Andrew Lilico: BA's woes reflect wider economic turbulence

First, since the recession began, many firms have avoided making staff unemployed by instead freezing their pay or by having schemes whereby staff work short hours (eg, four days per week) or take extended reduced pay holidays. BA itself called for staff to volunteer to work for a month without pay in 2009, following the example of chief executive Willie Walsh.

Over the economy as a whole, the Treasury estimates that 1.7 million people are only in their jobs because they have accepted pay freezes, pay cuts or reduced working time. Since its peak in early 2008, the total amount paid to workers across the economy has shrunk by 6.7 per cent. Workers have been kept going – despite these pay losses – through a combination of reduced mortgage costs and increased benefits.

But this cannot go on indefinitely. More productive workers will resent less productive workers being kept in post at the expense of pay rises. Relations between staff and management will decline. Industrial relations become difficult, and even relatively minor incidents are likely, increasingly, to blow up into disputes.

Second, during the long boom of the 1990s and 2000s, it became easy for companies to agree to generous conditions or not to prune away older, generous condition packages that had become obsolete. Some of the BA staff practices and expectations that have come to public attention during recent disputes seem almost comically old-fashioned.

When a company is losing money as rapidly as BA (400m in the year to 2009), it is forced to reconsider many areas of its business that should perhaps have been addressed long before. Though there is a cold calculating sense in which this can be seen as "efficient" – leading some economists to talk of the "healthy" or "cleansing" effects of recessions – the human reality is that BA staff have been messed about. They were given promises about what they could do and how they would be paid which are not now being kept.

A third lesson concerns how effective markets can be in generating competition, given time. When BA was privatised in 1987, there were those that feared its position might be dominant and vested. Indeed, there were those that argued in the few years after privatisation that BA's market position was even stronger than when it was a nationalised industry.

However, over time, BA came to face many forms of competition: from companies like Virgin on the premium service side, and from the low-cost airlines carving away more price-sensitive customers and who have now launched aggressive marketing campaigners to woo passengers if BA staff go on strike.

Indeed, BA's 33 million passengers in 2008-09 was down by more than 17 per cent from the 40 million passengers in 2001-02. Of course, privatisation created many opportunities for BA as well — opportunities to access investment capital, new ideas that could be better rewarded with profits and so on. But the overall message is about the effectiveness of competition in the medium term.

Related to this is a message about how modern industry is changing. BA's traditional model has been challenged by lower cost, flexible players such as Ryanair. This is a pattern being repeated across much of the economy. Internet-based operations, companies purchasing in many services from consultants and niche providers that might once have been produced internally, companies with new ideas that have a much shorter life cycle than in the past — these and other related structural changes are well underway in the economy. It is plausible that the long boom of the 1990s and 2000s to some extent disguised how profound these changes are going to be over the medium term.

We see some of these factors reflected in wider society as well. Our politics is changing, as 24-hour news coverage and the power of bloggers undermines the traditional news management of political parties. Government will also need to adapt to a new environment, with much more flexibility and much less (or at least very different) central bureaucratic controls.

So, the travails of BA highlight for us some important short-term and medium-term trends in the economy. Can we make the necessary tough calls in the short-term, recognising that we should perhaps have dealt with many of these matters some time ago, and can we adapt in the medium term? The challenge awaits.

Andrew Lilico is the chief economist of Policy Exchange, a leading

think tank.