They say a week is a long time in politics, but it seems the adage is ever truer when it applies the world of business after International Consolidated Airlines Group (LSE: IAG), owner of British Airways, said this week that a pilots’ strike on September 9 and 10 will now mean full-year profits will be 6% lower than 2018. Seemingly a year ruined in just 48 hours.
It is a good job then that the company managed to avoid further strikes later in the month. Worryingly however, the company noted a number of reasons why the industrial action racked up such losses. The most obvious of course, being lost revenue and compensation, but perhaps far more seriously was a hit to the British Airways brand and what it calls “adverse” booking trends.
Adverse booking trends
The phrase is, of course, an overly technical way of saying fewer customers are booking flights with BA. This is something that has arguably been on the cards for a while, most notably through increased competition from low-cost airlines.
In addition, British Airways received much bad press – and dismay from customers – after implementing a number of cost-cutting measures, such as taking away free meals and newspapers on its flights. This seems superficial, but raises the question, what does BA actually then that cheap airlines don’t?
It has traditionally had a strong brand and customer base. Generally speaking, the kind of passengers who fly British Airways, often on business trips, are not the same customers going for cheap holiday flights. This has served the company well in the past, as a buffer against the low-budget airlines.
However, the reduced level of service and cost-cutting efforts have really put British Airways flights much more on a par with those of easyJet or Ryanair. Luckily for BA in the past, many customers may not have actually realised this, flying BA as a matter of course.
However after the pilots’ strike forced many customers to make alternate arrangements, customers may now just see that there is not such a difference any more. The key difference is now the routes themselves, and particularly the airports they operate from.
The Thomas Cook factor
Of course, for UK airlines at the moment, the collapse of Thomas Cook dominates. With an estimated 30% of the UK holiday market now up for grabs, one may expect all rivals to benefit. However, here BA’s old-fashioned, expensive image (and actual expensive flights) comes in to play.
BA does not traditionally have the same customer base that Thomas Cook did. It is unlikely that many of its customers will now be looking at BA as a real alternative, with rivals such as TUI much more likely to take the lion’s share.
International Consolidated Airlines seems to be at a difficult point – the British Airways brand and flights are simply not what they used to be, but the company is still charging its customers as though it were. The more BA die-hards fly with other airlines, the more they will realise this. I think we are going to see a lot more negative numbers coming from IAG over the next few years.
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Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.