The real failure of BA's Willie Walsh

Last autumn, the airline was "on course" and just two months ago "every focus" was being concentrated on BA pulling it off. And now disaster.

But unlike the passengers, pilots and staff and not a few commentators who are calling for the head of Walsh over the extraordinary incompetence at Heathrow of the last few days, we are not talking of Terminal 5.

For while 27 March and the opening of T5 was due to be a transformational day in the future of BA's fortunes, 31 March was always the day in the Walsh calendar, the end of the financial year for which the chief executive had pledged to deliver the target he has banged on about since his arrival: The achievement of a 10% operating margin.

That target, a never-before-achieved holy grail for BA, now appears to lie in pieces.

When Walsh's predecessor Sir Rod Eddington handed over, he left the Irishman fresh from Aer Lingus with little doubt as to what his legacy was.

"The long-term survival of the airline means that we have to deliver a 10% operating margin over the cycle," said Eddington in March 2005. "Will that be in one year or three years? I don't know. But if we are not there in 10 years we won't be around."

The day after Eddington finally left, Walsh picked up the gauntlet.

"We have traditionally accepted margins that other industries would not accept," he said. "We need it to be able to make sure that we can invest in our assets and our people. I do believe it is relevant and achievable. The overall target for the business has to be consistent with the goal of achieving a 10% operating margin."

Eddington and Walsh's point has been that unless BA grew revenues, slashed costs and eliminated loss-making operations to the point that on average 10% of every passenger's spend was turned into profit for future investment, the airline - indeed, any commercial carrier - is not sustainable and in a more competitive world will go bust.

Amid the fiasco of T5 and despite pledges every quarter for the last year, the 10% target appears no longer to be on the agenda.

Ahead of the announcement of the airline's official annual figures next month, City analysts have seemingly been briefed to accept the news that for the year to 31 March, the downturn in recent months, rising fuel bills, and unforeseen costs of moving into T5 will see BA struggle to hit that 10% target.

Worse, no 10% margin could mean no dividend, no return for the shareholder payout unseen since the last downturn in 2001.

But even if the 10% margin for 2007-8 is achieved, Walsh has already admitted the same factors will reduce the airline's margins to just 7% in the current year to March 2009, cutting profits by more than 25% and taking as much as £250 million off the bottom line.

While passengers and politicians may have demanded Walsh's departure (with or without his bags) from Heathrow, the City has been sanguine over the T5 farce. Investors know BA's had a shocker but are aware of the future financial efficiencies the terminal will achieve.

Yet to ask whether Walsh should depart over T5 is to ask the City the wrong question. Ask the City what it thinks about his failure to hit the 10% target over the cycle and the answer is there to be found on every dealer's screen. BA shares have dived 60% in a year and the stock is trading well below the £3 at which Walsh took over.

A global credit crunch-inspired downturn in airline travel and oil at in excess of $100 a barrel may seem decent enough excuses for Walsh's fiscal failings. Yet tightly-run ships such as Ryanair and easyJet remain on track for double-digit margins despite similarly inspired horror profit warnings.

Walsh has been the chief executive who has dared to promise. He dealt with BA's pension funds millstone. He dealt with its debt mountain. The T5 scandal and the failure to sustain margins of 10% could yet dog the rest of his time in charge.