City: Dirty tricks have clipped BA's wings

LAST week I wrote that it was hard to imagine a more damaging blow to a company's public image than the humiliation British Airways was about to face at the hands of Richard Branson's Virgin Atlantic.

The climbdown now complete, it is looking increasingly as if I underestimated the seriousness of the debacle. At best, British Airways emerges from the affair with its public image severely tarnished both domestically and internationally. That's bad enough for a company which sells itself as the world's favourite airline (most ruthless might be more appropriate) but it may well turn out to be a good deal worse.

It would be ridiculous to compare events with the Guinness or Blue Arrow affairs; what British Airways stands accused of is hardly in the same league. But there are ominous parallels. Who knew what and when are the questions on everyone's lips. According to insiders, the board of BA is now in a state of deep disarray, unable to respond to the gathering crisis.

The company insists that no director was 'party to any concerted campaign' against Mr Branson, while apparently conceding that one did exist. The words are no doubt carefully chosen and could mean almost anything. Yet it is clear what is meant to be understood; directors, Lord King and Sir Colin Marshall included, are deliberately distancing themselves from events.

If Mr Branson is able to show, as he is no doubt trying very hard to do, that board members did know of the smear campaigns and dirty tricks going on right under their noses, then clearly heads are going to have to roll. And if they didn't know, you have to ask why on earth not. Was it such a disorderly ship that apparently reprehensible if not outright illegal activities were allowed to go on unchecked and unaccounted for? Or was it just a case of turning a blind eye?

Either way, senior executives emerge extremely badly. If they really had no idea what was going on, then at the very least they seem to be guilty of mismanagement. Certainly they seem to have profoundly mismanaged the affair since it first came to light about a year ago. They have allowed Mr Branson to run rings round them, culminating in last week's grovelling climbdown - a magnificent publicity coup for Virgin Atlantic. Ever since Mr Branson began to raise allegations of dirty tricks, BA has vehemently denied them. Lawsuit has been met with lawsuit, and the company led both the public and regulators to believe the complaint was groundless. Either BA was being disingenuous from the start or it was extremely badly advised.

Thus far, the City seems singularly to have failed to recognise the significance of what has occurred. Friends in the City and investors in BA have an obvious interest in talking the episode down, but the process goes beyond that. The City genuinely seems to think the whole thing doesn't add up to much more than a hill of beans. The company's share price has suffered, certainly, but this has far more to do with an effective profits warning a little while back than the Virgin fiasco.

The attitude has been that all this is of far more interest to the press than investors. Costs and damages of pounds 3.5m are hardly much of a hit for a company of BA's size. The affair only takes on significance if it leads to substantial switching of customers away from BA, which seems unlikely, or to more costly legal action by Branson and others in the US. Much more likely the affair will blow over.

Nor is it generally believed in the City that it will have much impact on BA's global ambitions. The airline is about to relaunch its attempt to take a minority shareholding in US Air, America's sixth largest carrier. From the start, the US authorities have been hostile; they have turned BA down once already. You would have thought the Branson escapade would scupper its chances for good. Much more so than the British, the Americans love David and Goliath fights. Since his appearance on ABC's 60 Minutes, Mr Branson has gone down a bomb in the US. They love him. Even so, US regulators say, they may not be able to block BA second time round. Anti-trust violations in the US are no big deal. Virtually every US airline has been there before without apparently affecting their ability to do business. Engaging even in illegal activities of the type BA is accused of - hacking into Virgin's computer to poach its customers - may not be enough to disqualify you from taking a minority shareholding in a US airline.

That is the general City view anyway. Is it a reasonable analysis? I think not. Once US politicians get their teeth into what BA is accused of, there seems no doubt that they will stop BA doing a deal with USAir in any shape or form - never mind due process. This, apparently, was not just some smear campaign of the type often mounted in the cut and thrust of commerce. It went far beyond the antics of Brian Basham, the external PR consultant employed by BA to spread damning stories and rumours about Virgin. In the US, hacking into computers is a criminal offence.

What has emerged from this affair (see pages 4 and 5) is a picture of a company driven by a deep paranoia, a determination to protect its traditional monopoly at almost any cost. There seems to have been a history of dirty tricks from Laker onwards. There is nothing wrong with aggressive marketing; that's what you would expect from an entrepreneurially-led and innovative company like BA.

But the operation of a no-holds- barred policy goes beyond entrepreneurial zeal. Whatever the extent of their knowledge about the Branson campaign, Lord King and Sir Colin have to be held responsible for what has occurred. It was their company and it was they who created the culture which allowed such practices to flourish.

Can they survive? Lord King is understandably deeply upset by events. He is retiring as chairman this summer anyway and after all he has done to make BA into one of the world's most successful airlines, this is a miserable note to bow out on. Sir Colin, the chairman and chief executive designate, is a different matter. Clearly quite substantial cultural and operational changes are going to have to be made to stop this sort of thing happening again; whether he is the man to make them is anyone's guess.

You would have thought not, given how strongly identified he is with the modus operandi of the past. We are moving into a new, more constrained and less entrepreneurial phase of the company's history. For investors, that may not be an altogether good thing. With its wings clipped, BA is not going to be the force it once was. The glory days are over.