EXECUTIVE SUMMARY

The Thatcher government in the United Kingdom firstly practiced privatization policy in

the world. British Airways was one of the candidates for privatization. In this paper I analyzed the

privatization of British Airways.

In the history section of this paper, I briefly talked about the background of British

Airways, which is full of events. And also, I analyzed the airline market in the United Kingdom

after 80s. Because, after 80s as can be found in this paper, the strict rules of airline regulations

started to smooth. New alliances and also new opportunities started to occur. Thus, these

“advantages” may help British Airways to be better than 80s, which is automatically effect the

result of privatization. It will be difficult to differentiate the effects of the UK airline market

advantages from the privatization analyze. Because of this you can find a brief discussion about

the airline market after 80s, in UK.

The privatization section is, as the name refers, about the privatization of British Airways.

I tried to answer “How, When, and the consequences” of this privatization. The performance

evaluation part of this section can be divided into two categories. Analyzing by the help of

accounting data and the industry comparison. I do not want to analyze the effects of privatization

only by accounting data, which can be easily manipulated by the management. And also, after

privatization, the objective of British Airways changed to “profit maximization”. Thus, the

accounting data may not be helpful by alone. To overcome this issue, I also find analysis regarding

the industry of British Airways. The reaction of competitors, which can show the expectation in

the market after privatization and also the new incentives introduced to the British Airways, may

provide a better look to the case from a different perspective.

The final section “Future of British Airways”; discuss the current issues and also an

outlook to the future. In this part of my paper, I also point-out the lessons that Turkish Airlines

(THY) can take from the privatization of British Airways. These airlines are common on some

historical events, however, current situation of THY is not so bad as BA before privatization. But I

believe that after privatization of THY, it will be considered as a world airline like British Airlines.

 

 

II. II.            BACKGROUND OF BRITISH AIRWAYS

 

A. HISTORY*

When looked to the history of origins of British Airways, it can be seen that, there were

lots of mergers and acquisitions. BA was formed not like a simple firm. “The airline under its

current name was the result of a merger in the 1970s between the United Kingdom’s two publicly

owned dominant carriers, British Overseas Airways Corporation and British European Airways”1

(Ahmed Galal)

We can see that BA’s origins based on the days of the World War I, where the civil

aviation started to occur. The world’s first daily international scheduled air service between

London and Paris begun on 25th August 1919, by Aircraft Transport and Travel Limited. Two more

British companies started to service between Paris and Brussels. These pioneer companies faced

severe difficulties. “Passengers were few, fares high and air travel seldom less than an adventure.

One pilot took two days for the two-hour flight to Paris, making 33 forced landings along the way.

One by one, the fledgling companies ceased operations, undercut by heavily subsidized French and

Dutch competitors.”2(BA web site)

In 1924, Imperial Airways Limited was formed by four main fledgling airlines, Instone,

Handley page, Daimler Airways and British Air Marine Navigation Company Limited. This new

company services to Paris, Brussels, Basle, Cologne and Zurih. Services were widened to Egypt,

the Arabian Gulf, India, South Africa, Singapore and West Africa between 1920s and 1930s. In

these times, small UK air transport firms had grown up. In 1935, they merged, and formed original

privately-owned British Airways Limited, which became a strong competitor of Imperial Airways,

on European routes. By the Government, Imperial Airways and British Airways were nationalized

in 1939 to form British Overseas Airways Corporation (BOAC)2.

British South American Airways, which was operating to long-haul services to South

Africa, merged back into BOAC in 1949. Continental European and domestic flights were flown

by a new airline, British European Airways (BEA). BOAC also started to services to New York

(1946), Japan (1948), and Chicago (1954). “From 1946 until 1960, BOAC and BEA were the

*

1

2

principal British operators of scheduled international passenger and cargo services – and they

preserved Britain’s pioneering role in the industry.”(BA web site). The 1950s saw the world enter

the passenger jet era- led by BOAC, with the Comet flying to Johannesburg in 1952, halving the

established flight time1. “BOAC introduced the world’s first jet airliner, the Comet, in 1952 but

had to withdraw it from service after three crashes in the next two years, and the company

frequently recorded losses”(Ahmet Galal)

Other British airlines began to operate competing scheduled services, after the

establishment of the Air Transport Licensing Board in 1960. In 1967, the Government set up

another study into the industry. It recommended a holding board to be responsible for the two main

airlines, BOAC and BEA, with the establishment of a second force airline. “In 1969 the Edwards

Committee, which had been established in 1967 to consider the future of U.K. aviation,

recommended combining the two airlines under a State Airline Holdings Board, although it did not

advocate an operational merger. It also recommended encouraging the private sector to create a

second force airline, so that the UK could always have a choice when designating airlines for

international routes.”1(Ahmet Galal). As a result, in 1970, Caledonian Airways took over British

United Airways to form British Caledonian (Bcal). Bcal was given a number of international route

licenses, although it remained smaller than BA and financially much weaker.

Two years later, the business of BOAC and BEA were combined under the newly formed

British Airways Board according to 1971 Civil Aviation Act. In January 1973, it was decided that

the entire airline should be under the single name of BA, and the subsidiary corporations were

dissolved in April 1974. Thus, British Airways was formed in 1974. “ Although this merger was

lead initially to substantial financial losses and industrial strife, the new airline inherited its

predecessors’ pioneering path, launching the world’s first supersonic passenger service,

simultaneously with Air France, with Concorde in January 1976.”2 (BA web site)

After the merger, BA was suffered from the problems that are the result of merger of two

organizations and the duplication of some services. Moreover to this, two corporations were

continuing as separate divisions within BA, each controlling its own marketing and operations. In

1977, British Airways was reorganized. Four divisions were established as commercial operations,

flight operations, engineering and planning. “Throughout the period, the British Airways Board’s

objective was to rationalize the operations of BA without resorting to layoffs, a policy that would 1

2

have fitted well with political constraints even if it was not dictated by them.”1 As can be seen

from this argument, it can be said that, this policy would result with overstaffing. And also,

overstaff problem will create low productivity and poor labor relations, which were actually

happened to BA. There were strikes, which caused to loss of 11 Million pound in 1975 and 40

Million pound in 1978.

In 1978, Roy Watts, who became CEO in 1979, prepared a corporate plan with his team.

The plan also complained about the overstaff problem. When compared other airlines in 1976, BA

was only producing 122,000 available tone-km per employee, whereas other airlines were

producing approximately 208,000 available tone-km per employee. British Airway’s earnings were

also low. The airplanes of BA was old, moreover, most of them would fail the noise regulations,

which would be introduced in 1986. The Watts plan offered to overcome these problems by

volume growth. If the industry growth would increase like the current years, he planned to use

same staff to serve the growth volume. Thus, BA would increase its productivity in the future.

However, the oil price shock in 1979 destroyed the assumptions of Watt.

In 1979, during the general election campaign, the Conservative party announced its

intention sell some of the government’s shares in BA to the private sector, which aimed to create a

mixed private and public enterprise like British Petroleum. This can be seen a political movement.

Because of the power of labor unions, Conservative party may face difficulties. However, if they

sell public enterprise to private, they would be able to reduce labor power. “In July, with the

Conservatives in office, Trade Secretary John Nott formally announced this plan and introduced

the Civil Aviation Bill to transform BA from a public enterprise to a company suitable for sale”1.

The Civil Aviation Act 1980 was passed to enable this. By that time BA’s profits had been worsen

(total 141 million pound between 1979-1980) due to oil prices, and fall of passenger demand.

After 1981, John King became the chairman of BA. He planned some actions to

overcome with existing problems. These were; a number of routes were-cut, cargo-only services

were ended, some subsidiary companies and assets were sold. Flying training college was one of

them. More dramatically, large-scale layoffs were applied. In March 1979, there were 57,741

employees whereas in 1984, there were only 39,794 employees. So, Sir John King was trying to

survive the company by downsizing. As a result, there was an immediate impact of this plan, with

a small increase of operating profits. BA’s operating profits also increased in 1983.

1

After this “survival plan”, BA faced with a lobbying campaign by BCal. According to

BCal, “ a divested BA would dominate the UK airline industry to an unhealthy extend”. “BCal

suggested that BA should transfer its domestic flights to UK regional airlines and sell BCal one-

fifth of its routes and planes for ₤200 million, which would reduce BA’s share of scheduled

services among UK airlines from 83 percent to about two thirds”1. Until the report of CAA in

1984, BA was quite. Then BA started forcefully lobbying activities. This war was ended with the

victory of BA. However, moreover to Bcal’s case a new struggle has begun. In November 1984,

BA was threatened with legal action for alleged collusion against Laker Airways, which helped to

postpone the sale of BA. “A criminal investigation was dropped under political pressure from the

UK, but the government could not insulate BA from the risks of the civil case-had the government

agreed to bear BA’s costs, it might have inflated the value of any settlement, while an outstanding

case would certainly have reduced the value of BA, and might make it unsaleable.”2 . The actions

were settled out of court in summer 1985, but the sale was again postponed in 1986. At last,

British Airways was finally privatized on 30 January 1987, which was after nine years of the

first announcement.

 

B. AIRLINE MARKET AND ECONOMICS IN UNITED

KINGDOM AFTER 80S 

1

2

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

1977 1979 1981 1983 1985 1987 1989

Airline Passengers in the UK (passenger miles)

International

Domestic

So

urce : CAA Data

 

Although there was recession related to the airlines in 70s and 80s, from the figure, it is

very clear that the rate international airline passengers in UK increased rapidly, in contrast to the

rest of the world.

The high costs of heavy fuel consumption at takeoff, airport charges, and the engineering

checks that must be performed after every flight, in total creates a higher average costs per

kilometers in the short flights, when compared with the long ones. BA costs was 7.5 pence per

available seat-kilometer (ASK) on its European routes in fiscal 1990, against a cost of 3.7 pence

per ASK on its international routes (Galal).

To be profitable in flights, a careful scheduling is needed. During 1980s, airlines

increasingly attempted to solve scheduling problem by the use of hub and spoke systems. They

decreased the number of direct flights between minor airports while concentrating on providing

good services to a hub airport, with convenient connections along other spokes to the passengers’

final destinations. “The main motive for changing to a hub and spoke system is to raise the load

factor on an airline’s services, for this is one of the crucial determinants of the relationship

between revenues and costs.”1[1] For example, British Airways’ 70% of passengers were traveling

through London’s Heathrow Airport, while 25% of them changing flights there. And also in 1980,

64% of the passengers who arrived to Heathrow Airport by British Airways and also, changed

flights were with BA, at the same time BA only picked up 36% of the different airline passengers.

1

At Heathrow, where it is BA’s main base, BA is facing a major competitive issue. The

demand for takeoff and landing slots at Heathrow does not meet the current supply. There is a

committee which made up of representatives of the airlines, allocates these slots. They allow using

the slots to each airline as they used them before and the costs are based on the British Airport’s

Authority costs, rather than on the value of those slots to the user. Thus, this practice gives

incumbent airlines an advantageous and very valuable position.

There is also another issue related with the finance of the fleets of the airlines. In the past,

most of the airlines owned the aircraft from the finance leases or rentals. They were rarely able to

finance the costs by their retained earnings. (Perhaps this is because of the requirement of heavy

investments and the short-history of commercial airlines). After 80s, British Airways has

increasingly use its operating leases to purchase its aircraft, whereas the leasing company retains

ownership of the aircraft. And also some of these leases were not for fixed terms, which others can

be extended. This agreement gave a flexible position to BA in its debt financing.

Some changes have been occurred in the airline market in Europe. As a result of

European Community, the travels between member countries is being liberalized. Entry

restrictions on many routes were eased. The automatic government approvals of various categories

of discount fares were applied. Moreover, “fifth freedom” rights were given. It is the right to carry

passengers not passing through the carrier’s home country. “Beginning in 1993, all European

airlines are allowed to fly any route within the Community, including domestic routes, subject to

common licensing requirements.”2[2]

There is not a detailed regulation to international charter flights, which serve 30% of UK

passengers. The bilateral agreements usually don’t cover them. These airlines directly apply to

government for permission to fly. Access between UK and Mediterranean countries is generally

easy and also, cheap travel is allowed without the need to belong any affinity group. Thus, charter

flights have a high market share in this market.

The CAA is responsible for the airline industry’s economic and technical regulation in the

UK such as issuing domestic route licenses. CAA was very restrictive in the 70s. However, in the

80s they gradually became more flexible. By 1985 it was “ready to license competing services by

British Airlines even at the risk of impairment of an existing British service”3[3]. After this point

entering to UK domestic airline market is free, except some services at Heathrow Airport. And 2

3

also “whenever possible the Authority will allow market forces to set or influence the levels of

fares and rates for air transport”4[4]. This shows us that although CAA can disapprove the prices,

they left the control to the market.

From 1977 to 1991 special rules applied to Heathrow, because of overcrowding. An

important restriction was also applied. The airways that were not operating before 1977 at

Heathrow Airport were not allowed to fly there. It really decreases the competition among the

airlines, and also gives a competitive advantage to British Airways. And also whole-plane charters

were banned. Any new domestic services had to be authorized by the Secretary of State for

Transport. 1991 was a turnaround. “In spring 1991 two ailing US carriers sought to sell their

Heathrow routes to stronger rivals that did not have landing rights, and the UK government

decided to end the ban on new airlines to accommodate the newcomers.”5[5] As a result of this other

airlines have entered to the Heathrow.

To summarize we can see that the airline market in UK and also Europe was started to be

more flexible after 80s. This practices increased the competition. Moreover, softening the strict

rules at Heathrow may have affected British Airways badly. But, increased competition forced the

airlines to be more efficient and productive. I want to also point to an issue. The success of the

British Airways after privatization may be also a result of increased competition as a result of new

softened regulations in the airline market and economics, which forces BA to be more efficient.

Before 80s there were protective regulations, which did not require the efficiency in the operations.

It will be really difficult to find out the success after privatization due to the new regulations or the

privatization issue.

4

5

III. PRIVATIZATION OF BRITISH AIRWAYS

 

A. A.     REASONS BEHIND THE PRIVATIZATION OF BRITISH

AIRWAYS: 

As can be noticed from the brief history of British Airways, there were many acquisitions,

mergers, cases, regulations, and strikes, which in total brought problems to BA. All these problems

created the base and reasons for its privatization. In the following paragraphs I want to discuss

some of them.

First of all, being a public enterprise will open the company to the politicians. When a

political part became a government, they will probably employ their supporters to the public

owned enterprises. I believe that BA was also used like this. One of its problems was over-

employment. As mentioned before, BA’s productivity was very low compared to its competitors.

Besides the low productivity, the cost of employees was also a problem, because the earnings of

BA were declining. Seeing public enterprises as a “supply” will always be true. Thus, this

argument can be used for the reason of privatization.

Secondly, the losses of BA were increasing year by year. I think it is the destiny of public

enterprises. Because, SOE’s first goal is not profit-maximization, they are not managed like a

private firm. So, the efficiency, profitability, and debts are not so important criterion for

government managers. This incentive leads huge losses in the future, which is usually offset by the

governments.

The next reason can be based on Thatcher government policy of privatization. They

wanted to decrease the labor unions power. The easiest way is selling the enterprises, which can be

influenced by government, to private owners. Thus, in the future, if the labor party comes to

government, they cannot be so influential as before on the whole economy.

 

B. B.    METHOD USED IN PRIVATIZATION OF BA

The method used to privatize British Airways, was “fixed-price offer”. And also there was

no “Golden Share” in the privatization of BA6[6]. The term “Golden Share” was first used in

Britain. This share gives a privileged position to government. This share prevents the privatized

company from acquisition by unwanted people.

In the following table, the prices of the offer was given, in the day of privatization:

British Airways’ Stock Prices in The Day of PrivatizationInitial Public Offer (p) First Operational Price (p) Revenue%65 109 68%

Yaşar, Süleyman; (1997): “Özelleştirme (Privati ation)” page 59⁺

 

In this day 1,100,000 people applied to buy the shares of British Airways. At the end of

the first year after privatization, 420,526 people hold British Airway’s shares7[7].

 

 

C. C.     PERFORMANCE ANALYSIS OF PRIVATIZATION OF

BRITISH AIRWAYS: 

In this section I want to analyze before and after privatization effects of British Airways.

But before starting to analyze section, I want to discuss an issue. Some of the analyses are based

on accounting data of BA, which can be manipulated by the management. And also, the incentive

of BA changed after privatization to profit maximizing, which is aimed to improve profits. Thus,

these benchmarks are based on the trustworthiness of management of BA after privatization.

 

6

7

A. A.   PROFITABILITY:

One of the tools for analyzing a firm’s performance is the profitability comparison. (The

data of this chart can be found in appendix section)

0

100

200

300

400

500

600

700

1983 1985 1987 1989 1991 1993 1995 1997

Nominal Profit of BA (£ million)

Before Privatization After Privatization

Source: Walker and Vasconcellos8[8] ; Hemmington Scott Limited Web Site9[9]; and British Airways Web site10[10]

 

When we examine the profits of British Airways, it can be seen that after privatization

their profits boomed. There is an interesting point on the chart. In 1991 BA had an “Exceptional

Item” of £120 million, where its profit before the exceptional item was £250 million. The

beginning of 80s was not a good start for BA. Until 1982 the profits were negative. After 1983 to

1987 the profits were stable. But I think one of the reasons for poor profit performance before

divesture was the “Announcement” of privatization. The management of BA, may not be keen on

the operations, or did not want to make investment. Because, they were sure that BA would be

privatized, thus why did they want to make investment and increase efficiency? I think that the

stability of these years’ profits can be explained in this way.

 

8

9

10

B. STOCK PRICES:

The following chart represents BA’s stock prices in £:

BRITISH AIRWAYS BAIR £

0

100

200

300

400

500

600

700

800

02.1

0.19

87

02.1

0.19

88

02.1

0.19

89

02.1

0.19

90

02.1

0.19

91

02.1

0.19

92

02.1

0.19

93

02.1

0.19

94

02.1

0.19

95

02.1

0.19

96

02.1

0.19

97

02.1

0.19

98

Source: DataStream, Bilkent

It is very obvious that there is a boom in the stock prices of BA. In this analysis we don’t

have stock prices before 1987. It was a public enterprise before 1987. (If it had a corporatization

structure, it may have stockholders). The quickest way to look at the success of a firm is its stock

prices. I mean the historical stock prices are an easy way to evaluate the firm’s success. When we

use this approach, we can clearly say that, after privatization, British Airways was successful.

The next thing that can be concluded from this chart is the profits of initial British

Airways stockholders. When they purchased the stocks at 109 p (the public offer was 65 p

however, in stock exchange the first quotation was 109) in 1987, they were very profitable in the

long run.

 

C. C.               NUMBER OF EMPLOYEES:

Number of BA's Employees

0

10000

20000

30000

40000

50000

60000

70000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Before Privatization After Privatization

Source:

Yaşar Süleyman11[11] the data for this chart is in the appendix section

 

At first sight we can see that, before privatization, number of employees in BA was

reduced (which was a part of the survival-plan). After privatization it was increased by 31% from

1987 to 1995. As stated in the history of BA, the decline between 80 and 87 was the result of

Watts plan. According to his plan BA was badly overstaffed. Thus, he dramatically reduced the

number of employees.

When we look at the BA’s overall employee trend from 1980 to 1995, it was dropped

6.7%. The decline is not too much. But, there is an important issue in here, BA at 90s, which

became more profitable and one of the leading companies in the world, is operated with same

amount of workforce in the BA of 80s’. This is a good indication of improvement after

privatization of BA.

In the following table, there is a comparison of salary of workers in BA:

Comparison of BA’s Employee Salaries with the Average Salary of the Economy1

Before Privatization After Privatization182 199

These numbers indicate this analysis: The employees of British airways before

privatization have a salary, which is 82% more than the industry. It is very high. This ratio is

11

increased to 99% after privatization of BA. I think that the employees were much more happier

because of their average salary increase due to privatization.

D. INDUSTRY EFFECTS12[12]:

The authors of this paper found an interesting result of privatization of British Airways.

They analyzed the effect of privatization on the performance of BA by examining the

privatization’s impact on airfares and competitor’s stock prices. They found that stock prices of US

competitors (Pan Am, TWA, Braniff, Northwest, World Air, Delta) fell a significant 7% upon

British Airways’ privatization. Thus, it can be concluded that, these rivals were expecting a

stronger British Airways after it has been privatized. In addition to this research, they pointed out

that closer rivals of British Airways experienced a greater drop in stock prices than more distant

rivals. And also, airfares in markets served by BA fell significantly 14.3% relative to those on

other transatlantic routes upon privatization. The authors concluded “a change from government to

private ownership improves economic efficiency”.

i. Compensation:

This paper also figured out that the privatization of British Airways affected its internal

organization in ways that improved its efficiency and profitability. The compensation structure of

the top management changed considerably. Before the privatization, there was no performance-

based incentive scheme. I think, it is really a bad kind of encouragement for employees, not to

have a performance-based incentive. So, why did the employees want to improve the performance

of BA, although they had no gain from this effort? As a result of the privatization, now the

management was encouraged to increase the performance, because they would benefit from this by

the new incentive plan. In the following chart, the changes of the compensation for each year are

given:

 

 

12

0

100.000

200.000

300.000

400.000

500.000

600.000

700.000

1987 1988 1989 1991

Chairman's Compansation

Before Privatization

After Privatization

Source

: Privatization and efficiency article, page293 table of this chart can be found in appendix.

The increase in the salary was amazing. And also 1991-92 salary of £669,350 included

£220,000 as bonus.

Moreover to this, British Airways introduced an Executive Share Option Scheme in 1987,

to align management objectives with stockholder objective. The ESOS provided an incentive

related to the growth and profitability of the company for key employees and executive directors.

 

ii. Other Industry Measures of Performance:

In this section, performance of privatization of BA was based on, before three-years

average and after three-years average of 1987. The authors13[13] exclude the year of privatization.

The Industry is consist of large US airlines as American Airlines, United Airlines, Delta, US Air,

Pan Am, and TWA. The table for these charts can be found in the appendix section.

13

0

10000

20000

30000

40000

50000

60000

Before After Industry

Available Seat Miles (ASM) in millions

3-Year Average

3-Year Average

Source:

Privatization and efficiency article (Journal of Financial Economics), page 295

There is a 40.77% improvement in available seat miles of British Airways after

privatization. When we looked the industry, the three-years average after privatization is still

higher than BA. This shows us that, the privatization helped to close the gap between the industry

and the British Airways.

 

0

5000

10000

15000

20000

25000

30000

35000

40000

Before After Industry

Revenue Passenger Miles (RPM) in millions

3-year average

3-year average

Source:

Privatization and efficiency article (Journal of Financial Economics), page 295

 

This chart also shows us an improving in revenue passenger miles. This indicator refers to

seat miles used by revenue-generating passengers. So it is a kind of measuring profitability of the

available seats. After privatization, BA was improved its condition about 48.20%, which is very

close to industry average.

E. E.    MARKET SHARE:

2,70%

2,80%

2,90%

3,00%

3,10%

3,20%

3,30%

3,40%

3,50%

Before After 1990

Market Share of BA in its Worldwide Market

3-Year Average3-Year Average

Source:

Privatization and efficiency article (Journal of Financial Economics), page 296

 

After the privatization of British Airways, market share, which is a very important

criterion, increased 0.3% after three years and in 1990 it improved 0.50%. This market share is

British Airways’ worldwide market. Thus, a small improvement makes really an important step for

BA.

 

IV. FUTURE OF BRITISH AIRWAYS:

The airline industry is changing rapidly, and also changes in market organization have

been so affected by world politics, which is in long run uncertain. Thus, predicting future of BA is

a little bit difficult. But I am sure that British Airways will enter to the 2000s years with a

powerful, and stronger position.

In the European aviation, if access to European airports is managed on the basis of

auctions or some other non-discriminatory method once the industry is fully liberalized, there will

be an intensive competition14[14]. Thus, new joint ventures and cross-shareholdings have started in

order to access. For example, British Airways has taken substantial shareholdings from USAir,

Quantas, TAT, (the largest independent French Airline), Deutche BA. I believe that it is a smart

tactic to overcome aviation rules, which are strictly discriminative in the countries. These alliances

14

will lead much more strategically improvement for the future of British Airways. There is also a

threat for the local airlines of the countries. BA is one of the most profitable airlines in the world

(thanks to privatization!), in addition to this, its operating costs are lower than many European

airlines, as a result of this, it can really create a threat for the European airlines. To balance this

“unfairness”, the governments may support their local big airlines to compete with British

Airways. The future will show us that.

An important event was happened on February 1, 1999. The “Oneworld” alliance was

formed. American Airlines, British Airways, Canadian Airlines, Cathay Pacific Airways and

Qantas Airways were the members of this alliance. “From then, they will together phase in a wide

range of initiatives designed to provide their 174 million passengers with improved levels of

service and benefits, greater value and increased opportunities for rewards and recognition when

flying to the more than 600 destinations worldwide served by the oneworld carriers.”15[15]. I am

sure that this alliance will give a distinctive competitive advantage to British Airways. The

customers of BA and as a result, the stakeholders will benefit from this alliance. However, in the

following paragraph, some objections to the airline alliances were written.

I have read an interesting article of from “The Economist”. The heading was “Turbulence

in the air”16[16]. This article claims that the alliance of British Airways and American Airlines will

lead risks and problems. It is said that, “if the alliance of BA and AA will happen (however, this

alliance was happened and also expanded by the membership of Canadian Airlines, Cathay Pacific

Airways and Qantas Airways, the author of this article will really be surprised!), airport slots

bought and sold rather than allocated by committee, an airline bosses free to decide where and

when to fly, aviation on the world’s busiest international route could have become likely any other

business, shaped and fostered by market forces”. The article also claims that the passengers will

have to pay more in future.

These were some of the current issues related with the future and destiny of British

Airways. These discussions could not be done, if British Airways was not privatized. I am sure

that, if BA was not privatized we will hear other kinds of news, instead of these issues. We will

hear that BA was financially in problem, strikes in BA, “Britain’s number 1 airline is going

where?” and other kinds of bad news. The privatization helped British Airways to be a world’s

airline. It provided new and broad visions to the company.15

16

The lessons that can Turkish Airlines (THY) take from Privatization of BA:

In 1984, privatization of Turkish Airlines was planned. In 1994, it became an affiliate of

the Privatization Department. After two years, in 1996, its status of State-owned enterprise would

change when the public share of its capital falls below 50%.

The case of THY, is like the British Airways. Nearly fifteen years passed but it was not

been privatized. However, there is a difference. Currently, THY was going well. It is one of the

fastest growing airlines in the Europe. Like British Airways, THY is also a member of new-

world’s alliances. “Since March 30, 1998 Turkish Airlines has been in alliance with five big

airlines of Europe, Swissair, Austrian Airlines, Sabena, TAP Air Portugal and AOM of France,

under the name of "Qualiflyer Group" which covers several regions and a wide range of joint

activities17[17]”

In this point, a question comes to my mind. If it was fully privatized, what will be its

current situation? From my case study of British Airways, I saw that, privatization helped too

much. Thus, I believe that THY will be more successful and one of the biggest airlines in the

world. Under the state control, it achieved an important milestone. But the vision and the

management of the state are limited. The competition in the airline market is increasing rapidly.

The government may not be able to manage THY in the new century. Thus, THY must also be

privatized.

 

V. CONCLUSION

Privatization of British Airways was successful. It helped the company to be a world

airline. The success story of the privatized British Airways can be an example for those airlines

that are waiting to be privatized, such as Turkish Airlines.

The next thing that can be concluded from this paper is the answer of “How can be a SOE

which is failing day by day turned into a cash producer (by the tax)?”. The answer is simple,

“privatize it!”. But, Privatization is a broad issue, not all examples can be valid to other countries.

However, the case of British Airways can be used for most of the airlines operated by the

governments in the world. British Airways is a strong example that suggests why government must

not operate an airline, which it has other things to focus on.

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VI. APPENDIX:

1) 1)                  Table of British Airways Nominal Profit in ₤ million

Year Nominal Profit before tax £ million1983 741984 1851985 1911986 1951987 1621988 2281989 2681990 3451991 1301992 2851993 1791994 2801995 3271996 5851997 6401998 580Source: Walker and Vasconcellos18[18] ; Hemmington Scott Limited Web Site19[19]; and British Airways Web site20[20]

2) 2)      Number of Employees in BA (yearly)

Year # Employees1980 56,8661981 58,5151982 53,1481983 45,9271984 37,2471985 38,2401986 39,6351987 40,4401988 43,9691989 50,2041990 52,0541991 54,4271992 50,4091993 48,9601994 51,5301995 53,060

Source: Yaşar Süleyman21[21]

18

19

20

 

21

3) 3)      Chairman’s Compensation:

Year Compensation in £ (yearly)1987 52,7401988 178,0501989 385,7911991 669,350Source: Eckel, Catherine; Eckel, Doug; Singal, Vijal, (February 1997): “Journal of Financial Economics: Privatization and efficiency: Industry effects of the sale of British Airways” page 293

 

4) 4)      Operating Performance around British Airway’s privatization:

 

Three-year average % ChangePerformanceMeasure

BeforePrivatization

AfterPrivatization

BritishAirways

Industry Change Relative to Industry

Available seat miles (ASMs) in millions

35,453 49,907 40.77% 47.28% -6.51%

Revenue passenger miles (RPMs) in millions

23,734 35,174 48.20% 50.96% -2.77%

Source: Eckel, Catherine; Eckel, Doug; Singal, Vijal, (February 1997): “Journal of Financial Economics: Privatization and efficiency: Industry effects of the sale of British Airways” page 295

 

5) 5)      Market Share:

Before Privatization(Three-year average)

After Privatization(Three-year average)

1990

3.0% 3.3% 3.5%Source: Eckel, Catherine; Eckel, Doug; Singal, Vijal, (February 1997): “Journal of Financial Economics: Privatization and efficiency: Industry effects of the sale of British Airways” page 296