Summary
The first summer loss since it’s privatisation is not a surprise - British Airways has been on a downward spiral for a while and now it is time to pull it out of that nose-dive.
Analysis
There’s no question that British Airways’ first half results make for poor reading, despite nudging down its debt mountain.
With revenue down a whopping 20%, the high yield, high fare dependency model is one that the British Airways executive team has to move away from. It comes as no surprise that British Airways has again decided to push back its A380 deliveries to 2013, just four months after deferring them the last time around (click).
Even the October YoY figures underscored just what the problems are at British Airways and that’s before we consider the union posturing itching for industrial action.
Despite pulling ASKs down near 6% and 23% for North America and Asia, only the former showed any positive revenue increase while Asia still torments the yield erosion that continues to destroy income for pretty much every major full service carrier across the globe.
Then you look at the yield deterioration (before exchange) and the 18% figure is a frightening one – and it should be frightening for those staunch union leaders too who believe that forcing British Airways management into capitulation over their demands for changes to working practices. If those labour changes are not enacted, a bigger axe will fall across the entire business when headcount has to be shrunk and not through attrition either.
The worrying feature of British Airways’ numbers is also fuel costs. Despite being down nearly 18%, the LBT of £292m makes you wonder just what is being done wrong and where the airline is bleeding money.
British Airways may argue that its premium traffic declines are better than the IATA average, but dissect the numbers and you find that the double-digit yield falls in British Airways’ routes to Asia and you’ll see that it is becoming a burden. It is this region where the A380s would be deployed – it is this region that has seen most of the A380 order book being deferred and it is that airplane which is the most susceptible to yield changes that no matter what a salesman says, the A380 cannot and will not ever “break-even” at 65%.
Now that the bad news has been made known, the real two key interim tests of Willie Walsh and his team will be to quash any strike action and by spring next year, verifiably demonstrate a turnaround in the business.
Standing down sixteen airplanes during winter will not achieve that goal – nor will a merger with Iberia yield synergies that quickly. Anti-trust immunity between itself and Iberia and AMR’s American Airlines will certainly help shape policy towards a more organic growth and enhanced competitiveness by using the strong base it has at Heathrow to leverage its business goals.
If any of these challenges and deadlines are missed, serious questions must be asked as to whether British Airways has the right management team to deal with the carriers problems – they’ve had ample time to see that the industry was heading for a slow down and were equally slow to react to it – do they have the impetus and stamina to turn things around?
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
