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Business Analysis & Features

Fasten your seat belts, turbulence ahead

Threats of industrial action, disappearing passengers and swine flu - BA faces a dark summer says Richard Northedge

British Airways chairman Martin Broughton knows Kempton Park racecourse well from when he chaired the British Horseracing Board. It has mixed memories for him, though. BA Dreamflight, which he owns with other BA executives and managers, started 4-1 favourite when it ran at the west London course this year but finished unplaced.

Last week, 2,000 of Broughton’s cabin crew rallied at the racetrack and roundly rejected the airline’s plan to cut jobs and pay. This weekend the cabin crews’ union is locked in talks with management at Acas, the arbitration service. If no compromise is reached – and last week’s vote was almost unanimous – BA could be heading for another summer of industrial chaos when it can least afford it.

On Tuesday Broughton will chair BA’s annual shareholders’ meeting in Westminster. Cabin crew traditionally act as attendants at these meetings, checking in investors and handing out the microphones. It may be a rough ride this year with Broughton facing difficult questions. Last year he reported record profits of £922m; this year he must explain how BA lost a record £401m. The dividend, cancelled in 2001 and restored last summer, has been cancelled again.

BA has been hit hard by the recession. Passenger numbers are down and revenue dwindles further as BA gives discounts and offers to fill seats. Sterling’s weakness has made fewer Britons want to holiday abroad and more than one seat in five is now empty on the average flight. Cargo is down 10 per cent too but the front of the plane is the biggest problem. BA makes two-thirds of its profits from business and first-class passengers, but premium traffic is down 15 per cent on last year.

The airline has bumped from crisis to crisis recently but Broughton warns that this year’s beats others. “September 11 happened against a background of strong consumer confidence and we had a functioning banking system,” he says. “Now we have weak confidence, a very poor economic environment and a dysfunctional banking system. Then swine flu comes along.”

With chief executive Willie Walsh he is undertaking a three-year change programme that means cutting capacity, costs and staffing. It costs £9bn a year to keep BA flying but the £2.2bn pay bill was last year overtaken by fuel costs, which jumped £1bn to £3bn. And even now oil prices are below their peak, BA made losses because it hedged against last year’s levels.

After cutting 2,500 jobs last year, BA wants to shed another 3,700 of its 42,400 employees. Pay rates can be twice those of rival airlines, however, and BA wants not only a two-year pay freeze but also the right to recruit at lower wages. Unions say that creates first- and economy-class workers.

The CBI, where Broughton has just moved from president to vice-president, last week proposed a scheme that would pay workers for not working. At BA, however, he is advocating working for no pay.

Walsh and finance director Keith Williams are setting the example by forfeiting a month’s salary and 7,000 staff have volunteered for this or other schemes that could save £10m, but unions have reacted with derision. “It’s hard to exaggerate the severity of the current economic conditions,” says Walsh.

Capacity, already cut once, is being trimmed again as passenger numbers fall. The airline’s three remaining 757s will be grounded next summer with three 747-400s in winter 2010. The Gatwick fleet is being cut from 32 to 24 planes with services to Alicante, Madrid, Barcelona, Palma, Malta and Krakow suspended, reducing short-haul flights by 10 per cent.

But the serious money will be saved by cancelling orders for new planes. Pilots have been told 16-year-old Boeing 737s will have to keep flying. BA’s future capital commitments of £4.8bn compare with a stock market value that has fallen nearly 80 per cent in three years to £1.4bn. Delivery of six Airbus A380s has been postponed until 2012 with the other six delayed for two years until after 2015.

The current year’s capital budget has been slashed from £725m to £580m, but debt has risen by £1bn over the past year to £2.3bn, and off the balance sheet is a rising pension fund deficit. A recovery programme agreed with unions three years ago that involved an £850m one-off contribution and will see another £180m payment this year has not closed the gap. It was £1.2bn last year but a revaluation currently under way will at least double the deficit and could take it to £3bn.

Directors were annoyed when Virgin founder Sir Richard Branson said BA should not be bailed out. Williams says: “After making inquiries, our directors have a reasonable expectation that the company has adequate resources to continue operating for the foreseeable future.”

But Walsh worries that today’s problems are not temporary. “The industry rarely recovers to the pre-crisis trend,” he says, looking back to when he entered aviation in 1979. “And even when it does – and the only example of that was post 9/11 – it takes a long time; in fact it took seven years to get back to trend. We see this as a structural shift in the business.”

Walsh considers consolidation a solution but his attempt to form an alliance with American Airlines is bogged in bureaucracy, his proposed union with Qantas came to nought and the year-long merger talks with Iberia have stalled. “Airline mergers are difficult, not impossible,” he says. “I’m under no pressure to pursue a deal.” He blames corporate governance issues but Broughton admits: “Our pension deficit is a concern to Iberia.”

BA has considered charging for catering, luggage or other services like no-frills rivals such as Ryanair, whose boss, Michael O’Leary, last week rubbed salt into BA’s wounds by claiming the “world’s favourite airline” tag. Walsh argues the extra revenue does not offset the long-term damage to the brand.

He is determined BA remains a “global premium airline” – despite the current shortage of premium paying passengers. Indeed, despite axing other flights from London City Airport, BA will in September start a 32-seat first-class-only service to New York, backing up the Paris and Amsterdam flight to the US city operated by its Openskies subsidiary.

September is a far away, however. By the time Broughton chairs this week’s shareholder meetings he may know the result of the Acas talks . “The next few months will be uncomfortable for everyone within our business,” says Walsh. That could include passengers as well as shareholders.

BA's timetable of woes

2003 Cabin crew wildcat strikes over pay and rotas

2004 Strike over electronic clocking-in by check-in staff costs £50m

Staff shortages and strikes leads to 1,000 August flights being cancelled

2005 Sympathy strikes by ground staff over dispute at Gate Gourmet on-board catering supplier causes cancellations, lost luggage and foodless flights

2006 New government-imposed security measures cause massive airport delays

2007 Baggage handling staff dispute and cabin crew strike ballot over pay and pensions cancel 1,300 flights

BA fined £275m for price fixing

2008 Pilots threaten Easter strike

Heathrow Terminal 5 fiasco and baggage handling failure causes 500 flights to be cancelled and delays others at £50m cost

2009 Cabin crews reject survival plan