Outside Perspective
By way of background, let me say my interest here is one of investment analysis of transport sectors generally, and I'm also a (very) frequent flyer!
The first point I'd make is that BA has one of the most challenging pension scheme problems in the industry, actually across all industries. BA is really a mid-size fund management company (ie its pension schemes), with a small flying subsidiary on the side. When I last looked at this specifically, BA's pension schemes' value was about 8x that of the company's market value. Academic? No. For two big reasons. Firstly, managing the pension scheme cost and deficit is a major challenge in itself. It represents a big financial risk to the company, and one that is very large relative to future profits. Secondly, new entrants to the industry do not have this risk/cost, as they never had defined benefit pension schemes in the first place. Straight away they have a big cost advantage over BA and others.
This leads on to my second point. I think many if not all posters here are missing a very important point. Airlines like Virgin, AF/KLM etc are not your major long-term threat. Ryanair is the model you need to look at, as Willie Walsh knows from personal experience from Aer Lingus. Whilst many people here are assuming that profitability will return to BA (and the other "old economy" airlines mentioned), Ryanair is still profitable. They made about €100m in operating profit in the year to 3/09, and only made a loss because of the provision on their 30% Aer Lingus stake. Ryanair has already destroyed the old short haul business model of BA and others, and has announced plans to go long haul (quoting one-way fares to the US of €10 incidentally).
Is O'Leary serious about expanding long haul? And if so, how does this impact BA? Again, you need a reality check to begin with. Ryanair is already a bigger customer of Boeing than BA, so already getting better price/financing deals on aircraft than BA. That gives them a cost advantage already even before factoring in relative staff costs.
I don't know Walsh or O'Leary. My investment style is quant driven: I just look at the financial numbers. So my views are based on affordability and just what I hear and read like anyone else. This, though, suggests two things to me. First, Ryanair can certainly afford to expand outside Europe. They've got about €2 billion in cash and near-cash though, like all airlines, they are burning through this during the severe downturn. Secondly, should such expansion come, it will be in typical Ryanair style, eg the €10 tickets, to build market share quickly and force capacity cut backs onto established players. What if they start running a business class to New York at, say €1,000 each way? That would be about a 50% discount to BA, wouldn't it? How long before BA had to reduce service levels?
If you want to see a good analogy for what's happening to airlines, just check out the US motor industry. A domestic player that used to be "the world's favourite motor car company" now reduced to administrative protection from its creditors, caused mainly by over-generous health and pension benefits and restrictive work practices. The three old "big beasts" all in a run-down not-fit-for-purpose city, Detroit (read: Heathrow). Meanwhile the new players have far fewer workforce worries, more flexibility, and are nowhere near Heathrow. I'm actually surprised BA supported (this time) the BAA break-up. One thing that will do is allow a non-BAA London airport to be a pure low-cost provider, competing directly with LHR.
I hope my outsiders' perspective is interesting if nothing else. As I said at the start, I have no direct link to the industry other than using it too often than I really want to. My focus is on advising investors, not trying to help company managers talk up the value of their stock, so I stay well clear of them. Just my views based on the numbers I see. From that I see BA in a mess, but not as bad as some others. Unfortunately, though, you have the leanest, meanest, toughest, most aggressive low-cost provider right on your lawn. Pre-Ryanair, Aer Lingus had a monopoly of its home business, and I remember the days of paying £250 economy/£350 business fares between LHR and DUB. Look at Aer Lingus' relative position now and short haul fares generally. Incidentally, Ryanair destroyed EI well before Willie arrived. He did a reasonable job of fighting back, hampered by a then 100% shareholder (the Irish government) that was more worried about what the Unions would think of privatisation than EI's need for investment finance to be able to challenge Ryanair.
A failure to move to low-cost airline working methods and efficiencies will have only one result for BA. Ryanair could take the existing BA premium model and simply operate it at much lower cost if they wanted to. They don't need to dumb down the product to reduce the price.