Strategy that put BA in tailspin

Robert Lea12 April 2012

BRITISH AIRWAYS is in a tailspin. By the calculations of its own financial advisers it will post a loss of £775m this year and almost certainly dive out of the FTSE 100.

If the record fall into the red is not ignominy enough, expulsion from the blue-chip index of Britain's top companies later this month would count as the most humiliating financial setback in BA's 14-year publicly quoted history.

An airline reporting monthly shortfalls of more than a third in its key passenger market and which is likely to scrap all dividends this year has few friends on the stock market and the recent fall to within distance of its 125p a share float price sees BA valued at less than £1.5bn.

That is not that far removed from the value of Railtrack when the Government put it into administration last month and there are now very real fears for BA's solvency at a time when a major cost-cutting programme is being far outstripped by collapsing revenues.

Ten years ago Lord King, the legendary former chairman of BA, saw that if one thing had to be learned from the Gulf War, it was that the airline should never again be so reliant on North American traffic and should start harvesting the growing European market.

A decade on, Lord King's then chief executive and now successor as chairman, Lord Marshall, reported that the aftershocks of 11 September had produced a 'far sharper and more devastating' collapse in traffic than the Gulf War.

The pain is being felt in just the markets which BA was vigorously chasing: the business travellers (passenger numbers down 36%) who fly mainly over the North Atlantic (passenger numbers down 30%). BA's success in Europe has been limited and the recent failure to make a profit on offering traditional, full service hospitality at full service prices, led last month to the cull of many services out of Gatwick. At Heathrow, the six-times-a-day run to Belfast was axed, having lost £38m in four years.

BA had also launched in Europe a successful low-cost operator, Go. But it grew impatient to see a return on its investment and ended up selling it to City financiers. There is more than a little irony that Go and its budget rivals such as easyJet and Ryanair are all heading for record figures this year. BA's latest chief executive, the Australian Rod Eddington, fully embraced the strategy of his sacked predecessor Bob Ayling, who decided business travellers paying top whack to fly across the Atlantic were the segment it would chase. That strategy was already creaking by August when a slowdown in the US economy and foot-and-mouth disease were already producing falls of 16%in North Atlantic passenger traffic.

Eddington recognised the heavy weather on the way. Five days before 11 September he announced 1,800 job losses. The destruction of the World Trade Centre changed everything and within 10 days he had increased the job losses to 7,000 - one in eight of BA's staff worldwide.

BA is by no means alone: Virgin Atlantic is even more reliant on American traffic but is claiming the continued backing of its 49% shareholder Singapore Airlines; Heathrow rival United Airlines racked up losses in the third quarter of $1.16bn. But the cost-cutting at Britain's flag carrier looks increasingly desperate. Eddington has pulled the programme of fitting the much-hyped flat bed in all Club Class lounges. It has sold an investment in France Telecom for £23m when it could have got triple that figure earlier this year. And Eddington has scrapped the Christmas bonus for 36,000 UK staff and told 3,500 middle managers to take a five% pay cut and forgo bonuses next year, together saving £24m.

But the bad news has just kept coming. Credit-rating agency Standard & Poor's is now rating BA's debt at just above junk bond status meaning when it needs to raise more City funds the debt interest will be more costly.

The Civil Aviation Authority says the likes of BA will have to pay tens of millions of pounds more a year to help fund upgrades at Heathrow and Gatwick. Even Eddington's success in managing to sell the job cuts to the majority of unions was clouded by the maverick GMB which is threatening Christmas industrial action and to sue the company for breach of contract.

On Wednesday he flies to New York on Concorde in its first commercial flight in nearly 16 months since the Air France disaster. It will be terrific public relations and the descent into JFK will be charged with emotion. But Concorde is no panacea. In fact BA is already offering cut-price flights. That sort of promotion is alienating many at BA who see the job losses or their own loss of bonuses as subsidising the fat cats who fly supersonic.

Today Eddington will give more details on BA's future. The last few weeks has seen the failure of Ansett, the Australian airline from which he joined BA 18 months ago. It is hoped BA's future does not mirror that fate.

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