From today's Sunday Times
BA in danger of running out of money within five months
THE collapse of Swissair did not come out of a clear blue sky. The airline had been troubled for months, long before the terrorist attacks in America on September 11.
Yet the collapse of the Swiss flag carrier was still shocking. For many business travellers, Swissair was the epitome of Swiss reliability, solidity and service. More than this, for all its troubles, the company had appeared to be in relatively robust financial shape even quite recently.
At the end of last year, Swissair had cash of £900m, medium-term investments worth £500m and other non-aviation assets of £620m. Yet much of this was swallowed up by the savagery of the decline in the airline industry.
This has troubling implications for Rod Eddington, chief executive of British Airways. He has trumpeted that BA has loads of cash as well as £1.4 billion in property assets and investments. Yet, proportionately, BA has less of a financial cushion than Swissair had at the end of last year. As the Swiss carrier has demonstrated, such funds can be eaten up quickly.
With the exception of Swissair and the near-bankrupt Sabena, BA is the most highly geared airline in Europe. Unless something radical happens, a Sunday Times analysis suggests that the company could run out of cash in as little as five months. The company will either have to launch a rights issue, sell large chunks of assets or restructure itself.
Even before September 11, BA's balance sheet was in a bad way. In June, at the end of the first quarter, it had £3.4 billion of liabilities due within a year. Its assets minus stocks were equivalent to £2.3 billion and it was expected to generate Ebitda (earnings before interest, tax, depreciation and amortisation) of about £900m a year. That would leave it with a funding requirement of about £200m a year, or £16m a month, achievable though difficult. "There will be no wholesale rescheduling of debt," says one analyst.
BA's first-quarter operating profit of £50m was well below the £81m net interest it paid.
"If operating-profit levels over a long period stay beneath interest, a company is no longer investment grade," said Jens Jantzen, a debt analyst at Bear Sterns.
Things have since deteriorated rapidly. Trading in July and August was weak, and The Sunday Times estimates that BA consumed another £30m of cash in that time. September, as BA revealed on Wednesday, was much worse. Traffic fell 36% in the week of September 11 and was still down 28% by the last week of the month. In contrast, the three other big airlines that reported September figures - Air France, KLM and America's Southwest Airlines - saw a pick-up in the last week of the month. The cash position looks extremely worrying. BA said it lost £40m in the week of September 11. One source close to the company suggested it lost another £20m in each of the two following weeks, leaving it with cash of £800m by the end of the month.
And that cash is going to be eaten up as conditions deteriorate. BA said October traffic would be down another 25% to 30%, weaker than most analysts' worst-case assumptions. One investment bank said that if BA traffic fell by another 13% from where it was before the attacks, the company could lose anything from £400m to £1 billion this financial year. At the midpoint of the range, the losses would be £80m a month for the remaining eight months of the year.
The company is in the unfortunate position of seeing revenue fall while many costs rise. Insurance alone could cost an extra £200m this year.
Remember, BA has assets minus stocks of £2.1 billion and liabilities of about £300m falling due every month. Assuming monthly losses of £80m, the company has cash for just over five months. That assumes that traffic falls by 13%. Any greater fall, which BA itself expects, and the position will become dire.
What can BA do? True, it can sell some assets, though selling property and leasing it back would only postpone its problems.
It can also sell landing slots and subsidiaries. However, the sale of Go, the low-cost airline, brought in only £100m, only a third of the original target. There does not seem too much money there. All in all, assets are a big problem. One investment bank says that if aircraft values fall by 30% - not an unrealistic assumption - BA will have a book value per share of a negative 58p.
Some analysts believe a rights issue is the only option. But BA is worth only £1.5 billion and any issue would have to be deeply
discounted. So how much could it raise? And who would stump up more cash?
and from Phil Condit of Boeing:
PHIL CONDIT, chairman of Boeing, believes the aviation crisis following the September 11 attacks will be 10 times worse than during the Gulf war.
Condit, one of the most respected figures in the industry, also said he expected a number of American airlines would go bust as a result of the terrorist attacks.
In a interview on American television yesterday, Condit said: "I think we can see bankruptcies in America in the next 30 or 60
days."
Condit has been forced to slash 30,000 workers so far. He cannot rule out further cuts
British Airways has told the government it wants financial assistance to help it survive the crisis in aviation.
It will join Europe's other leading airlines this week in calling for the European Union to allow them to claim state aid in the wake
of the terrorist attacks on America.
Loyola de Palacio, the EU's transport commissioner, is likely to approve a package that will allow governments to cover losses
caused by the September 11 atrocities.
Airlines will not be able to make claims for state aid covering losses incurred due to the general slowdown in the aviation sector, as this was well under way before the disaster.
BA, along with rivals such as Lufthansa of Germany, Air France, Virgin and British Midland, is likely to ask for aid to cover the losses incurred when flights to America were grounded in the days after the attacks on New York and Washington. But KLM, the Dutch carrier, may not support the call.
De Palacio will consult with colleagues such as Mario Monti, the competition commissioner. Both are thought to have softened their views on state hand-outs in America.
BA will ask for the £48m it says it lost when American airspace was closed. European airlines are expected to ask for a total of
about £2 billion from their governments.
BA is also seeking to renegotiate a deal with Airbus to buy 43 short-haul aircraft, due to be delivered before the end of 2005.
Rob Ruijter, chief financial officer of KLM, said the current turmoil made it impossible to move ahead with merger talks for now: "It is every man for himself," he said.
Ruijter added that Alitalia, BA and SAS, the Scandinavian carrier, were in a perilous condition. He said BA was "much more stretched" than KLM, and that BA's big problems were its cash burn and commitments to suppliers. "It needs to slow the outflows and persuade its suppliers to share the pain, and that means Boeing and Airbus."
He said no airline should get state support and predicted the crisis would help consolidation.