BA is facing a record pension deficit and strike action by cabin crew.
Suppose you are employed by a company that is in big trouble -- failing to compete, losing money hand over fist, heavily in debt, and with a huge pension fund deficit.
Now suppose that your company serves the public directly, and for its survival it is going to need every regular and loyal customer it can get. What do you think the best thing you could do would be? How about going on strike during one of the company's busiest periods?
If you're like me, you might think that would be cutting your own throat, by adding to the company's woes and hastening its demise. But that's exactly what cabin staff at British Airways (LSE: BAY) have chosen to do, after voting nine to one in favour of a 12-day strike over Christmas, set to run from 22 December to 2 January.
How bad is it?
What kind of state is BA really in? After seeing profits rise quite nicely in the boom years leading up to 2008 (a year in which it recorded a pre-tax profit of over £870m), BA has gone into rapid reverse. A pre-tax loss of £400m was recorded for the year ending March 2009, after the recession led to a great reduction in high-priced business travel, which has traditionally been a lifeline for BA.
That has since been followed by a pre-tax loss of £292m at the 2010 half-way point in September. And the second half looks likely to be worse, with analysts having pencilled in a full-year pre-tax loss of around £615m -- and that's before taking into account the effects of the strike, which could hit up to a million passengers over the 12 days, and could cost BA up to £10m a day.
A look at BA's debt situation is also pretty depressing. With net debt standing at nearly £3bn in 2005, the company steadily chipped away at that, getting it down to under £1bn by 2007. But that crept back up to £1.3bn in 2008, and ballooned to more then £2.3bn by March 2009, a figure that is larger than the company's total market capitalisation. By the time of September's half-year results, the debt figure was still around that level.
Pension woes
As if all that wasn't enough, BA is also struggling with a serious pension fund deficit. It has seen the shortfall between the value of its assets and its future pension payout obligations grow by 76% in the past three years, to stand today at £3.7bn, dwarfing the value of the company itself. BA currently has two final salary schemes, its Airways Pension Scheme, which is showing a deficit of £1bn, and its New Airways Pension Scheme, short by £2.7bn.
The recession has had a damaging effect on the BA's fund assets, with falling stock prices and falling interest rates knocking a fair chunk off their valuation. That will be reversed to some extent as world economies get back on track, and interest rates start to rise again, but the Pensions Regulator is apparently of the view that the funds' values are materially below an appropriate level.
BA now needs to formulate and agree a plan with the regulator by 30 June 2010.
Belt-tightening
The company is clearly in dire straits and desperately needs to cut costs to survive. According to a statement from Chief Executive Willie Walsh, BA's pilots have accepted pay cuts, its engineers have agreed on efficiency improvements, a third of its managers have accepted voluntary redundancy, and nearly 7,000 employees have volunteered for salary reductions to help save the company.
But cabin staff, through the agency of their union, Unite, are having none of this, and are walking out rather than accepting BA's cost-cutting proposals aimed in their direction. But what sacrifices are they being asked to make?
BA has reduced the number of cabin crew on long haul flights from 15 to 14, has imposed a 2-year pay freeze, and has proposed new contracts for fresh recruits and new promotions. Is that unfair treatment? Well, BA cabin staff are some of the best paid in the business -- according to the Civil Aviation Authority, the average costs of BA crew are twice those of rival Virgin Atlantic. So it hardly looks as if they're being hard done by.
It's still possible that the strike might be averted, but if not, the action is going to harm customers, it's going to harm shareholders, and it's going to harm the cabin crew themselves. If BA can't cut its costs, a lot of them are going to lose their jobs, and could easily end up at the other end of the pay scale, scrabbling for jobs with other airlines.
Would I touch BA shares? A phrase concerning bargepoles springs to mind.
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