Page last updated at 15:30 GMT, Monday, 9 November 2009

British Airways' rapid descent

By Joanne Babbage
Business reporter, BBC News

Willie Walsh
BA chief Willie Walsh is facing a massive challenge

When British Airways' chief executive Willie Walsh agreed to work for nothing in July, in a show of solidarity with the 800 workers who BA say volunteered to do the same, it was obvious that the recession was hitting the airline harder than it would care to admit.

True, the move was not the first sign of trouble at the airline, but it was obvious that the situation was getting increasingly tough.

During the six months to September 2009, the company suffered a £292m ($485m) loss, compared with £52m profits during the same period a year earlier.

These are the worst first-half losses in the company's history.

BA also said it would cut a further 1,200 jobs, bringing the global workforce reduction to 4,900 positions by March 2010.

High cost vs low cost

So, where did it all go wrong for BA and is the recession wholly to blame?

BA is dependent on high cost fares and some say it has been slow to respond to changing consumer demand.

BA profits

More and more air travellers want low-cost fares, especially business travellers, traditionally BA's core customers.

These customers are the ones who are taking advantage of the new routes to Europe offered by the low-cost airlines such as Ryanair and Easyjet.

The loss of business passengers is potentially fatal to the future of BA, according to analysts.

"If its most profitable business passengers don't come back in the numbers, and paying the prices they were paying before the economic slowdown, then BA's current operating structure and cost levels will in no way guarantee its survival for the future," says John Strickland from JLS Consulting.

Faced with the competition, British Airways seems to be experimenting with cost-cutting and surplus charges, such as not serving food on all flights - those that last less than two-and-half hours after 10am - and charging passengers who want to place a second bag in the hold.

BA has not gone as far as charging for food, which some budget airlines have done, but analysts argue that these measures will possibly not be the airline's last.

"You have to wonder just how far BA's new pricing regime will go in the pursuit of generating revenue to stem the losses," says Saj Ahmad, from Gerson Lehrman Group.

Jobs

BA Share prices

The 1,200 job losses announced with the half-year figures are just a drop in the ocean, according to Mr Ahmad.

"You can expect five or six times that number. It's why BA is at loggerheads with the union."

BA is currently locked in a battle with the Unite union over changes to the workforce.

The airline wants to cut the number of cabin crew staff on its long-haul flights from 15 to 14, with the change coming into effect on 16 November.

It also wants to bring in a two-year pay freeze, saying the changes are essential to its survival.

Unite has taken its objections to the High Court where it wants the changes blocked.

The legal challenge has been delayed until next year, so in the meantime Unite says staff will "unwillingly" work the new schedules but it will still ballot for a strike.

A BA plane
BA has a higher cost base than other airlines

BA's 14,000 cabin crew are well-paid in industry terms, according to a survey for the Civil Aviation Authority, which suggested they earn twice as much as rivals on Virgin Atlantic.

The average pay for a BA crew member is put at £29,900 a year, including bonuses and allowances, compared with just £14,400 at Virgin Atlantic.

Insiders claim some BA cabin crew earn much more than the average, with a senior crew director on a long haul flight getting paid about £60,000 a year.

BA has warned that it is in a battle for survival, and it must restructure and permanently reduce its cost base.

Pensions

The position of the company's two final-salary schemes is another sore-point.

In the past six months the surplus in one scheme fell from £860m to £27m and the deficit in the other grew from £1.167bn to £2.66bn.

In order to balance the schemes BA will have to increase payments into both, something its obliged to do but which it will inevitably find difficult, although the company says it is managing.

British Airways is facing a difficult future in an industry ravaged by the recession, and Willie Walsh faces a tough battle to turnaround the situation.

"Is he even the man to start this rejuvenation?, " asks Mr Ahmad.

"Questions will certainly be asked of his tenure if the second half earnings next spring are just as bad."



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