It was close to midnight when Willie Walsh finally emerged from Waterside,
British Airways’ sprawling Heathrow headquarters. The airline’s chief
executive blinked in the lights of the waiting television crews, cleared his
throat, and started to speak, his voice trembling.
“I am sorry to say that despite our efforts today we have been unable to
secure further funding from our banks. The cash drain we sustained as a
result of the rolling programme of industrial action by cabin crew and
ground staff means we can no longer continue as a going concern. British
Airways has this evening been put into administration.”
This may seem a far-fetched scenario, but not according to Walsh’s own
doom-laden forecasts. BA is in trouble, with recession and the banking
crisis – banks accounted for nearly 40% of BA’s business-class traffic –
pushing it to its worst-ever loss in the financial year that ended in March.
In recent weeks Walsh has issued dire warnings to staff, saying that almost
all the business is unprofitable, the current awful trading situation will
only get worse and that the company faces “a fight for survival”.
Last week he went farther, inviting all employees to work for a month without
pay – following the example set by himself and Keith Williams, the finance
director. Staff have even been asked to drum up business by selling tickets
to friends and family under the company’s “Hotline” scheme, with special
cheap fares being made available last week.
In an intranet message, the company told workers: “Time is running out.”
So is it really all over for BA? Is the world’s (former) favourite airline,
Britain’s (former) national flag carrier and the (former) operator of
Concorde really heading for the scrap-heap?
Seasoned airline watchers say not, accusing Walsh of having an ulterior
motive. His apocalyptic missives, they say, are designed to soften up BA’s
unions during crucial talks about cost-cutting.
Walsh wants big concessions – and an air of crisis will help. This month has
brought voluntary pay cuts from pilots and engineers (pilots still have to
vote on the plan), but the battle continues with ground staff and cabin
crew. Walsh wants it sorted out by June 30. Industrial action this summer
cannot be ruled out.
Walsh has another audience in mind, too, governments and regulators on both
sides of the Atlantic. BA is trying to stitch together a merger with Iberia,
the Spanish airline, and a strategic alliance with American Airlines. The
latter, a deal that would leave BA and American free to collude on price and
scheduling on Atlantic routes, faces a rough ride from competition
watchdogs. Its fate is in the balance, with a decision expected in a few
months.
BA’s management would also like some breathing space from the British
government on a swingeing rise in air passenger duty, which the airline
claims leaves it at a competitive disadvantage to its rivals.
“In my view, he is attempting to manage the expectations of staff. His view is
that there is a serious structural shift here, not just a cyclical blip,”
said Douglas McNeil, transport analyst at Astaire Securities, the investment
bank.
Other airline bosses say that if Walsh is crying wolf, he is taking a big
risk. “Either they are in that kind of trouble, and could go bust, or they
are not, and are trying to pull the wool over people’s eyes. You don’t ask
staff to take a one-month pay holiday and risk having those kind of
headlines unless it’s serious. If you do, it’s a very dangerous game,” said
Sir Richard Branson, founder of Virgin Atlantic, BA’s biggest rival.
There may be more to this than a none-too-subtle attempt to frighten the
awkward squad. Evidence can be found in the boom-to-bust nature of the
airline’s trading over the past two years.
BA’s big strength has always been the Heathrow hub and its dominance of the
lucrative business traffic across the Atlantic. In 2006-7, the final year of
the financial-services boom, BA posted a record result. Corporate lawyers,
merchant bankers and other masters of the universe thought nothing of paying
£4,000 and more for a return trip to America, and the cash rolled in.
The airline announced a record profit of £922m , achieved an operating margin
of 10% (something that had eluded BA managers for the previous two decades)
and paid a dividend to shareholders for the first time since 2001.
Then the music stopped. The credit crunch and recession revealed the reliance
on Heathrow and Atlantic business traffic to be not a strength, but a
weakness. Business traffic dried up with companies, and in particular the
big banks, slashing their travel budgets.
“Companies are travelling less, and spending less per trip,” said Amon Cohen,
a business travel expert and contributing editor of Business Travel News.
“With so many empty seats, airlines are falling over themselves to offer
discounts of as much as 70% in business class. Looking ahead, it does not
get much brighter. A survey of British corporate travel buyers published by
the Institute of Travel & Meetings last week found that three-quarters
of them expected their spending to fall even farther over the next 12
months.”
BA’s results for the 2007-8 financial year showed how hard and fast the
downturn had hit. The airline recorded a £401m loss – £331m of which came in
the final quarter of the year alone – and scrapped the dividend.
BA’s lifeblood “premium” traffic – first and business class – fell 17% in
April, and by the same amount in May. Business-class fares across the
Atlantic have dropped sharply.
In an intranet posting to staff last week, the airline said: “Many First or
Club passengers are on greatly discounted fares that the airline has
introduced to keep people flying. Currently there are Club World offers at
£1,100 for Heathrow to New York return and some are travelling free (2 for 1
offer).”
Walsh’s problem is that BA is set up to make money at £4,000 for a return
ticket to New York, not £1,100. He must now convince the airline’s unions
that the current drop in traffic is not just a temporary blip, but, as he
puts it, “a structural shift in the nature of our business”.
Time is not on his side. The airline’s cash balances are dropping, down from
£1.8 billion last year to £1.3 billion at the end of March. This could be
completely used up by the company’s outgoings as currently scheduled – £750m
of capital spending, debt repayments of about £650m and interest charges of
£150m.
There is little fat for Walsh to fall back on. Much of the company’s property
was sold during its last restructuring, the so-called Future Size and Shape
programme put in place by Walsh’s predecessor, Sir Rod Eddington. The
worldwide airline slump means it is hardly worth selling aircraft.
In other industries, companies under pressure are raising cash as fast as they
can to tide them over the downturn, either increasing their bank borrowings
or asking shareholders to back rights issues.
BA’s board would probably opt for the latter, although analysts think there
needs to be a successful resolution of the industrial talks before a
fund-raising could go ahead. “You need to have a recovery story to tell, and
that means having big cost reductions in the bag,” said one City source.
Walsh will move heaven and earth to preserve the airline’s cash by cutting
spending, but he might find himself on a slippery slope if the company’s
position deteriorates further – made worse, perhaps, by industrial unrest,
worsening swine flu or terrorist action.
Bankers point to the examples of Sabena, the Belgian airline, and Swissair,
both of which came to grief in the slump that followed the September 11
terrorist attacks.
“It can run away from you. There is a minimum cash level – in BA’s case I
would say it’s about £500m – after which the banks start to tighten the
screws, suppliers get nervous, the public gets nervous and your need for
funding balloons out of control,” said one senior banker who worked on the
restructuring of Swissair. IF BA were to get into serious trouble, a rescue
would be far from straightforward. The board could seek a white knight, but
there are two obstacles to a bid.
First, any buyer must be majority-owned and controlled by European nationals,
a prerequisite of BA’s traffic rights. This would probably rule out Arab or
Asian sovereign wealth funds, which otherwise would be tempted by such a
prestigious brand.
The second obstacle is more daunting. BA has a large pension liabilities. An
actuarial review of its two defined-benefit schemes is under way, with a
final figure on the size of the black hole expected in September. Some
analysts think it could be as much as £3 billion, nearly double the
company’s £1.57 billion stock-market value.
Administration, which would allow the airline to shake off the pension fund,
is also problematic, thanks to the industry’s regulated nature.
For an airline, administration would normally mean immediate revocation of its
operating licence and the loss of its runway slots – BA’s most precious
assets.
“Airlines cannot do business without an operating licence and an air
operator’s certificate, which are granted in the UK by the Civil Aviation
Authority,” said Hugh O’Donovan, barrister and leading aviation lawyer at
Quadrant Chambers.
“For the administration to be successful and the business to continue to
trade, there must be financial arrangements in place to enable the operating
licence and certificate to be maintained.”
If they wanted to be sure of the business emerging intact, BA’s board would
need to have a buyer in place before the crunch came. In other words, BA
would have to do a prepack administration, the much-criticised type of
insolvency that has come into fashion among retailers since the recession
bit.
That kind of crisis may still be a remote possibility. Professional investors
certainly think so. Respected analysts believe BA will ride out the
recession and, again thanks to its dominant position at Heathrow, be
best-placed of all airlines to exploit a recovery.
Andrew Light at Citi rates the shares a buy, with a target price of 260p (the
shares closed on Friday at 136½p). Andrew Lobbenberg at Royal Bank of
Scotland also has a buy recommendation, with a target price of 225p.
Walsh, however, who declined to speak to The Sunday Times this weekend, is
still talking down the airline’s prospects, with another round of meetings
scheduled this week with cabin crew and ground staff.
And it is worth bearing in mind that this recession has already demolished
organisations that were thought to be fixtures on the corporate landscape –
AIG, Lehman Brothers, Chrysler and General Motors.
Could BA join the list?
Jetting into another summer pay storm
Another summer, another industrial battle at British Airways. The airline has
made a habit of stranding passengers at the height of the holiday season and
exhausting the lexicon of the shop steward. There have been official strikes
and stoppages, work-to-rules, wildcat action, “sick-outs” (staff going sick
at short notice) and strikes at key suppliers. Sometimes the airline
managers have not even needed the (non)cooperation of staff to ground
aircraft, doing a good job themselves during the shambolic opening of
Heathrow’s Terminal 5 last year.
Most of the disputes have included public discussion of how much BA’s staff
earn, with a particular focus on the perks enjoyed by cabin crew and pilots.
This time round has been no different, with figures from the Civil Aviation
Authority showing that BA cabin crew, for example, can be paid twice as much
as their counterparts at Virgin Atlantic. The average salary for BA’s 14,000
cabin crew, including bonuses and allowances, is £29,900, compared with
£14,400 at Virgin Atlantic and £20,200 at Easyjet. BA's pilots earn an
average of £107,600, compared with £89,500 at Virgin and £71,400 at Easyjet.
Reliance on such figures riles cabin crew, who accuse the airline of using
them to win over public opinion in case of industrial action. Airline
industry insiders are also reluctant to draw conclusions. In the case of
cabin crew, they say, BA managers have bought off trouble over the years by
increasing allowances instead of basic pay – rather in the manner that MPs
were given generous expenses.
Senior cabin crew can now pick up several hundred pounds in allowances for
long-haul trips. While the allowances are large, the insiders say what
really matters is productivity, which is where BA falls down. “To get big
cost savings at BA, you need to tear up the scheduling agreements with the
pilots and cabin crew,” said one. These agreements govern the rest periods
between trips. To do so, however, would almost guarantee industrial action –
something at which BA has had a lot of practice.
