A year ago, Willie Walsh was crowing about British Airways’ “outstanding” financial results. Now the UK airline he heads has gone from a record profit to a record loss and is burning cash rapidly. The difficulties have pushed BA into survival mode. Embarrassingly, Walsh is having to axe the dividend he reinstated only 12 months ago.
Trading conditions are about as tough as they come. But BA can’t blame everything on the economy and the weakness of sterling. After all, revenues were slightly up in the year. But BA’s fuel-price hedging policy meant it missed out on the cheap fuel bonanza earlier in 2009.
While BA expects a lower fuel bill in the current year, revenues are now falling too - by 8 per cent in the fourth quarter. Walsh says he sees no signs of recovery. Small wonder. BA’s heavy reliance on business travel across the North Atlantic leaves it particularly exposed to a prolonged downturn. Premium traffic slid 17 per cent year-on-year in April.
Walsh has an interest in sounding gloomy: BA is in the thick of difficult negotiations with unions over wage cuts. Bearing down on payroll costs is just one of the sensible measures being taken now to return to profitability and conserve cash. Cutting capital expenditure is another. BA is also grounding 16 planes over the winter, reducing its capacity by 4 per cent.
Will it be enough? BA’s financial position is clearly worsening but it is not critical yet. Net debt nearly doubled in a year to £2.4 billion. Analysts expect further losses this year, and losses in 2010-2011 can’t be ruled out. But net debt is still far from its 2002 peak of £6.3 billion.
A merger with cash-rich Iberia, the Spanish airline already in talks with BA, would certainly help the UK carrier’s finances. Synergies from the deal could be worth up to £2 billion. The difficulty is that the more BA’s poor performance increases the need for a deal, the more the uncertainty surrounding matters such as the pension deficit make a combination harder to agree. The Iberia discussions were relegated to a note in BA’s numbers. The hope must be that this was a deliberate understatement of their seriousness.
