British Airways must up 'run rate'

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Economy
Written by Gary Howes   
Wednesday, 10 June 2009

Brokers Collins Stewart say labour costs and mergers key to future share price.

 

Stock brokers Collins Stewart have said that it is crucial that British Airways (LON:BAY) lowers its cost base in order to improve its standings on the FTSE.

The warning was issued following the news by the Civil Aviation Authority (CAA) that British Airways is paying its cabin crew significantly higher wages than its competitors.

To highlight the extent of difference it can be shown that the British Airways cabin crew earns double the salary of those working for Virgin.

Collins Stewart say current trading is dire; premium volumes are down 15-20% with yields under pressure.

"At the current run-rate, revenues are on course to fall by £1bn this year. The £400m fuel cost reduction is a helpful offset, but significant non-fuel cost saves are needed. The short-term target is cash flow stability; this is unlikely this year," reads a memo released this afternoon.

Negotiate with staff


Negotiations with staff over changes to pay and conditions are key. There are a range of legacy issues which need to be eliminated for BA to rebuild returns.

Willie Walsh has set end June as a deadline for staff to agree to pay cuts and job reductions.

So far the ground staff and cabin crew are unreceptive and speculation has started to grow within the media that there is the possibility of significant industrial unrest over the next month.

Share price outlook hinges on labour cost savings and mergers


In an advisory to investors Collins Stewart say:

"Short-term trading prospects are bleak; traffic comparatives only begin to improve in the Autumn. If management can conclude satisfactory labour agreements this month, BA has a fighting chance of stabilising cash flows and positioning itself as a survivor; if not, it would be difficult to be optimistic about the outlook.

"Mergers with Iberia and American will also help transform the business, if agreed. Combined synergies on Iberia are estimated at £400m and American synergies would be much bigger than this. Excluding mergers, default Quest value has fallen to 74p. Assuming these deals happen returns rebound and we get to 214p. 

 
 
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