Summary
British Airways' pension deficit is the matter of much conjecture. It is shortly to be revalued. Why then is there a significant influx of short players into BA? And what does this mean for BA's global ambitions?
Analysis
The article raises a number of good points - however it appeared before the JAL story hit the presses. Further the article did not address some of the many pressures BA faces on a wide array of fronts. BA may indeed be spread very thin at the moment.
BA faces a fair amount of pressure on different sides. Let's quickly recap what they are:
1. Its bread and butter business (premium travellers) have deserted the airline (actually all airlines) in droves resulting in a huge drop off in revenue and yield to which BA and other premium focused airlines have been disproportionately affected
2. The uncertainty of the Iberia agreement/merger, this has now been sitting in limbo for nearly a year. At the start of 2009 it was clear that the currency crisis of the pound vs the Euro had radically changed the economics of an Iberia merger.
3. The changing of chairs among the other players has left BA out in the cold several times: The loss of BMED and GB Air to BMI and Easyjet respectively, the Alitalia debacle, the merger of KLM and AF, etc etc has left BA as a marginalized player in the global stakes of consolidation.
4. The potential acquisition of the rump of BMI by BA.
5. The likely demands by the European Commission to have BA divest itself of some of its prime slots at LHR in order to effect the merger with IB will be compounded by the need to divest even more if any arrangement with American is to take place. Given the value of the slots at LHR - currently in the 40 million dollars range per slot pair - could cause pressure on BA's capital values and resulting debt grading.
6. Now BA , AA and Qantas - none of whom are particularly robust financially - are coming together to try and save the OneWorld Alliance by taking a financial stake in Japan Airlines (JAL). The Japanese carrier needs cash so each of these three airlines faces a cash requirement to invest significantly. For what can be regarded more as a defensive posture rather than a value add to the UK based airline.
7. Its pensions are under water and in deficit. Whether this improves or not compared to last year - does not belie the fact that the airline has a significant pension's deficit to account for. Something that the regulators are none too pleased about.
8. Staff unrest. Significant layoffs and staff cost reduction measures included earlier this year the airline banning all nonessential travel and even asking its staff to work for free. Future pressures to recoup some of this can only be expected based on BA's past fractious employee relations.
So if this was the background to any decision you would be making - surely it would be a tough call. BA cannot possibly hope to achieve success in all these situations. Which one would return the best value to the former UK flag carrier, perhaps should be looked at more on the home front rather than some of the more risky long distance opportunities that faces Willie Walsh and his team.
Timothy O'Neil-Dunne consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
