Martin Broughton interview: The chair of BA on how his airline is piloting a course to avoid a bumpy flight

Published on Saturday 22 November 2008 13:16

The BA chairman and president of the CBI gives credit where it's due, but still has advice for the Chancellor, finds Rosemary Gallagher

CHAIRMAN of BA Martin Broughton hasn't had a great deal to celebrate this year. Not only did the airline endure a massive backlash for the chaotic opening of Heathrow's Terminal 5, the racehorses he owns haven't been romping to victory either.

"I have not had much time with my horses lately. Of 11 or 12 runs this year there has been only one success," he says. At least that solitary triumph has given him some cheer in a year that has seen the economy plummet and prospects worsen.

When he's not worrying about the problems besetting the aviation industry he is president of the Confederation of British Industry (CBI), a post he's held for almost two years, and the challenge could hardly be tougher.

As the dapper 61-year old worked the room at the CBI Scotland Tayside business dinner in Dundee he would have heard a familiar tale of woe from members ranging from Fife farmers to local accountants.

His address pulled no punches as he even cautioned against his own organisation's forecasts, describing the CBI's estimate that unemployment in the UK will hit 2.8 million by the end of next year as optimistic. "You have to take our 2.8 million unemployment figure as being at the benign end of the range," he warned.

Broughton has previously used his position at the CBI to criticise Chancellor Alistair Darling and the rest of the UK Government for its handling of the economy. In March he described the Treasury's policies as "corrosive" and seemingly "drawn up on the back of a fag packet". Controversial changes to capital gains tax and the treatment of non-doms in the UK were on the receiving end of his wrath at the time.

But the Government's more decisive action in taking the lead in saving banks has softened his view. Chatting in a side room at the Apex Hotel before he spoke to members, he refused to use the term "bailout" to describe the Government's intervention. For Broughton, "bailout" has connotations of the Government saving banking fat cats rather than rescuing the financial system. "I don't like the term bailout. It's a bit like Maggie's Community Charge becoming the Poll Tax and being seen as a negative," he explains.

He even goes as far as to praise Darling, saying: "I don't know who came up with the plan, but Darling was in charge (of the Treasury] at the time so I give him the credit."

But he warns that the Government still has its work cut out if a prolonged recession, or even a depression is to be avoided. "The good news is that the financial crisis has been basically averted. The bad news is there's now the recession to deal with," he says. "There's a big piece the Government still needs to tackle and that's credit availability. It has made masses of capital available to facilitate the lending process, but they're just not getting traction on lending and credit markets remain paralysed."

He suggests two ways in which the Government can boost the real economy. One is to follow the US Federal Reserve's measure of providing a commercial paper facility. According to Broughton, this will make credit available to large firms and allow banks to start lending to small to medium-sized enterprises which are currently suffocating from lack of capital.

Secondly, he would like the Government to act as a credit insurer of last resort for smaller businesses which are in danger of going under if a key customer runs into financial difficulties. "Small companies use credit insurance and that's being taken away from the market. That can dramatically increase the number of unnecessary bankruptcies," he says.

He was involved in a precedent to such a scheme in the early Nineties as part of Pool Re which was set up to help companies at risk from terrorist activities. The Pool Re insurance scheme provided full cover for loss or damage to commercial property caused by acts of terrorism and was underwritten by the Government. "That's two specific ways in which the Government can get ahead of the curve and keep the real economy working. They won't cure recession as confidence has been shattered, but they would make it shorter," he says.

Regardless of the length and severity of the recession, it seems Scotland should think itself lucky that its economy is not in a worse state. It is "very fortunate it is not independent as the UK has come to its rescue". It is a sentiment he chose not to repeat during his formal address.

BA's relationship with Scotland was tested when the company decided to close its Glasgow crew base, arguing that it was cheaper to run the operation from London. Its move to reduce its winter schedule by 3% means less frequent services from Glasgow, Edinburgh and Aberdeen to Heathrow and Gatwick. But BA has stuck to the message that nobody comes near in terms of servicing Scotland. Chief executive Willie Walsh was in Edinburgh recently reaffirming the company's commitment. Broughton echoes that view. "We are by far the biggest carrier out of Scotland and we plan to remain so."

However, earlier this year, in a statement that will further test the company's loyalties, he warned that the airline was "up to its neck in perhaps the biggest crisis the aviation industry has ever known".

While the 9/11 disaster caused what he describes as a short, sharp crisis against the background of a strong economy, the current downturn does not look like a rapidly passing issue.

In May the company revealed record profits of 883m for the 12 months to March and paid its first dividend since 9/11. But in its results for the six months to September, it reported a 91.6% fall in profits. Broughton says: "Last year BA made a record profit, this year our ambition is to stay in the black and that's a tough call. Next year, if the economy is working against us, even if oil is working for us, it will be a tough year."

BA's mind-boggling fuel bill will rise from 3bn to 4bn in 2010, despite recent price falls because , in common with other European airlines, it hedges its fuel needs. This year it has hedged at about $87 a barrel, which means it benefited when oil was up at $125, but it is currently losing out. "In the first half of this year we gained a large hedge profit, followed by a loss. Over the year, on balance, hedging is a sensible thing to do," he says.

BA is currently working through a major review of its business, with the aim of cutting costs. This has so far resulted in its 1,350-strong management team being reduced by a third. The airline is examining whether everything it does is either to meet regulatory and safety requirements or benefit customers. If an activity does not fall into either category it will be deemed unnecessary and cut.

BA's low point of the year was arguably the fiasco around its Terminal 5 opening. Its 4.3bn baggage system failed, forcing the cancellation of 500 flights and leading to a backlog of 28,000 bags. Broughton says the firm has recovered from the disaster, but admits there is still work to be done to improve the image.

"There's a big gap between the 11 to 12 million passengers who use T5 who love it and those who haven't been through it. The message is gradually getting out."

Despite the downturn and the failure earlier this year of rival airline Silverjet, BA is pressing ahead with its plan to launch a business class service flying from City of London airport to New York. It is a major investment as the firm has to buy an A318 aircraft, the largest that can fly out of the airport. Broughton is adamant the launch is on schedule for September 2009 and that the route will be profitable. "Silverjet suffered from flying out of Luton, not London City where the market is. We think the demand is there and we can meet it," he says.

As one of those business leaders who regularly appears in power lists, Broughton's noted diplomacy does not deter a willingness to speak his mind. At the annual CBI dinner in London ahead of Gordon Brown's ascendancy to Number 10 he lambasted the then chancellor and the Government's handling of the economy, with Brown seated beside him at the top table.

He has spent his career at the pinnacle of British industry, as chief executive then chairman of British American Tobacco, director of Whitbread, chairman of the British Horseracing Board and his current post at BA.

He has found time in this hectic schedule to indulge his passions, not only for horseracing, but for his beloved Chelsea Football Club and even welcomes the competition from a now wealthy Manchester City.

"It's a good thing," he says. "Chelsea broke the duopoly between Man United and Arsenal. With Liverpool also in the running, we now have five teams with a chance of winning the title."

With the economy in the doldrums and his horses struggling, he will be hoping his team gives him something to celebrate.