Ayling flies into turbulent skies

BA's chief executive faces searching questions over airline's future
Click to follow
The Independent Online
IT'S GOING to be a bad case of Monday morning blues for Bob Ayling. The chief executive of British Airways is to meet City analysts and journalists following the publication of the airline's interim results. While the results in themselves are expected to be respectable, Mr Ayling can expect some tough questions regarding the airline's future - and maybe his own.

Analysts expect the company to post a rise in second-quarter net profits of around 16 per cent to about pounds 244m, from pounds 210m in the same period last year. But profits should be up. Last year, a strike by cabin attendants knocked pounds 110m off of BA's net earnings. Given that the aviation market was fairly robust, and that oil prices were at historical lows, you can bet City analysts will tell Mr Ayling he could have done much better.

But a less-than-stunning financial performance in the second quarter of the year was not the only trigger for a downgrading of earnings estimates on BA's annual results last week. City brokers are concerned about falling business class travel revenue, caused by slowing global economic growth. The tell-tale signs were in BA's October statement on traffic and capacity. While the number of passengers rose by 0.3 per cent compared with last year, the number of business passengers - the biggest spenders - fell 2.4 per cent. That is because a number of BA's biggest customers, such as the investment bank Merrill Lynch, are cutting costs by ordering their staff to fly economy. Higher grade seats account for 15 per cent of passengers but 40 per cent of revenue. The airline is also continuing to feel the pinch of the strong pound.

And while BA's shares may have undergone a temporary rise when the company announced it was scaling down its planned alliance with American Airlines last week, the defeat of BA's strategy cornerstone added to the negative sentiment on BA's stock.

"Their international strategy is in tatters, oil prices are going to go up and sterling is still strong," said Alistair Gunn, airline analyst with Credit Lyonnais Securities. "That's why everyone is cutting their forecasts." BA shares closed the week down 10.5 pence at 453.5.

BA said last weekend it wants to phase in its alliance with American over five years because the price that EU regulators demanded to approve the alliance was too high. Brussels ordered BA to give up - for free - 267 transatlantic take-off and landing slots. If the economic climate had been better, that may have been acceptable to BA, especially if it had been allowed to sell those slots. However, because of the downturn, BA decided it was a safer bet to batten down the hatches and create a "Fortress Heathrow".

BA said it would merely tighten its marketing ties with AA, such as linking frequent flier programmes and sharing airport lounges.

However, US regulators are expected to give even the most modest arrangements a hard time. From now on, the Oneworld alliance with American, Canadian Airlines, Cathay Pacific and Quantas seems set to be the focus of BA's strategy. But the march has been stolen on BA by the competing Star Alliance, led by Lufthansa and United.

A worsening business climate for BA is likely to spur a call by analysts and investors for Mr Ayling to speed up his cost-saving programme. He has said he wants to make pounds 1bn in savings by March 2000. However, it was his rough handling of the cost-cutting programme that triggered last year's strike. According to City analysts, and calls made to this newspaper over recent weeks, morale among BA staff reamins low.

Even though he has the reputation for being more diplomatic with analysts than his predecessor, Sir Colin (now Lord) Marshall, Mr Ayling will have a tough time answering questions on Monday.

"The underperformance of the share price and the downturn in profitability at BA has coincided with Ayling being appointed chairman," said one disgruntled BA analyst.

To be fair to Mr Ayling, Lord Marshall was always going to be a tough act to follow because he stepped down when BA's performance was at its peak, and things could only get worse. However, Mr Gunn said: "BA didn't capitalise on the good times. As the economy goes into a downturn, they still haven't solved a lot of problems."

While a BA spokesman dismissed as "nonsense" speculation that Mr Ayling's days at BA could be numbered, you just cannot help wondering.