Grounded? Fight to steer British Airways back on course to profits

Even before last week's terrorist attack on America, British Airways was going through turbulent times. Now its transatlantic market is in disarray, costs are rising and thousands of jobs are threatened. Can the chief executive, Rod Eddington, keep the world's favourite airline on course?

Less than 30 minutes after the devastating terrorist attack on New York and Washington last Tuesday, a small group of British Airways executives gathered in crisis session at its offices on the fringe of Heathrow airport, London. Chairing the meeting was Rod Eddington, BA's chief executive. He was flanked by five members of the airline's operations control incident centre or OCIC team, which convenes for emergencies. Those present were BA's director of flight operations, Lloyd Cromwell Griffiths, the director of technical operations, Colin Matthews, the director of marketing and communications, Martin George, BA's general manager of operations, Geoff Want, and its general counsel, Robert Webb.

As the live television pictures relayed the full extent of the carnage inflicted on New York and Washington by the hijacked planes, and the Bush administration grounded all flights to the US, Mr Eddington and the rest of the OCIC group began plotting BA's response to the gravest threat it has faced since the Gulf War a decade ago.

The immediate task was to account for then divert the 22 BA planes in the air heading for the US. That done, the team began to assess the longer-term damage. Within 24 hours, an "economic impact team" under BA's new finance director, John Rishton, had begun to determine how badly the airline would be affected by the suicide plane attacks on the World Trade Centre and Pentagon and what action BA needed to take in reply. Any day now, perhaps as early as tomorrow, the airline's 62,000 staff will find out. The news will be grim. "We need to adjust our operation and we need to think carefully what that means for jobs," Mr Eddington said yesterday.

Based on the crisis measures taken by Virgin Atlantic and rival carriers in the US, BA seems certain to cut transatlantic capacity by at least 20 per cent, and ground some of its 374 aircraft. Union leaders were called in this week to be briefed on the impact this would have on jobs and, although no figures were given, there could be up to 10,000 redundancies, including the 1,800 job losses BA announced a fortnight ago.

For the world's airlines, the atrocities in America have made difficult times far worse, buffeted as the industry already is by a downturn in key markets such as the transatlantic and the looming threat of a global downturn. For BA, its long-cherished hopes of sealing a transatlantic merger with American Airlines have almost certainly been dashed, since this required agreement on an "open skies" deal between the US and UK by the end of the year.

No one knows how much worse things may get, because a great deal rests on precisely how the US and its allies choose to prosecute the war against terrorism. Chris Tarry, transport analyst with Commerzbank, says: "The outlook is uncertain, unpredictable and unforecastable." His counterparts at ABN Amro are equally unsure, warning that the earnings visibility of BA "which is traditionally opaque is now effectively zero".

BA's share price has taken it on the chin. Since last Tuesday, it has fallen to £1.74, 35 per cent lower, and now stands at just a third of its high for the year, valuing BA at £1.9bn and putting it in severe danger of being ejected from the FTSE 100 blue-chip index. Even before the atrocities, BA's house brokers had slashed their forecast from a £150m profit for the airline this year to a loss of £65m. Now all bets are off.

In the week since the attacks, Amadeus, the giant airline reservations system which handles 400 million passengers a year, says worldwide bookings are 28 per cent lower and US bookings are down by a thumping 74 per cent. The US airline industry is forecast to lose between $5bn and $7.5bn this year, and sack 100,000 people.

The financial impact on some carriers is likely to be terminal. Ansett, Australia's second-biggest airline, went into receivership last week, and Continental, the fifth-biggest in the US, warned this week that it could be forced to seek Chapter 11 bankruptcy protection before November. Ominously, Continental has already delayed making $70m in aircraft financing payments this week and will be in default if it does not make them by the end of next week.

Sir Richard Branson says Virgin Atlantic, which was losing £2m a day last week when all flights to the US were suspended, has enough cash to last it through the winter. Commerzbank's Mr Tarry estimates BA has around £450m in free cash, in addition to its credit lines, which should be more than enough to survive on. "No-one can predict how bad it will get but I do not believe BA will go bust," he says.

The problem for BA and its fellow airlines is that there really is no precedent for what happened last Tuesday, not even the Gulf War. In 1991, when Operation Desert Storm began to drive the Iraqis out of Kuwait, the immediate effect was a 24 per cent decline in transatlantic air travel. The Americans assumed the Gulf was next door to Europe and voted with their feet. This time, analysts believe the "fear factor" induced by the way the terrorist attacks were committed, will deter more people from flying on anything other than essential business. They also warn that the bounce-back in air travel the industry experienced within months of the Gulf War ending, may not be repeated this time.

For BA, it is difficult to overstate the consequences. The Americas account for about a third of BA's turnover and 40 per cent of its capacity but 140 per cent of its profits. Even 20,000 job losses might not be enough to bring its costs into line with the potential fall in traffic numbers and revenues. The Bush administration has recognised the steep decline in activity facing its airlines and is preparing a financial aid package, perhaps eventually worth up to $20bn. This consists of $2.5bn in direct aid and at least $12.5bn in loan guarantees to enable the industry to remain solvent. In addition, legislation is being debated which would suspend the tax liabilities of US carriers for an extended period.

Scant surprise, then, that UK airlines are seeking a similar safety net. A delegation of three airline chiefs, Mr Eddington, Virgin's Sir Richard Branson and BMI British Midland's Sir Michael Bishop, yesterday met Stephen Byers, the Secretary of State for Transport, to discuss the security and financial implications of the terrorist attack on their operations. Afterwards, Mr Eddington said: "We are very conscious that other airlines around the world will get support, airlines who are competitors of ours both individually and collectively, and we want to compete on a level playing field."

The indications are that the UK government will resist a huge bail-out package for the industry. No specific request for aid was made yesterday. The only subjects touched on were the costs involved in tighter aircraft security and the possibility of suspending the airport tax on passengers introduced two years ago. Although Mr Byers's attitude was said to be encouraging, one of those who was at the meeting said: "Encouragement does not amount to a cheque in the post."

Mr Byers raised the prospect of El Al-style security measures becoming the norm, with armed air marshals on board every flight, longer check-in times, and far tighter cockpit security. But he seems to have accepted this is not feasible. One airline chairman said: "El Al is a tiny airline by international standards with a particular security threat. You would bring the airline industry to its knees if you tried to replicate the kind of security they have."

In theory, BA should be better prepared for a downturn in transatlantic traffic than other carriers. Two years ago, it started a capacity-reduction programme that will have reduced the number of seats on its aircraft by 18 per cent by spring, 2003. It has also been more ruthless than most in cutting costs and reckons to have saved more than £1bn in efficiency since 1997.

But in practice, the impact of the terrorist attacks will be crippling because of BA's dependence on the North Atlantic market, a reliance outmatched only by Virgin, which generates 60 per cent of revenues and passengers from services to the US.

Whatever package the Government does come up with, more companies than just BA and Virgin will be assisted. Sir Michael Bishop estimates that short-haul passenger numbers are down by perhaps 15 to 20 per cent compared with previous levels. The civil aircraft industry has also been affected. BAE Systems, a 20 per cent shareholder in Airbus Industrie, has cut its forecast of aircraft deliveries next year to between 350 and 370.

And the share price of the aero-engine maker Rolls-Royce slid by more than a quarter since the atrocities, though civil engine sales account for only 35 per cent of its business.

Given the general fear of travelling engendered by the suicide attacks, Commerzbank's Mr Tarry doubts whether BA will be able to attract passengers back by cutting prices.

In the US domestic market, one of the world's most cost-competitive, traffic levels have fallen off a cliff. Indeed, if anything, the pressure is on BA to raise prices to pay for the increased security costs it faces. Small wonder then that those analysts who are prepared to forecast the future of BA and its fellow flag carriers present a bleak outlook.

As a spokesman in one New York bond rating agency said yesterday: "This is going to be the most challenging environment they [BA] have faced. It will probably take them several years to recover."