The FT story:
BA maps out its pensions flightplan
By Kevin Done,Aerospace Correspondent
Published: January 5 2007 23:41 | Last updated: January 5 2007 23:41
British Airways has agreed a further major increase in its annual pension contributions to secure the backing of its trades unions in a breakthrough deal last night.
It is making a one-off cash contribution of £800m, subject to fund members also accepting reductions in pensions benefits, and has agreed to make annual contributions of £280m a year, up from the £272m proposed in November.
It has been forced to move a long way in negotiations; first with its pension fund trustees and then in talks with the unions from its first proposals tabled early last year, when it put forward a one-off cash injection of £500m and annual contributions of £235m. BA will also pay an additional £50m a year for the next three years depending on the group’s financial performance.
The £800m injection will be paid out of the group’s cash balances, which totalled £2.6bn at the end of September. The three annual payments of £50m will be paid as long as BA’s year-end cash balances are above £1.8bn.
The £800m will be paid in two tranches, £250m this month and £550m in April in order to secure the maximum tax benefits. The £800m payment will be tax-deductible and will have a net cost for BA of £560m.
The deal will involve employees contributing a one-off saving of £400m by agreeing to a 2.5 per cent cap on future pensionable pay increases, which, together with the cash injection, will reduce the actuarial deficit from the current £2.1bn to £900m.
The remaining deficit is due to be eliminated during the next 10 years through increased company contributions and changes to benefits, which include a higher retirement age and a lower cap on annual increases in pensions.
Previously, the proposals have centred on staff accepting cuts in future benefits, including an increase in the normal retirement age of 10 years for pilots and cabin crew from 55 to 65 and from 60 to 65 for ground staff.
The main pension fund will remain a final salary defined benefit scheme for existing members, but the scheme was closed to new members in 2003.
Last night the Transport and General Workers Union said that BA’s four main unions had agreed to recommend “changes to future benefits” to secure the cash contributions from BA. The changes would provide “a choice of benefits at differing levels of contributions”.
and:
BA in pensions deal with unions
By Kevin Done, Aerospace Correspondent
Published: January 5 2007 23:24 | Last updated: January 5 2007 23:24
British Airways reached agreement on Friday night with its four main trade unions on a package of reforms to eliminate the £2.1bn deficit in its pension fund over the next decade.
The deal, which will be recommended by the unions in a ballot by the workforce, ends 16 months of negotiations and lifts the threat of industrial action against the airline over the controversial changes in pensions terms and conditions.
BA will make a one-off cash contribution of £800m, subject to fund members also accepting reductions in pensions benefits, and has agreed to make annual contributions of £280m a year.
The agreement is expected to lead to a review by rating agencies of BA’s credit status and could pave the way to the airline regaining an investment-grade rating. Its bonds were relegated to junk status in the wake of the September 11 terrorist attacks in 2001, an event which contributed to the global airline industry’s prolonged financial crisis.
A resolution of the pensions issue will also clear the way for BA finally to embark on a decade of heavy investment in the renewal and expansion of its long-haul fleet with capital expenditure of more than $10bn (£5.2bn).
Ironically, the breakthrough on pensions and the improvement in its financial status could leave BA more vulnerable to possible takeover.
The airline, already one of the most profitable network carriers, has been the subject of growing speculation as a target for private equity funds, which has been triggered by the recent acquistion of Qantas, the Australian flag-carrier, by a team of financial groups including Macquarie and Texas Pacific.
The BA share price has risen by about 75 per cent in the last 12 months. Collins Stewart, the UK stockbroker, said this week: “We strongly believe BA is a primary takeover target.”
The share price closed last night 4p higher at 548¾p, its highest for seven years.
BA has been burdened with the biggest pensions deficit of any group in the FTSE 100 index of leading companies relative to its market capitalisation. Resolving the pensions issue has posed one of the biggest challenges to Willie Walsh since he took over as chief executive of the airline at the end of September 2005.
Mr Walsh last night hailed the deal wth the unions as “great news” and said: “[It] effectively tackles one of the most fundamental issues we face.”
By reaching agreement with the pension fund trustees and the trades unions, BA had found “a shared solution” that had helped to secure the pensions of the 33,794 active members in the group’s New Airways Pension Scheme (Naps) and had removed “a major blocker to future investment in British Airways,” said Mr Walsh.
BA still faces big labour challenges, however, including the result of a ballot, due next Friday, by cabin crew on taking industrial action over controversial changes to working practices.