David Prosser: Fierce headwinds face British Airways' attempts to get back in the black
Friday 24 September 2010
Outlook Go Willie, go. The Iberia merger may finally be cleared for take-off, the pension scheme hurdle having been officially overcome yesterday, but British Airways boss Willie Walsh will be acutely aware of the turbulence he faces turning the fortunes of his business around. This, after all, is an airline that lost more money in the first quarter of this year than in the same period of 2009.
There were a couple of exceptional reasons for the scale of that loss – the small matter of the Icelandic volcanic eruption and the seemingly never-ending industrial dispute with cabin crew staff – but even leaving those aside, the outlook is bumpy. While Iata, the international airlines group, this week trebled its profits forecast for the global airline industry for 2010, it singled out one region as likely to incur losses topping £2bn: Europe. And where in Europe did Iata suggest the airlines' recovery was weakest? Step forward the UK.
Mr Walsh thinks an aggressive expansion of its global network will help BA to rise above the gloom. The Iberia deal will give it a much better exposure to the fast-growing Latin American routes, but BA is thinking about a dozen or so more transactions to step up the pace of expansion and diversification. Qantas is an obvious target in Asia, for example, while closer to home, Air Berlin might help the airline bridge the gaps in its coverage of central and Eastern Europe.
All sensible stuff, with the added bonus that consolidation brings lower costs as well as better exposure to fast-growing economies. The Iberia deal alone is forecast to save more than £300m a year within five years.
Still, the headwinds are fierce. BA is not alone in plotting consolidation and there will be rival bidders for many of the assets it fancies. Regulation, too, can be tricky, particularly with rivals such as Sir Richard Branson's Virgin Atlantic trying hard to whip up dissent. Other problems include the competitive threat from the cash-rich airlines of the Middle East, plus the ongoing industrial dispute. That festering sore, where both sides have been stubborn to the point of stupidity, needs remedying immediately.
Above all, however, it is the threat of slower than expected recovery from global recession that BA should fear. Overall, the first quarter was poor, but the underlying trading performance at least looked much better, with passengers finally returning, even in the posh seats. Any faltering of the world's return to growth will reverse those improvements.
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