Riding the bottom

BA: British Airways has become one of those companies that is trapped in an endless restructuring. Over the years, the UK airline has undergone successive rounds of cost cuts. The need for yet more is as urgent ever. Sales fell 14 per cent in the first half of BA’s financial year, but costs were not removed fast enough to avert a record pre-tax loss of £292 million. And that was in the normally buoyant summer months.

Willie Walsh, BA’s chief executive, is delivering the usual, sensible response: reducing manpower, delaying capital expenditure and cutting capacity. Non-fuel costs have fallen by £275 million so far this year, against an annual target of £220 million.

But such achievements will be too little, too late to prevent another big loss for the full year ending March 2010. BA expects revenues to be down £1 billion. Like its European peers, BA took too long to slash unprofitable routes in the face of falling demand.

Labour productivity is still one of the biggest challenges. BA made £3.97 per pound spent on employees in the first six months, versus £4.25 in the previous period. It is in a protracted tug of war with unions over plans to cut another 3,000 jobs by March 2010. Strikes loom.

If there is any good news, it may be that this is as bad as it gets for BA. Premium traffic, which accounts for nearly half of sales, now appears to be “stabilising”, having fallen for 14 consecutive months. That is usually a precursor to better ticket prices overall. The news was enough to send the shares up 6 per cent in morning trading on November 6.

But BA is still firmly in survival mode. Nor can it rely on M&A to pull it out of the mess. It is hard to see how it can conclude a long hoped-for deal with Iberia in this state, even if outline terms could be agreed soon. In any case, the Spanish carrier is losing money too. BA's proposed alliance with American Airlines and Iberia is being scrutinised by watchdogs on both sides of the Atlantic. The shares have fallen 15 per cent since a year-to-date peak in September, even after the recent rally. The stock's recovery is not yet around the corner.