Staff and fuel costs are too high as passengers fly “Anyone But BA”

Robert Lea
6 Nov 2009

Today's appaling figures from British Airways put the flag carrier on course for its second consecutive year of record losses.

The latest deficit comes in the week that Ryanair reported it nearly doubled profits over the same period to €387 million (£347 million).

BA is paying the price for running a “full-service” airline during a recession. Ryanair is reaping the rewards of a “no-frills” model attracting passengers on a budget.

But how fatally holed is BA? This week, travel writer Simon Calder said the flag carrier is suffering from the “ABBA effect”, that disenchanted passengers are now flying with “Anyone But British Airways”. Calder may only be scratching the surface, as ABBA's greatest hits bear witness:

Waterloo

Chief executive Willie Walsh is resembling Napoleon Bonaparte in 1815 and not just because he is the shortest chief executive in the FTSE-100.

Pugnacious and abrasive compared to his charismatic and conciliatory predecessor Sir Rod Eddington, Walsh is preparing to meet his Waterloo having picked another fight with the unions which could close BA down this Christmas.

Eddington's legacy to Walsh was an over-manned airline and Walsh is hell-bent on doing something about it.

Money, Money, Money

BA makes none of it. Especially compared to Ryanair which make so much money there is €2.5 billion of cash on its balance sheet.

The main reason is the historically high cost of fuel. For BA its fuel bill to and from far-flung airports is measured in the billions of pounds.

For Ryanair which flies only short-haul in Europe — and on a much newer, fuel-efficient fleet — kerosene costs are in the hundreds of millions of pounds.

The same can be said for staffing costs. At BA it represents around a quarter of its revenues compared to less than 10% at the Irish airline.

I Have a Dream

Walsh is on record as saying that BA is only a sustainable business proposition if it makes operating profit margins of 10% over the cycle of the aviation industry economy. In the biggest money-spending market of all time, the 2007-8 last fiscal year before last autumn's crash, BA just about scraped to that 10% holy grail.

Some analysts are saying BA may not be properly profitable again until the middle of the next decade. Walsh's 10% dream may just be that

The Winner Takes It All

Airline analysts predict that in pretty short order the world's carriers will gravitate to three global alliances: the Star Alliance dominated by Lufthansa, SkyTeam dominated by Air France, and Oneworld in which BA is a member. As Open Skies around the world allows airlines to fly wherever they want, it is Lufthansa which looks likely to be the world's “nummer ein”.

Hasta Mañana

The merger with Iberia was supposed to be a panacea for BA's ills, allowing it to obliterate costs and opening up new lucrative markets to Latin America. Well into its second year of negotiation, the merger still has not happened in stark contrast to the fast-tracked deals pulled off by Air France-KLM and Lufthansa and Swiss. And there is no sign of that American Airways deal either.

Knowing Me, Knowing You

Walsh has just passed his fourth anniversary in the job and so the City has got to know him pretty well. If the City loved volatility and uncertainty, British Airways would be the best-rated stock in the Footsie. They don't.

Investors want clarity and visibility of earnings — neither of which Walsh can offer.

Compare and contrast: loss-making BA's biggest problem is that it spends far more on staffing than its profitable Irish rival