Strategy & Operations

2008 was a year of turbulence for British Airways: the UK flag carrier said today that it made a pre-tax loss of £70m in the last nine months of the year, a stark contrast to the £816m profit it posted in 2007. BA blamed the weak economy and the collapse in sterling for the losses, which have reduced demand and margins all at the same time. And there’s more pain still to come: as he faces up to a full-year operating loss of £150m, CEO Willie Walsh says he’s opened discussions with the unions ‘about pay and productivity’. That’s unlikely to go down well...

BA got hammered from every direction last year. The economic climate meant that fewer people were buying plane tickets, particularly the business-class seats that account for a large proportion of the company’s profits (and this got even worse last month, with sales 14% down on the previous year). The rising oil price pushed fuel costs up more than 40% during the period, while non-fuel costs jumped 8%. And all this was exacerbated by the weakness of sterling – BA pays for lots of stuff in dollars but measures performance in pounds, so even though costs are starting to fall, it’s not getting the full benefit.

At least passenger revenues were up – 6.2%, to be precise, although this was less to do with volumes (which were down 2.4%) and more to do with higher prices and the impact of selling more tickets in countries with a respectable currency. In fact, Walsh said BA was going to focus this year’s marketing on these lucky locales, to maximise ticket revenues. But with a £150m loss looming, the CEO clearly feels more urgent action is needed. He’s already cut about 1,400 middle-management positions recently – now it sounds like more jobs could go and even those who stay are likely to be looking at a pay freeze, according to reports. And he’ll also be looking for any other extraneous costs that can be chopped (which could make it an uncomfortable place to work).

Some of these figures may sound pretty gloomy, and the outcome of its merger talks with Iberia remains unclear (its Qantas talks have already collapsed). But at least today’s projected loss was no worse than previous forecasts, and at least Walsh seems willing to take decisive action to bolster BA’s bottom line – hence why the airline’s share price is up 5% this morning. Investors are betting that BA will emerge as a leaner, meaner business, in good shape to profit from the recovery. At which point maybe they’ll need some of those middle-managers back...

In today's bulletin:
Company bankruptcies rocket as recession bites
BA losses soar - and more cuts loom
M&S tax victory takes the biscuit
MT's Week in 60 Seconds
Lessons in perseverance, from YouTube