INVESTORS SHOULD OPT TO REMAIN IN THE BA DEPARTURES LOUNGE; COMMENT;
16 July 2008Angela Jameson
Apologies are easy, especially if, like British Airways, you are repeatedly in the public relations dog house. And at yesterday's annual meeting, both Willie Walsh and his chairman Martin Broughton were quick with the guilty pleas on a range of mishaps and cock-ups - most notably Terminal 5 - in the hope, no doubt, of receiving a lighter sentence.
But yesterday's humiliations are nothing to today's shareholders. What they really wanted to hear was how the airline is going to make any money this year, with oil soaring to the hitherto unknown altitudes of $140 a barrel.
The answer they got was hardly reassuring. Management conceded that it would be a "considerable achievement" to break even this year. BA has outlined plans to cut 3 to 5percent of its capacity this winter, taking its least fuel efficient aircraft out of service. It has already put up fuel surcharges and has raised fares for business and first-class passengers. Higher core fares are next on the agenda as the airline tries to pass on its rising costs.
However, there are fears that passengers will shun air travel if fares accelerate too quickly. June's passenger statistics showed that traffic is falling, especially from the United States, although British sales have held up surprisingly well. But given that the UK is following the US into a downturn, BA's prospects look set to worsen.
Of course, all airlines are hit equally by soaring fuel costs and BA is, in many ways, well placed to deal with this problem. It is better hedged than it has been in the recent past, with 75 per cent of its fuel for this year hedged at $90 a barrel and 35percent of next year's.
Its debt position is also better than many of its rivals, particularly the US airlines, with gearing at only 21 per cent. Another positive is that it carries more business traffic than its rivals, which is usually less price sensitive.
Perhaps, more significantly, the regulatory environment seems to have improved. A second "open skies" agreement between Europe and the US is in the offing and talks with American Airlines to revive the transatlantic revenue and capacity-sharing plans may have a better chance of success in these straitened times. The benefits of securing an AA/BA alliance and then another with Iberia could result in costly half-empty flights across the Atlantic being cut. That would lead to lower staffing costs and would probably allow for other cost-savings at US airports.
BA's share price in the last downturn fell from a peak of 760p to 86p in 2003. The fall was precipitous because of the gearing effect of BA's then hefty debt. Things are different this time. A tough climate will encourage greater discipline at BA.
Although it is still too early in the cycle to buy the shares, BA should recover faster than its rivals. However, avoid for now.
(c) Times Newspapers Ltd, 2008
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