17 April 2008
As I discussed in this column recently reputations in the City are hard won and very easily lost and the market tends to have a long memory when it comes to forgiving indiscretions.
The classic recent example of Rentokil came to a head late last month when its embattled chief executive Doug Flynn and chairman Brian McGowan bowed to shareholder pressure and resigned following a disastrous run relating to its poorly integrated acquisition of parcel delivery company City Link.
Meanwhile, Rentokil shareholders have been tempted by another team with a strong reputation and turned to John McAdam and his team, who brought with them a strong reputation forged at ICI, and as a result have already been rewarded with a slug of shares and hefty six figure salaries.
With the pressure off, at least temporarily, investor attention has switched to BA and its chief executive Willie Walsh. The Terminal 5 fiasco has seriously dented the reputation of the company and by association Walsh, who had previously been credited for steering it competently through turbulent times of soaring fuel costs and fierce competition.
The opening of T5 was meant to be the high point of Walsh's tenure at BA, moving the airline into its own bespoke terminal at the UK's premier airport, and also the first in a series of landmark developments which will bring the UK's infrastructure up to speed in time for the Olympics in 2012. Hell, even the railways people got St Pancras opened on schedule. Everything seemed to be going swimmingly for T5 and BA, completed on schedule and opened with a fanfare. Sadly for Walsh, the world's media was on hand to see it go into meltdown within hours, turning what should have been a good news day into a PR disaster. The problem has not been easily fixed either, hundreds of flights were being cancelled and bags stacking up long after they could be blamed on 'teething problems'.
More worryingly for BA investors the fiasco is believed to have cost the company in the region of £16 million thus far and its share price has also suffered. One can only imagine some of the phone calls Walsh has had to field in the past two weeks. March's performance statistics did not make happy reading either with both traffic and passenger loads down. Even though BA should have flights from T5 operating as 'normal' by the time you read this the longer term reputation damage will take some time to repair both with investors and potential customers. At a time when an economic slowdown looks likely, combined with sky high fuel prices, such damage is most unwelcome.
The lessons of T5 are difficult to glean at first glance. BA claims it had fully tested its systems before opening and the breakdown in performance certainly seemed to come as a surprise. BA has taken much of the flak but some blame has to be laid at the army of contractors that should help T5 run smoothly and this could affect companies' confidence in outsourcing such flagship operations when the ramifications of failure are so acute. Whether it has a long term effect on the trend to outsourcing is difficult to predict but its certainly going to take BA some time to recover its poise.
Graeme Davies writes for Investors Chronicle