Aviation's bumpy ride
Last Tuesday could not have been a good day for BA executives. They had to negotiate a small but rowdy group of demonstrator as they arrived for their AGM in London and, inside the Queen Elizabeth II Convention Centre, they faced more heckling from shareholders.
But these events can not have been a surprise. The airline is aiming to cut 3,700 jobs, impose a two year pay freeze and change working practices. The demonstrators, largely BA staff who belong to the GMB union, fear for their jobs. The shareholders, meanwhile, have seen the carrier's share price plummet from 450p in 1999 to a current 132p at 1pm today (July 16).
BA is in trouble just like every other similar legacy carrier in the world. Its chairman Martin Broughton told shareholders that the airline was seeking to raise money through institutional investors. The sum required varies from £200m to £500m. The money is needed because despite having some £1bn in the bank, it is losing £3m a day through its operations.
This is a scenario which both Air France KLM and Lufthansa will recognise. The former has raised €661m through a convertible bond issue and the latter €750m also through a bond issue. Like BA, they have both cut capacity, squeezed costs, cut staff and reported losses.
Just this week, Lufthansa's new ceo Christoph Franz sent a memo saying he was looking for a 20% cut in staff in the medium term. That is twice the size that BA is seeking. If you are unfortunate enough to find yourself in a lift with an executive from just about any airline, he or she will tell you, before you have reached the first floor, that the industry is facing its worst ever crisis.
If the current set backs are merely part of the normal aviation industry cycle, the good times will return although perhaps later rather than sooner.
But there is a palpable fear among airline executives and travel analysts that these day will not return, that when the world emerges from the recession, things will be markedly different. If that is the case then Europe's big three legacy airlines really do have something to worry about.
This fear was starkly expressed by BA's ceo Willie Walsh at the AGM this week. He told shareholders, wondering no doubt where their investment had gone, that there had been a "structural shift" in the premium market, that fewer business traveller would be flying at the front of the plane and those that did would be paying less than in the past.
In case anyone missed the point, Mr Walsh added: "Hanging on in there and just hoping for old high-roller times to return is the road to oblivion."
To cope with this shift, Mr Walsh indicated he would be reducing premium seats on some planes by about 25%. For example, the 70 premium seats in its Boeing 747s operating on the routes to New York, Lagos and Hong Kong could be cut to 52.
But isn't this tantamount to cutting the airline's profit. When the good times roll and business travellers head left when they board a plane, that is exactly how BA and other carriers make their profits. If those seats are gone or reduced, where then will the profits come from? It isn't going to be from economy passengers.
There is no certainty that this will be the case. After all, the premium travellers have always returned in the past. Why should this time be different? But the monthly figures on premium travel from the International Air Transport Association (IATA) do make grim reading.
The May figures, released today (July 16) show a 23.6% fall in premium traffic compared with the same month last year. The decline follows a 22% drop in April and a 19.2% fall in the first quarter. Premium traffic has now dropped every month for a year.
ABTN has made the point several times that airline economics are not actually related to the real world. Any decent accountant given access to an airline's books is likely to be led away quietly sobbing.
So airlines which seem to ricochet from fabulous profits to dire losses will need to be very certain that there is a structural shift before they start cutting the number of premium seats. With each seat goes a part of their profit.
The great dilemma facing airlines and the industry is that no one really knows what will happen in the future let alone when or in what shape the good times will return - and that makes planning ahead supremely difficult. But if airline executives get their forecasts wrong or make a mistaken assumption, their carriers could be condemned to making losses for many years to come.