Jeremy Warner's Outlook: Alarmist talk from British Airways' Willie Walsh

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The Independent Online

Willie Walsh, chief executive of British Airways, is not given to exaggeration, so when he says "we are in the worst trading environment the industry has ever faced", we are obliged to sit up and take notice. In his view, it's much worse than the aftermath of 9/11, the previous "worst ever", or even the recession of the 1970s, which was in any case a little way before the age of mass air travel.

Doth he protest too much in his attempt to explain why BA will struggle to make a profit at all this year? What makes the present turbulence so life-threatening is the comb-ination of cripplingly high fuel prices and a now precipitous downturn in consumer and business confidence. Lots of airlines will go to the wall in the coming shakeout, and the number of major carriers will be greatly reduced. Some airports are already demanding cash payments from smaller airlines for refuelling. What's clear is that the industry will look very different in two to three years' time.

Already seat load factor at BA is well down, even in premium traffic, which to begin with seemed to be relatively immune to the downturn. Even with hedging, fuel costs are 49 per cent up on a year ago, and eventually these hedges will run out of road, exposing the airline to the full force of the elevated oil price. To survive, Mr Walsh intends to jack up his prices again, even though this will further damage demand. Is this the end of cheap air travel?

Round at Ryanair, Mr Walsh's fellow countryman, Michael O'Leary, promises to cut prices in response to the downturn, not raise them. With the lowest operating costs in the business and €2bn in the bank, Mr O'Leary has all the firepower he needs to blast the competition out of the skies in the coming shakeout. But don't imagine his low prices are going to last forever. When the dust settles, and Mr O'Leary is the last man standing in the low-cost sector, he'll jack them up again.

British Airways, which is in a largely different part of the market, should similarly emerge the other side of the downturn as one of the winners. Winter capacity is to be shrunk by 6 per cent compared with previous plans, but Mr Walsh insists that at this stage there are no plans to ground aircraft. Nor will he be cancelling orders for new, more fuel-efficient aircraft. In an era of high energy prices, Mr Walsh counts his new aircraft as one of his competitive advantages.

Mr Walsh calls it the "worst crisis" he has known, but if British Airways can stay in profit until things get better, it hardly passes muster against the devastating losses BA has suffered in previous downturns. You can't help but think his comments are aimed at adding urgency to merger talks with Iberia, which is smaller than BA but at least has a pile of cash sitting on its balance sheet.

The worst ever? I guess we are about to find out.