentage of the cost of the snow ploughs would show up as a depreciation charge.
The point of this speculation about BAA’s accounting practices is that if I was the CAA, the UK’s aviation regulator, I would ask to what extent Mr Matthews’s bonus was dependent on annual financial results, and why BAA’s Board of Directors was satisfied with the company’s level of preparedness for extreme weather events.
I doubt if BAA’s investigation committee will ask those questions. They should. Financial commentators bang on about bonus-driven short term thinking within the banking system. Perhaps they should look at other sectors.