British Airways has just unleashed a bombshell of a trading statement.
Further economic weakness in January and the outlook for February and March combined with the fall in sterling, are impacting our outlook for the year ended 31 March 2009.
Revenue guidance for the year remains unchanged as being up at least 4% year on year with yields benefiting from exchange more than offsetting volume declines. Traffic volumes remain in line with the market.
However costs are being equally impacted by foreign exchange and non-fuel costs are now expected to rise by 8% year on year compared to our previous guidance of 5%.
Fuel cost guidance is largely unchanged at around £3 billion as the lower price of fuel is being offset by a lower fuel hedging benefit for the year and currency impacts.
The results for the third quarter to 31 December 2008 are expected to show an operating loss of around £50 million which is after a £56 million non-cash charge relating to the retranslation of certain foreign currency obligations.
At current exchange rates the year to 31 March 2009 is now expected to be an operating loss of some £150 million.
That’s very much at odds with previous guidance given in November of “a small operating profit” and it rather puts paid to BA’s strategy of attempting to offset a global recession by boosting average ticket prices, or yields. Airline fares, we noted last week, rose over 30 per cent in month-on-month and year-on-year terms in December — far outpacing overall consumer price inflation of just 3.1 per cent. With BA shares down 8 per cent on the above news, further capacity cuts and aggressive cost-cutting now look to be a certainty at the carrier.
Independent airline consultant Chris Tarry, incidentally, has picked up on the range of strategic options facing airlines in his January commentary for IATA:
Whilst gloom abounds at the moment the reality is that there will still be a demand for air travel after this downturn and the real issue is what the shape and size of the industry will be and the nature of the adjustment process to get from “here to there”. In this respect against the background of falling demand and revenue the challenge is to take capacity and cost out of the market quicker than the speed at which traffic is falling – but is a “shrink to survive” strategy the only one that will work? The answer is no – as indeed for some airlines such an approach would represent shrinking to oblivion. In economists terms the market has moved away from what was not a particularly profitable position of equilibrium into one of unstable disequilibrium; there will be a whole series of adjustments and movements before the industry is again in balance …
Related links:
Flying like it’s 1991 – FT Alphaville
Flying forces – FT Alphaville