British Airways has announced plans to raise about £600m, as it battles to survive what’s likely to be its worst ever year. The UK flagship carrier admitted this morning that it racked up operating losses of about £100m during the three months to June – and with no sign of passenger numbers picking up, and the threat of industrial action looming ever larger, it’s no wonder it has decided to boost its war-chest. About half of this £600m will come from a bond issue, while the rest will (controversially) come from taking back guarantees to its heavily-indebted pension fund. Clearly the trustees have decided that it’s worth the risk if it saves BA from going bust...
Today’s financial forecasts, released early to justify the fundraising, show just how parlous a state BA is in. Revenues for April-June, the first quarter of its financial year, are expected to fall below the £2bn mark, a drop of about 12% - while a loss of £100m would represent its worst ever first-quarter performance. This time last year it managed to turn a profit of £35m – and even then it slumped to a £400m loss for the year as a whole. Cost-cutting is now the priority for CEO Willie Walsh; he’s already persuaded his pilots to take a pay cut, but a deal with his 14,000 cabin crew (who in fairness earn an awful lot less) could prove more difficult. Strikes look likely, which will presumably hammer BA’s profits even further.
Walsh’s plan – apart from the cuts – is to boost the airline’s cash position. BA is selling a five-year bond, which pays out interest of 6% and can be converted into shares once the stock price hits a certain level. No surprises there; but the more controversial aspect is this deal with the pension fund. We should stress that BA isn’t actually taking any money out of the pot (which is a good job, since it’s already an eye-watering £3bn in deficit). Instead, it’s taking back £330m in guarantees that it’s been paying to the fund as an insurance policy for benefit payments in case it goes bust. But as the trustees have clearly realised, life will be a lot easier if BA can avoid going bust in the first place – hence the return of the cash.
All being well, this fundraising (on top of ticket sales and so on) should leave BA with about £2bn in liquidity, which it hopes will be enough to get it through the turbulence. It’s another chastening experience for Walsh, particularly since rumour has it that he’s already trying to flog BA’s loss-making OpenSkies subsidiary (which has only been going for a year – not an impeccably timed launch, that one). But investors seem to like it, judging by the bounce in BA's share price this morning. He may have just bought himself a little more time...
In today's bulletin:
Battered BA seeks £600m cash after record loss
Editor's blog: It's no time for a lynch mob
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