(FORTUNE Magazine) – THE BRITISH DELIGHT in heaping abuse on public institutions -- the House of Lords, the National Health Service -- that seem archaic or ineffectual. Under government ownership, British Airways slid into that sorry niche in the late 1970s. A huge, unproductive work force and lax management produced losses that reached nearly $1 billion in 1981, and service slipped badly. Long known by its familiar initials, the national carrier had become a laughingstock. ''What does BA really stand for?'' the baggy-pants comedians used to ask on the telly. Came the answer, with a malevolent cackle, ''Bloody Awful.'' Privatized in February 1987, British Airways gets guffaws no more. While once-mighty U.S. competitors such as Pan Am, TWA, and Eastern have gone into tacky decline, a new team of managers has engineered a sparkling turnaround at British Airways. In a country little noted for astute managers or employee productivity, BA's bosses have generated results to rival the performance of any U.S. carrier. Since much of the success has been built on attending to customer needs, managers of service industries everywhere can draw lessons from the British Airways story. ''If you wanted to know what the model global airline of the future is, you would have to say that BA is that model, the perfect example,'' says John Pincavage, veteran airline analyst at Paine Webber. The carrier has greatly spruced up service, gone high tech in its marketing and operations, and fine- tuned its massive global route structure with acquisitions and joint ventures. Michael Derchin, airline analyst at Drexel Burnham Lambert, lauds BA's ''leading edge moves that, over the next five to ten years, will be envied by other airlines.'' In the fiscal year ended in March, British Airways' profits were the highest in the industry at $284 million on revenues of $7 billion -- though earnings have since turned down as BA absorbed the costs of a merger with British Caledonian. The carrier excels by other important benchmarks. The average revenue per passenger, $266, is among the industry's highest. Its load factors are lofty as well. Two years ago BA, which serves 166 cities in 80 countries around the world, became the world's largest international airline in terms of passengers carried (23 million last year) and passenger-miles flown (31 billion). Curiously, success has yet to turn on investors. Though British Airways stock recently sold close to its 12-month high, it commands a relatively modest price/earnings multiple of 8 on the London and New York stock exchanges. Investors worry that, like most airlines, BA is both labor- and capital-intensive, as well as vulnerable to economic downturns. In a recession, high-yield business travel, the lifeblood of any airline, dries up fast. A big cut in cash flow could bump management's plan to spend $6 billion for new planes into the 1990s. Still, BA has become such a potent force in the business that security analysts expect it to get more notice in the future. Says Candace Browning of Wertheim Shroder: ''The management is great. They are experienced, and they understand the importance of technology.''

The turnaround began not long after Margaret Thatcher's election in 1979. The new Prime Minister was determined to get the carrier into private hands, but that seemed a daunting task because of the line's huge losses. To put things right, Mrs. Thatcher turned to John King, a Conservative Party stalwart and chairman of the big engineering firm Babcock International. A blunt, cheerful man of considerable charm, King, now 70, had earned a splendid reputation as a manager. He was fully aware of the tough job facing him. Not only would he have to transform the company's ingrained ways, he would also have to take on the unions, the competition, and a host of other opponents in pitched political battles. Says the patrician BA chairman, honored in 1983 with the title Lord King of Wartnaby: ''Everyone knew that we wanted to go private, but no one thought that we could.'' King's first major task was also his most unpleasant. Within a few months he reduced BA's bloated work force from 59,000 to 36,000. To ease the impact, he offered generous severance packages to all who left voluntarily. He scrounged the $530 million or so needed for the payments by selling off surplus aircraft and some real estate holdings in the London area. NEXT TO DRAW his attention was the airline's board. Directors got their jobs via political patronage under government ownership. The board was a largely ineffective bunch that included an economist, a union leader, the head of another nationalized industry, and a former treasury official. Convinced that British Airways needed top professional counsel, King transformed the board with some high-octane executives. Among them: Henry Lambert, former chairman of Barclays Bank International, and Robert Henderson, a director of Cadbury Schweppes. Since then Michael Angus, chairman of Unilever, has joined the board. In part to signal change, King fired the insurance agency that had handled BA's business for 60 years. Then he switched advertising contracts from American-owned Foote Cone & Belding, BA's agency for 36 years, to the London shop run by the Saatchi brothers. ''After those two moves,'' King recalls with obvious pleasure, ''people around the place really began to listen to me.'' A lot of folks outside the company discovered the new atmosphere when Saatchi & Saatchi unveiled a spectacular ad campaign featuring splashy graphics and the slogan ''The World's Favourite Airline.'' The campaign's original TV commercial, which showed Manhattan island whirling through space to land across the Atlantic, has been called a pioneering example of the global-marketing approach now used by many advertisers. Still up in the air was the crucial matter of a new chief executive. King refused to be rushed into a decision. He grumbles: ''The way it sometimes works, you take a year to find the man, then another year and a half to find him out, then you start all over again.'' Convinced that British Airways needed a completely fresh outlook, King was determined not to hire an airline expert. ''We were looking for someone who understood service,'' he says. ''But there seemed to be an advantage in not knowing too much about the business. In my ignorance, I could do things I might not have done if I had been better informed.'' King and the board settled in early 1983 on Colin Marshall, an aggressive, hands-on manager. Now 54, Marshall was then deputy chief executive of Sears Holdings, parent company of the Selfridges retail empire and no kin to Sears Roebuck. He had taken a circuitous route to the top. Raised in a middle-class home, he left school at 18 and went to sea as a purser with Orient Steam Navigation Co. At 25 he landed in Chicago as a management trainee with Hertz Corp. A few years later he moved over to Avis and rose to become a top executive at Norton Simon Inc., Avis's parent. On taking charge at British Airways, Marshall set about lifting employees' sagging spirits. ''Morale really was appalling,'' he says. ''People had seen thousands of their colleagues go out the door, and they had no idea what would happen next. They needed some inspiration.'' To restore pride and, not coincidentally, announce a change in direction to the marketplace, Marshall repainted his fleet with distinctive new stripes and a company coat of arms bearing the motto ''To Fly, To Serve.'' He also ordered up newly designed uniforms for ticket agents, ground personnel, flight crews, even baggage handlers -- the first change of garb in 20 years for male staffers. Marshall's biggest step was to launch a complete cultural change at the , airline. He recognized that more and more passengers, especially business travelers, were becoming fed up with deteriorating service. While price cutting would continue to put bodies in three-abreast seats on some highly competitive routes, the business clientele was increasingly yearning for at least a semblance of the past, more gracious era of airline travel. To exploit the yearning, Marshall first needed to change the attitude of ground and air employees accustomed to dishing out basic services in a perfunctory, if not almost surly, manner. His first stab at reintroducing some civility to operations was to order all employees to attend a two-day seminar, developed by a Danish consulting firm and called ''Putting People First.'' The workshops attempted to put British Airways employees in the customers' shoes. Flight attendants, for example, were asked to recall their own experiences in restaurants when meals were dumped unceremoniously in front of them. LOOKING FOR WAYS to boost the high-yield end of his business, Marshall took an entirely new, quite successful approach to marketing the supersonic Concorde service (see box). He also upgraded BA's business-class service by refurbishing lounges at major airports, putting seats with adjustable headrests in business-class cabins on most planes, and improving the food. Like several other airlines, BA has tried to lend an air of exclusivity to its business-class service, dubbing it Club World. Those changes, along with an advertising push stressing creature comforts, resulted in a 20% jump in business-class bookings in the first six months of 1988. One key to better service was meticulous attention to detail. Market research suggested that passengers are exceedingly pleased when an airline employee addresses them by name -- ''Have a good flight, Mr. Jones.'' To test the premise, British Airways researchers spent months studying passengers on shuttle flights from London to Glasgow and Manchester. When ticket agents made a particular point of using names, customer satisfaction scores rose about 60%. BA agents everywhere now call you by your name whenever possible. At London's Heathrow Airport, British Airways deployed so-called hunters, or trouble-shooters, who speak a babel of languages and roam the terminal looking for bewildered passengers in need of assistance. At Heathrow and Gatwick airports in London and at JFK in New York City, BA passengers can also videotape comments or criticism about service in space-age booths set up near entrance ramps. When it came to schedules in pre-Marshall days, the airline's convenience took precedence over the customer's. If it were more advantageous for crews to fly a certain route late in the morning, chances are the schedule would be so adjusted. Now planes by and large are scheduled to take off when the passengers want them to. ''It's a matter of amended focus,'' says BA general manager Chris Swan. ''It's customer, customer, customer.'' BY THE BEGINNING of last year, King's and Marshall's efforts had improved the airline's financial results and reputation enough to interest private investors. The $1.4 billion public offering for all BA's stock at $19 a share was vastly oversubscribed; the price has recently gone as high as $32. Set loose from government rule, the airline no longer had to wade through layers of bureaucracy to lease or buy new aircraft or enter into joint ventures with other carriers.

BA's new freedom also allowed it to move far more quickly when an opportunity to expand arose. British Caledonian, the nation's second-largest carrier, went on the block early this year after posting a quarterly loss of $58 million. Scandinavian Airlines System entered the bidding, but British Airways used its political clout and a strong dose of nationalism to win the prize for about $458 million. Marshall answers SAS charges that his team bullied its way to victory with a warrior's bravado: ''When you are in a knockdown, drag-out, you use whatever advantage you have.'' The acquisition has caused some financial pain in the short run, raising debt to nearly 60% of total capital and crimping profits. But BA has already realized economies of scale, cutting the merged carriers' annual operating costs by $70 million. About two-thirds of British Caledonian's 6,000 employees have been let go. The deal enhances the carrier's route structure and operating leverage. British Airways has gained attractive routes to the southern U.S., Saudi Arabia, western Africa, and South Korea, as well as dozens of gates and ground slots at Gatwick Airport. British Airways now accounts for about 90% of the scheduled flights in and out of Britain, and its London hub has become one of the world's busiest international travel centers. BA's share of the lucrative and bitterly contested U.S.-British market has climbed from 29% in 1983 to a recent 38%. More important, the carrier's new dominance of traffic to and from Britain -- a result of both the merger and success in wooing customers -- has enabled it to push up fares aggressively. Business-class fares, for example, are up 18% in the past year. THE AIRLINE has further broadened its global reach with a so-called marketing merger with the largest U.S. carrier, United Air Lines. The two have begun sharing ground facilities and various customer services at several U.S. airports and feeding passengers from domestic United flights onto British Airways' international routes. Since U.S. laws prevent foreign airlines from flying routes between American cities, overseas carriers have been unable to establish effective hub-and-spoke systems within the huge American market. BA can now count on filling up its international flights from major hubs like New York City with passengers arriving on shorter United flights from many American cities. In the long run the deal could also provide British Airways additional revenues and a larger presence in the fast-growing Pacific market. BA serves few Pacific routes, but United has become a major player since taking over Pan Am's Asian operations several years ago. The two carriers have begun jointly marketing globe-girdling World Class Vacations. A Japanese honeymoon couple, for example, might board a United flight in Tokyo bound for the U.S. Then they would fly BA planes from New York City to Europe and on to Japan, on routes not served by United. Marshall considers more joint agreements inevitable because ''it is no longer feasible for any single carrier to serve the world as a whole.'' No airline can alone bear the huge expense of maintaining a fleet and ground facilities to meet swelling demand for overseas flights. International travel has been growing at a 5.5% annual rate -- and more than twice as fast on some routes from the U.S. to Western Europe and the Pacific Rim. Indeed, this autumn SAS and Continental, the flagship carrier of Frank Lorenzo's Texas Air group, signed a marketing agreement similar to the BA-United deal. United and British Airways have linked up in another significant way. Along with Swissair, KLM, and Alitalia, BA has bought a stake in United's Covia, a highly advanced computerized reservations system. The deal has been held up because of legal objections raised by American Airlines Chairman Robert Crandall, who has been attempting to market his own Sabre system in Western Europe. Once the deal goes through, as seems almost certain, BA will enjoy a vastly improved distribution system. Travel agents, who write about 80% of all international tickets, often favor the carrier whose reservations system they are using because of financial incentives and the way flight information is displayed on computer terminals. The airline with the computerized reservations system usually lists its own flights first in each time slot, and many agents don't look any further. Says John O. Watson, BA's director of information management: ''The only way to get fair treatment is to be in the business. It's almost a mechanism of defense.'' The mood around British Airways' headquarters near Heathrow is by no means smug. Among the major concerns is how to prepare the airline for 1992, when many pricing and route restrictions governing air travel within the European Community will be lifted. Savage fare wars, similar to those that bloodied U.S. carriers during the first years of deregulation, could break out across the Continent. BA, no longer government-owned, could find itself at a disadvantage against other carriers in the EC, all of which enjoy subsidies and are government-owned in varying degrees. But the airline's strategists are aware of another lesson learned from the American experience with deregulation: Bigger is better in the airline business. BA's sheer size and marketing power will probably allow it not only to survive deregulation but perhaps to acquire some smaller European carriers if a shakeout takes place. KING AND MARSHALL also think they might enjoy some important strategic advantages after 1992. Most crucial, the various European carriers will present a united front for the first time when negotiating bilateral agreements with other nations. That means British Airways and the others no doubt will attempt to remove a major irritant: agreements that permit U.S. carriers to ferry passengers between European cities but bar foreign airlines from similar privileges within the U.S. If BA's top dogs get their way, a Denver salesman may one day be able to choose the British carrier on a flight to Dallas. Grumps Lord King: ''The Americans have been rather tiresome about picking plums over here and not allowing us to do the same there.'' Marshall speaks on the subject with less rancor but no less resolve: ''Let us say that 1992 offers the potential for a single force strong enough to persuade the U.S. government to change its position.'' Perhaps because of his years spent working for U.S. companies, Marshall has at times been portrayed in the British press as an American-style manager. He professes to be baffled as to just what that means, but he betrays little British restraint when he talks about market challenges or taking on the regulators. You get the feeling that more and more of his competitors are going to find there is absolutely nothing funny about British Airways.

BOX: IT'S A BIRD. IT'S A PLANE. IT'S A CORNUCOPIA OF CASH!

Among Colin Marshall's first acts as British Airways CEO was to rethink its Concorde service. The carrier had looked at its fleet of supersonic jetliners as a collection of fuel-guzzling white elephants. The attitude may have been understandable, since BA's seven Concordes, along with five flown by Air France, are the sole commercial result of a $3 billion R&D effort underwritten by the French and British governments. Marshall decided to treat the strangely beautiful planes as flagships of British Airways, proud symbols of a revitalized enterprise. He redecorated the planes' cabins and sharply raised fares. Concorde tickets had been priced near first-class fares on conventional jetliners; Marshall bumped them up to more than 30% over first class (round-trip fare from New York City to London: $6,420). He also changed marketing tactics. Marshall stopped trying to sell the Concorde as some sort of sybaritic delight. The plane's physical dimensions strained the credulity of that approach in any case. The cabins are narrow and somewhat cramped. The food and wines, served from limited galley space, are excellent for airline fare but no better than first-class subsonic. So Marshall decided to stress the Concorde's convenience. The new advertising message: Business travelers' time is valuable enough to warrant the high ticket price. The Concorde streaks across the Atlantic in about 3 1/2 hours, half the time it takes a conventional jet. Recently the carrier has been pitching a one-day London-New York round trip to top business travelers in Britain. They can leave London's Heathrow on a 10:30 A.M. Concorde, arrive at Kennedy in New York at 9:30 A.M. to hold a business meeting or sign legal documents, then return to London on the 1:45 P.M. flight. With any luck, they can be home in their own beds by 11 P.M. ''The Concorde is basically a time-management tool,'' declares Michael Batt, whom Marshall hired away from candymaker Mars Corp. to handle the Concorde and some of the carrier's other special services. The new marketing drive has been a winner. The 100-seat Concordes now fly at well over the breakeven point of 60% occupancy on Atlantic routes. Many of the passengers are the decision-makers every airline courts. Over two-thirds of them travel on business, and 40% of this group are corporate chairmen or directors. Household names also ride the Concorde regularly -- members of the British royal family, author William F. Buckley Jr., TV star David Frost, tennis ace Chris Evert, and golfer Greg Norman. BA reported revenues of more than $356 million from Concorde service last year. Airline officials say operating profits are ''substantial.'' Barring some unforeseen mechanical problem, BA plans to fly its Concordes into the next century. Right now, however, it does not appear they will be replaced by a new generation of faster ships. Boeing, McDonnell Douglas, and a European consortium have all begun looking into building hypersonic jets capable of flying as much as five times the Concorde's 1,350 mph. But no aircraft manufacturer is likely to put up billions in development costs without ironclad orders for many planes, and the market for such expensive, specialized craft is limited. These days carriers must have the flexibility of using larger planes with a range of ticket prices. The best bet is that no replacement will be around after the last Concorde heads for the hangar. Says Batt: ''The days when you see a plane full of nothing but high rollers will be over.''

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: INVESTOR'S SNAPSHOT BRITISH AIRWAYS