Backroom Boys
Page 7
The Select Committee had convened, and Concorde’s finances were back on the agenda, because at the Anglo-French summit in the spring of 1981 the French had hinted, for the first time ever, that they might be willing to say goodbye to the shared albatross. At the Committee’s earlier sessions, they had been presented with a table estimating that the net cost of keeping Concorde in service until 1985 would be a predictably grim £56.7 million; their first report, published in March 1981, expressed a sceptical concern that the figure might prove to be even higher and urged the government to act with all conceivable despatch to take advantage of the new French flexibility. In response, in July 1981, an official Reply by Norman Lamont, the Minister of State at the Department of Industry, announced that a survey was under way of the relative costs of three different options. They were: (1) immediate cancellation, (2) gradual rundown over a two-to three-year period, and (3) indefinite continuation. At a follow-up meeting with President Mitterand’s officials in October, the French formally objected to option (1), so that was out, and the survey then concentrated on comparing (2) and (3). In theory, then, keeping Concorde going was still on the table in the autumn of 1981, but the very terminology in which the options were posed showed which way official thinking was going. ‘Indefinite continuation’ is a phrase in civil-service language which already has the cool kiss of death planted on its brow. It implies deeply undesirable things, does ‘indefinite continuation’: it means ‘open-ended commitment’, it suggests ‘unlimited demand on public resources’. When a government department truly wants to do something for the long term, they do not present it as an ‘indefinite continuation’. The MPs knew this. When they met again in December they expected to roast Lamont a little, perfunctorily, for the sin of considering (3) at all. But it was settled in their minds that Concorde’s fate was going to be option (2); that, after a decent period of study and quiet Anglo-French diplomacy, the long nightmare would be over at last. After all, how could any analysis of costs not show that it would be cheaper to scrap the damn thing? No unexpected outside party was going to ride to the financial rescue now. The last person in the world who might actually have bought a couple of Concordes at the asking price, the Shah of Iran, had died in exile the year before in a Cairo hotel room, having definitively lost the ability to make extravagant status purchases for Iran Air. Federal Express had opened negotiations to lease two of BA’s Concorde fleet for use as blue-riband, top-of-the-range, supersonic parcel carriers; but it became clear to Lamont and co. that Fed Ex wanted the government to pay Concorde’s support costs for as long as the company chose to keep up the arrangement. In short, the Fed Ex deal would only have laid HMG open by other means to the spectre of … indefinite continuation.
But when Norman Lamont and his boss, the Secretary of State for Industry Patrick Jenkin, and a pair of supporting civil servants arrived in the Committee room on 9 December, things did not go as expected. A week before, the Committee had been sent a revised set of cost estimates, and as they questioned Lamont and found that he stood by the strange deviance of these figures from the earlier ones, it emerged that the Committee was facing an almost unprecedented development in Concorde’s history: a piece of good news. The March 1981 table from the Department of Industry had set the £56.7 million cost of keeping the plane against a projected cost for cancelling it (and paying redundancy money, compensation and so on) of £47.5 million. Cancelling was expensive, but it had a clear margin of advantage in its favour. In the revised figures, on the other hand, the five-year projected outlay for keeping Concorde going suddenly shrank to a mere £5.9 million. Though the cancellation estimate fell too, it only dropped to £34.2 million. The balance of advantage had reversed. Suddenly the Committee were being told that the economical option was to keep the plane in the air.
The MPs’ response was simple. They didn’t believe a word of it. For two whole decades, mirages of Concorde’s commercial success had been conjured periodically in the House of Commons by ministers making the case for just a bit more public money, and MPs had bought them. They were determined not to make the same mistake again. When anything even smacking of success was mentioned now in connection with Concorde, the MPs reacted with the hard-won wariness of punters who had previously been induced to invest in a perpetual-motion machine, a device for extracting gold from seawater, and several acres of beachfront property in Kansas. They hammered at the witnesses on the two points where it was claimed the improvement would take place: a sharp rise in British Airways’ income from Concorde, and on the other side of the ledger, a sharp fall in expenditure on technical support for the plane. Sidney Cockeram MP, laying into Lamont re. the promised rise in income: ‘Do you think the Committee can place any reliance on such a forecast?’ Ditto to Lamont, on the suspicious-seeming discovery that Concorde was going to need far fewer hours of expensive fatigue-testing than had been anticipated: ‘The amount of fatigue testing that is necessary, Minister, is not decided by your officials. They are not competent, I suggest, to make decisions of that nature. These are technical matters.’ Thomas McNally MP, to Lamont: ‘Are you taking risks on safety?’ The Committee’s printed report, published a few months later, was more wearily circumspect, but the judgement was clear. Promises of reduced expenditure were not to be relied on. ‘Few Government projects have produced more forecasts of expenditure which have later proved to be underestimates than the Concorde project.’ As for the rises in BA’s ticket receipts – ‘We should welcome these,’ muttered the report, ‘if they should actually occur.’ The Committee exuded a general disbelief that anyone was still prepared to make rosy forecasts about Concorde. They had thought the lesson had been learned, and learned by everyone, civil servants and politicians and airline executives alike. And instead, here was some more nonsense, another mirage, another burst of optimism that would surely evaporate when it turned out to be based on nothing more than hopeful jiggery-pokery with the accounts.
But in fact something really had changed.
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There had never been much enthusiasm for Concorde at the top of British Airways. BA’s management had been lumbered with buying their seven Concordes (for £165 million, only about half the cost of producing them). It was not a free procurement choice, but a duty imposed on them as the bosses of a nationalised industry. Essentially they saw the plane as an overspecified toy, an expensive gewgaw with too much vroom to it. Only the line managers in direct contact with BA’s Concorde operations were at all keen. They were the ones who had pushed through the dispiriting experiments with ‘city pairs’ in the hope of finding some combination that generated enough demand for Concorde. London–Bahrain? No. Melbourne–Singapore? No. A two-hop service from London to Washington to Dallas, in association with the Texan airline Braniff? Maybe, but Braniff went bust. Even on the core route from London to New York, income from ticket sales never came close to covering operating costs.
Then, in February 1981, Sir John King was made chairman of BA and suddenly – in the words of Bruce MacTavish, one of the civil servants who appeared with Lamont before the Select Committee – ‘it was “love that bird!” time’. It was not that King was in any sense a visionary. He was not the sort of businessman who would ever have let his enthusiasm for a product distract him from the bottom line. Though he came from manufacturing, and from aerospace manufacturing at that, he had deliberately chosen to work in areas where profits were not disturbed by unproven technology. His first company, Pollard Engineering, supplied Rolls-Royce with ball bearings. ‘One of the most basic things you can make,’ he said with satisfaction. When he praised the simplicity of a widget, it meant something quite different from the flush of cognitive pleasure engineers got out of the solutions they called simple. He meant simple as in dependable, with a dependable margin on each one sold. His recipe for business success was simple too: cut out the wishy-washy stuff, the blue-sky research, the divisions that didn’t contribute a healthy return on capital, and concentrate everything on the productive core
of a company. Nurture the cash cows, kill the rest. At his next company, the engineering conglomerate Babcock International, he fired 16,000 of the 40,000 employees. In his bristling assertiveness and self-confidence, he resembled a kind of human truncheon. He was Mrs Thatcher’s favourite businessman.
This was not a man who in a million years would ever have endorsed the building of a big-ticket dream machine like Concorde. Nor, probably, would he have allowed BA to buy Concorde in the first place, if he had been in charge back in the 1970s with the same powers Mrs Thatcher gave him in the 1980s. But he understood the value of a brand. He understood the subtle psychology of building up your product in your consumer’s imagination. When he arrived at BA and started totting up the assets he had to work with, he saw that by a historical accident the tangled processes of the corporatist state he had steadily despised throughout his entire working life had left seven planes on his tarmac that none of his competitors had, except Air France. Presently this was a burden, but it could be made into an advantage. None of his competitors had Concorde, because none of them had wanted it. It had been a commercial flop. But from another angle Concorde’s catastrophically small share in the world aviation market could be seen as giving it scarcity value. The mark of its failure could become the badge of its exclusivity. Concorde, he saw, could be used as a platform of glamour on which BA differentiated itself in the crowded market for transatlantic flights. It could be made into a unique selling point for the whole airline, for the BA-commissioned market research that crossed his desk showed that even passengers on BA’s bog-standard subsonic services experienced a kind of reflected lustre from the very existence of Concorde in BA’s fleet. It made their own choice of carrier seem that little bit more sophisticated and exciting. The marketing department called this ‘the halo effect’. What’s more, there were specific opportunities in Concorde’s position at the very top of the market. Seeing it as just an unfeasibly expensive way of getting about missed the point. A special super-luxury niche exists for a handful of products whose very high prices are effectively disconnected from their utility: instead, the price works as a guarantee of how desirable they are. Ferraris belong in this category, and so do Rolexes, couture clothing, and on a humbler level, bottles of champagne. Participating in this market is not easy; but if a Ferrari-like appeal could be established for the sensation of spending two and a half hours in a seat on Concorde, then BA could hope to obtain the pay-off for having the airline equivalent of champagne to sell, i.e. a truly fabulous profit margin, which (by a nice circle of logic) was what you’d need to make the economics of operating Concorde work out.
The question, then, was whether BA could find a basis for operating Concorde that would let it fulfil the two functions King had identified for it: promoting the airline as a whole, and supporting itself in the Ferrari–Rolex–Veuve Clicquot market segment. Fortunately, the first piece of the puzzle had already been laid into place, though not much notice had been taken at the time. In 1979, the government had agreed to wipe out the purchase price of BA’s seven planes with a payment of £165 million from the Public Dividend Capital acount, which was a special form of public expenditure reserved for occasions when there was a real prospect of a return, a ‘public dividend’. Instead of being paid for the planes, the government agreed to take 80 per cent of Concorde’s operating profits, if there were any. The significance of this was not just that it wiped the financial slate clean. It also allowed for the possibility of running Concorde on a different footing from all other airliners around the world. The usual rule of airline economics is that a new plane must be ‘amortised’ before the time comes when technology makes it obsolete and the airline has to buy a replacement. In other words, if you expect that you will be upgrading to the next Boeing or Airbus model in ten years’ time, you divide the price you paid by ten and work the plane so that every year it produces that amount of income, and then some. This is a formula for maximum utilisation of an asset that’s going to lose its value when the next generation of aeroplanes comes along. You’re in a hurry. You need your aeroplane to pay for itself now. But Concorde had no technological successor; there was no upgraded supersonic passenger plane coming along. Its only sell-by date was determined by the lifespan of the machine itself. It would be the most modern thing of its kind till the last one could no longer stagger off a runway. And if its purchase price did not need to be paid off over a set number of years either, that meant that, uniquely, there was now no hurry at all in how Concorde was operated. It did not need to rack up the mileage. It did not need to be sweated. It could be cossetted in its hangar and only deployed in situations where its unique qualities would be rewarded. It could be operated, if BA management had the wit to perceive their opportunity, not for maximum utilisation, but for maximum profit. And this is what happened: this is why, twenty years later, having served through the decades, been grounded after the accident in France, and returned to service again, the Concordes in BA’s fleet have still flown fewer hours than much, much younger subsonic planes.
So while King applied his traditional medicine of slashing cuts and mass redundancies to the rest of BA, he made sure that Concorde was nurtured and protected. He ordered the creation of a special Concorde Division to coax out the plane’s potential, effectively an autonomous ‘airline within an airline’. There was already an esprit de corps inside the small world of Concorde pilots. ‘It was like a little Concorde flying club,’ said Brian Trubshaw. Those who had experienced the unique satisfactions of flying the plane tended to be emotionally committed to its existence and were willing to do whatever was necessary to keep it airborne in a world that demanded a more practical reason to sustain it than uneconomic delight in a marvel. King took advantage of this. Captain Brian Walpole was appointed as General Manager of the new division, with a Concorde First Officer, Jock Lowe, as his assistant. It was the first time that the pilots had been put in charge. Walpole and Lowe set to work to build the brand. There was no way that they could alter the dimensions of Concorde’s cabin. It would always be a rather narrow aluminium tube into which they were inveigling their customers, but they compensated on the stylistic level. They had the planes’ interiors refitted with new leather seats and new carpets. They sorted out the menus. They stripped away the generic BA naffness that had afflicted Concorde in the 1970s and generally made it an environment in which rich people would be at ease. Then they turned their attention to the matter of routes. Here they abandoned all the hopeful experiments and concentrated Concorde operations in two areas only. For 5 to 10 per cent of the time, Concorde would fly charters sold through specialist travel agents, thus harvesting one efficient planeload at a time the wallets of the aviation buffs, not necessarily very wealthy, who were fascinated by the plane itself. So began the tradition of supersonic package tours to Paris, to Vienna, to Lapland for Christmas. For the rest of the time, Concorde would fly the Atlantic. BA had not quite given up on Washington yet, and later there would be a lucrative winter service to Barbados, but mostly and most importantly Concorde flew London–New York, New York–London over and over again; for of all the city pairs the route planners had ever considered, this was the only one in which two fat financial centres just the right distance apart were separated by a nice empty ocean you could blast with sonic booms to your heart’s content. To and fro it went in the purple stratosphere over the silver sea, carrying magnates and celebrities who had paid exactly as much as the market would bear. Till Walpole and Lowe took matters in hand, Concorde tickets cost around 25 per cent more than a standard first-class fare, which was what had been calculated to be a reasonable premium for going supersonic back in the early 1960s. Walpole and Lowe decided to start at the other end, with demand rather than supply. As Lowe told the witness seminar at the Institute for Contemporary British History in 2000, they commissioned an extremely straightforward piece of market research. They asked first-class passengers on BA’s ordinary subsonic flights across the Atlantic to guess what the Concorde fare w
as. The guesses were all a lot higher than first class plus 25 per cent. Then they raised Concorde fares to the average of the guesses. The price of a luxury, after all, is what people are willing to pay for it. As a result, although total demand for Concorde tickets was indeed down, in the recession years of the early 1980s, all the planes that did fly flew to the right place, flew full, and generated much more money per seat.
All these changes were very much in the spirit of a remark by Colin Marshall, the department store executive King later head-hunted to be the airline’s CEO. His first question to one of BA’s senior marketing men was: why had there only been three cheeses on his Concorde flight from New York the previous day? And that was just about the size of it. Concorde had always had crises. But this time, the plane’s fate would not be decided by aerodynamics, or by international treaty obligations, or by industrial policy. This time it was not about the technology, or any of the implications of the technology. This time it was entirely about the finances, about the marketing. It was about the cheeses.
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Only the very earliest results of BA’s change of direction showed up in the figures the Select Committee saw in December 1981. (Walpole and Lowe weren’t even appointed until the next spring.) BA predicted a small profit of £1 million or so in current financial year 1981–2, rising to £5.4 million for 1982–3, and £7.4 million for each of the years following. But the gains on the income side of the balance sheet made much less of an impression on the net cost to the government of keeping it, than the dramatic reductions that had been achieved on the expenditure side. The thing that had really revolutionised the outlook was a joint sweep by BA and the Department of Industry through Concorde’s support costs. The plans for supplying Concorde with spare parts and technical backup had not caught up with the fact of there only being sixteen Concordes in the world; the very small fleet of actually existing planes was being supported by arrangements on a scale appropriate to a success story. It was true that Concorde’s support costs per plane could never quite be brought down to standard airliner proportions. Like it or not, there were certain fixed costs involved in supporting a unique class of aeroplane, even if BA made the maximum use of resources like the old Concorde prototype they kept behind locked hangar doors as a ‘Christmas tree’, stripping out its systems one by one for the spare parts. But as they went through the plans for the period up to 1987, they found they could swiftly delete £7 million from the budget for engine spares; £5 million for airframe spares; £9 million for in-service engine support; £5 million for work in progress on engine spares; £4 million of insurance costs; £9 million in ‘lesser measures’; and £7 million in ‘residual reductions’. The really big item though was the Concorde fatigue specimen kept at the Royal Aircraft Establishment in Farnborough. This was a full-sized Concorde fuselage rigged with heaters and strain gauges to simulate the effects of the roasting the plane got every time it cruised at Mach 2.2. Getting rid of it was controversial. As the MPs asked: were they risking passenger safety? But 20,000 cycles of heating and cooling had already been logged on the test specimen, it was pointed out, and that was enough to guarantee Concorde’s immunity from metal fatigue well into the twenty-first century at the rate the plane was now being used. The test rig went, at a saving of £36 million. Adding all the cutbacks together produced a five-year forecast for the government’s net expenditure on Concorde that had been trimmed to £40.9 million. It was subtracting BA’s predicted five-year profits of £35 million from that £40.9 million which in turn produced the stunning new estimate of only £5.9 million to keep Concorde running.