For over a decade British Airways has been the shining example of how a profitable airline should look. But it could be about to fall from grace. After a series of disappointing financial results, including a dismal profits showing for the latest June quarter, analysts think the group will be lucky to break even this year.
BA is fighting back, as it did early in the last recession, with a virtuous drive to cut costs and rein back growth. But are these latest cutbacks another example of wise foresight or more like a reflex reaction?
The extent of the drive was highlighted in August when an internal BA document called for the group to "find additional cost efficiencies of £225 million [$360 million] before the end of the financial year and a 12% cut in capacity over the next three years".
Tough talk
Even with this tough talk in the air, London's financial analysts remain to be convinced. "BA will do little better than break even this year," predicts Andrew Light at Salomon Smith Barney. Others are more bearish, with Chris Tarry of Commerzbank looking at an underlying net loss of £7 million for the current 1999/2000 financial year. "The world suddenly became difficult for them a year ago," Tarry adds, pointing to a mix of falling yields and excess capacity.
BA means to shed roughly l,000 jobs before the end of the financial year, mainly from its new headquarters near London Heathrow. A few hundred job losses will be middle management positions while the rest will be taken from support and administration staff.
"We're clearly unhappy about the situation but we should be able to accomplish this via voluntary redundancies and we've got until the end of the financial year to do this," says Paul Talbot, national spokesman for BA's white collar union, MSF.
The job cuts have been praised by some. James Halstead, analyst at Banque Indosuez, believes BA has been heavily "over-managed" as a legacy of its state-owned days. But a former BA senior manager warns that the airline has tended to count heads rather than look at salary savings. "BA has an obsession with head count rather than budget," he says. "Last time BA cut jobs there was a lot of fiddling of numbers to get the right headcount and a lot of giving back of approved slots that people had to fill".
But a current senior executive praises the cuts as a reaction to market conditions. "This is the sort of approach you have to take in a liberalised environment - matching demand with supply. We've got a record of acting first and fast and we're going to do that all over again. What you're seeing played out in front of you is a consequence of the city watching us and of demanding shareholders".
Halstead, for one, agrees: "BA has to retrench, to react to the strength of the sterling and the restrictions it faces at London Gatwick and Heathrow. Other competitors are also creeping up to the level that BA used to be at and threatening its premier position."
BA is clearly suffering from the shift of capacity 18 months ago from Asia to its lucrative North Atlantic markets. Thus the focus on raising yields and the premium class product. Earlier this year BA revealed plans to take Boeing 777s in place of the larger 747s it had on order.
But if BA does manage to regroup its mainline services around the premium cabin - that begs the question as to its next move in economy.
Frank Wade, analyst at consultants SH&E, predicts that the group will keep its premium brand in Europe but allow low-cost subsidiary Go and the regional Deutsche BA and TAT operations to take over the economy product. He adds that this does run the risk of "utter brand confusion".
The senior BA source admits that the group has " not decided yet about Go", especially the questions over its base at London Stansted. "You have to think how many points you can serve at Gatwick and Heathrow and whether some points aren't better served by Go or our franchise operators," he says. The jury is also out on a low-cost long-haul product, although he points to the liaisons that BA has had with charter airline Flying Colours. Ed Winter, chief operating officer at Go, firmly rules out his airline as any sort of a contender for longer-haul services.
Wade see the capacity cuts as part of BA's plans for the oneworld alliance, including its prospective transatlantic ties with American Airlines. The well-established partnerships with Cathay and Qantas also allow BA to operate a global network with less of its own capacity in play. "If any of the airline groupings were to position themselves as a high quality alliance, it would be oneworld," says Wade.
Some are not so convinced that BA's drive to cut costs this time around is a visionary precaution. "Last time BA cut back it was a forward-looking move, this time it's more of a reaction, a quick-fix to a situation," says the former BA manager.
| British Airways Consensus forecast results (£ million) | |||||
| Historic | Forecast* | ||||
| 1996/7 | 1997/8 | 1998/9 | 1999/0 | 2000/01 | |
| Revenue | 8,359 | 8,642 | 8,915 | 8,842 | 9,499 |
| Operating profit | 673 | 504 | 442 | 309 | 413 |
| Operating margin | 8.1% | 5.8% | 5.0% | 3.5% | 4.3% |
| Net result | 409 | 447 | 206 | 7 | 123 |
| Net margin | 4.9% | 5.2% | 2.3% | 0.1% | 1.3% |
Note: *Aggregate of analyst estimates in UK£ million. 1998/9 annual translation £1-$1.654
Source: Airline Business
