The Guvnor
24th Sep 2001, 17:45
From today's Scotsman
BRITISH Airways, reeling from the devastating fallout from this month’s atrocities in New York and Washington, may be forced to pull its operations out of Gatwick Airport and sell its Heathrow properties as part of a desperate survival plan.
This week, chief executive Rod Eddington will study the proposals, and it is believed the real estate at Heathrow and the departure from Gatwick could be the best way to cut the airline’s debt, possibly through sale and lease-backs. BA recently opened a new £300 million headquarters at Heathrow. "There are £2 billion of assets readily convertible into cash. We have got substantial property in the UK," Eddington said.
He has not yet asked the government directly for financial aid. However, BA is saddled with mounting debt and falling sales revenues.
Industry sources believe that the major airlines face a 60 per cent fall in revenues in the aftermath of the terrorist attacks, and few of them have sufficient finances to survive the crisis on this scale.
BA’s flights to the US were grounded for several days after the attacks. About 40 per cent of BA’s revenue comes from its transatlantic US flights.
BA had already been scaling back activity at Gatwick, as its operations there are not profitable. BA, which is reviewing most of its operations, will announce its schedule next week and is almost certain to reveal reductions at Gatwick.
Lower cost airlines, such as the Go - the airline BA sold off earlier this year - may now be set to benefit.
BA has announced a total of 7,000 job losses this year, about 12.5 per cent of its workforce. Last week, it said it would reduce flights by 10 per cent, in addition to previously announced cutbacks. It also withdrew 20 aircraft from operations. Further cuts are not ruled out.
A BA spokesman said yesterday: "There’s a lot of speculation going on. Rod Eddington was saying that the company has about £1 billion of cash, and some assets, and that there are ways of coping.
"We haven’t said we’re going to sell the assets."
It is now feared that the airline may pass on its final-year dividend, to conserve cash.
British Airways’ shares rose more than six per cent on Friday to 152p, buoyed by the deal struck between the government and the insurance industry, allowing airlines to keep flying.
Insurance underwriters had said they were cancelling war-risk cover as a result of the attacks. The Treasury said it would give airlines a month of war and terrorism insurance for free, in the light of the airlines’ financial difficulties.
BA shares have declined from more than 350p in February, reaching 113p at one point - a 14-year low. The slump has wiped more than £2 billion off the company’s share value.
BA was already in trouble prior to the terrorist crisis. Last month, house broker Merrill Lynch downgraded estimates for the company, and said it would make a loss of £65 million in the year to 31 March 2002, having previously forecast a profit of £150 million.
Increasing oil prices has sent its fuel bill soaring, while pilots are demanding higher wages. It was already taking steps to reduce capacity.
This week’s announcement said capacity in the 2002/03 financial year would be 18 per cent below the peak level in 1999.
Brian Gorman
([email protected])
Monday, 24th September 2001
The Scotsman
and
Low-cost airlines could take control in downturn
AS FULL-SERVICE airlines around the world shed routes, planes and staff in a struggle to survive, their low-cost airline rivals are licking their lips at the prospect of an unique commercial opportunity.
Where the big carriers back away, budget airlines will be able to move into new markets and pick up staff and aircraft on the cheap. But the no-frills airlines are far from immune to the risk posed by the rapid downturn in aviation - their margins are likely to be reduced as the business grows more expensive.
Last week easyJet, Ryanair and BA’s former low-cost unit Go responded to an almost certain leap in costs by reducing fares and issuing bullish statements.
Barbara Cassani, Go’s chief executive, said: "Sales have come back to normal and the customer experience has become more streamlined. People have continued to fly."
But the budget carriers are paying for this commitment to air travel. Cassani slashed prices on all her routes by one-third, and her rivals made similar cuts.
These airlines are used to traffic slumping once the summer holidays are over. Their performance this winter is likely to define whether they will become permanent fixtures when their older rivals have failed, or whether their business models will wilt in the face of soaring costs.
Rising insurance premiums will be the most pressing concern, but there are a range of other worries. The prospect of US attacks on Afghanistan and the possibility of the conflict spreading into the Middle East has raised fears that the price of oil could rise to levels not seen since the 1991 Gulf War.
Then, jet fuel rose to $500 per tonne, against the current price of $261. Such a jump would easily cancel out the entire profits of Ryanair, the most successful of the low-cost businesses, and send Virgin Express, Sir Richard Branson’s Brussels-based no-frills airline, into a loss.
Ryanair has hedged 90 per cent of its fuel costs until March next year and 70 per cent between April and August next year. EasyJet has no such hedging in place and a rise in the cost of oil will make it difficult to do this. Go rushed to extend its hedging soon after the attacks.
Not every company in the sector is well prepared for a downturn. EasyJet frequently
experiences losses in its first half and Go is a young business which needs to boost its balance sheet. If investors see falling growth, they are likely to become impatient with expensive expansion plans, such as the building of new continental bases.
Airport landing charges are also set to rise. The hiatus in flights which followed the attacks resulted in significant lost revenue for airports - money that they will want to win back. And security delays could slow the number of aircraft that can be processed. This, combined with a drop in demand, will mean fewer flights and higher charges.
EasyJet has spent months renegotiating a vital contract with Luton airport’s owners TBI. A temporary agreement has already seen the company’s landing fees rise to £5.50 per passenger.
Overall these guys are going to be the winners rather than the losers
Last week TBI recommended its shareholders accept a take-over offer from French construction group Vinci. If it accepts TBI’s offer it will want to recoup some of its expenditure from easyJet. If it does not, the £5.50 price tag is likely to become permanent.
Ryanair and Go also face higher charges at Stansted airport. BAA, Stansted’s owner, is expected to be allowed to charge more for landings when the results of a regulatory review are revealed. Its publication was delayed after the disaster, but higher charges are still thought certain.
Extra security will also drive up costs. All airlines have been forced to spend more time checking passengers’ bags. But the most significant costs may come in the policing of airports. This is currently paid by their owners - variously TBI or BAA, which owns the London airports - and clawed back from airlines. Budget airlines are particularly sensitive to the inefficiencies of security.
They rely on keeping their aircraft flying for as long as possible every day to maximise the return on investments. Any delays in the turnaround time taken to clean and refuel a plane and get it in the air again threaten their businesses. Although delays have largely been a problem for passengers, extra security for those with access to aircraft could prove problematic.
The low-cost carriers themselves dismiss suggestions that they face a tough time in the coming months. They say all the problems that could affect their well-being will have an equal impact on full service airlines. While prices could go up, they argue, easyJet and Ryanair will still have lower costs than British Airways and Aer Lingus and will still be able to offer lower prices.
They also insist a slowdown will see business customers turning to low-cost travel as they seek to cut back on travel spending. Above all, they insist it is the US routes that will suffer and cut-price airlines do not cross the Atlantic.
Some analysts agree. Robin Horne, analyst at HSBC Investment Banking, said: "These guys are going to be the winners rather than the losers.
"Overall the market will shrink, but they will take some passengers from other airlines."
Ryanair told analysts last week that there was no need to downgrade forecasts.
Many remained upbeat about the low cost business, although Jonathan Wober, an aviation analyst at Deutsche Bank, warned: "Ryanair’s valuation looked stretched before the recent share price fall, and it still does."
The airlines themselves have been uncharacteristically restrained in the wake of the US atrocities. They are understandably concerned not to be seen taking advantage of their larger rivals’ troubles.
In the coming weeks, investors will be looking to them to do just that. Low-cost carriers will begin to offer more expensive tickets as fears of terrorism and an economic slowdown push prices up and patronage down.
But they will still be under-cutting full service operators, and for many leisure travellers will provide the only economic way to fly. The next year will be a crisis one for aviation, but it could see low-cost business come of age.
This article first appeared in Sunday Business on 23 September, 2001.
Ross Hawkins
Monday, 24th September 2001
The Scotsman
BRITISH Airways, reeling from the devastating fallout from this month’s atrocities in New York and Washington, may be forced to pull its operations out of Gatwick Airport and sell its Heathrow properties as part of a desperate survival plan.
This week, chief executive Rod Eddington will study the proposals, and it is believed the real estate at Heathrow and the departure from Gatwick could be the best way to cut the airline’s debt, possibly through sale and lease-backs. BA recently opened a new £300 million headquarters at Heathrow. "There are £2 billion of assets readily convertible into cash. We have got substantial property in the UK," Eddington said.
He has not yet asked the government directly for financial aid. However, BA is saddled with mounting debt and falling sales revenues.
Industry sources believe that the major airlines face a 60 per cent fall in revenues in the aftermath of the terrorist attacks, and few of them have sufficient finances to survive the crisis on this scale.
BA’s flights to the US were grounded for several days after the attacks. About 40 per cent of BA’s revenue comes from its transatlantic US flights.
BA had already been scaling back activity at Gatwick, as its operations there are not profitable. BA, which is reviewing most of its operations, will announce its schedule next week and is almost certain to reveal reductions at Gatwick.
Lower cost airlines, such as the Go - the airline BA sold off earlier this year - may now be set to benefit.
BA has announced a total of 7,000 job losses this year, about 12.5 per cent of its workforce. Last week, it said it would reduce flights by 10 per cent, in addition to previously announced cutbacks. It also withdrew 20 aircraft from operations. Further cuts are not ruled out.
A BA spokesman said yesterday: "There’s a lot of speculation going on. Rod Eddington was saying that the company has about £1 billion of cash, and some assets, and that there are ways of coping.
"We haven’t said we’re going to sell the assets."
It is now feared that the airline may pass on its final-year dividend, to conserve cash.
British Airways’ shares rose more than six per cent on Friday to 152p, buoyed by the deal struck between the government and the insurance industry, allowing airlines to keep flying.
Insurance underwriters had said they were cancelling war-risk cover as a result of the attacks. The Treasury said it would give airlines a month of war and terrorism insurance for free, in the light of the airlines’ financial difficulties.
BA shares have declined from more than 350p in February, reaching 113p at one point - a 14-year low. The slump has wiped more than £2 billion off the company’s share value.
BA was already in trouble prior to the terrorist crisis. Last month, house broker Merrill Lynch downgraded estimates for the company, and said it would make a loss of £65 million in the year to 31 March 2002, having previously forecast a profit of £150 million.
Increasing oil prices has sent its fuel bill soaring, while pilots are demanding higher wages. It was already taking steps to reduce capacity.
This week’s announcement said capacity in the 2002/03 financial year would be 18 per cent below the peak level in 1999.
Brian Gorman
([email protected])
Monday, 24th September 2001
The Scotsman
and
Low-cost airlines could take control in downturn
AS FULL-SERVICE airlines around the world shed routes, planes and staff in a struggle to survive, their low-cost airline rivals are licking their lips at the prospect of an unique commercial opportunity.
Where the big carriers back away, budget airlines will be able to move into new markets and pick up staff and aircraft on the cheap. But the no-frills airlines are far from immune to the risk posed by the rapid downturn in aviation - their margins are likely to be reduced as the business grows more expensive.
Last week easyJet, Ryanair and BA’s former low-cost unit Go responded to an almost certain leap in costs by reducing fares and issuing bullish statements.
Barbara Cassani, Go’s chief executive, said: "Sales have come back to normal and the customer experience has become more streamlined. People have continued to fly."
But the budget carriers are paying for this commitment to air travel. Cassani slashed prices on all her routes by one-third, and her rivals made similar cuts.
These airlines are used to traffic slumping once the summer holidays are over. Their performance this winter is likely to define whether they will become permanent fixtures when their older rivals have failed, or whether their business models will wilt in the face of soaring costs.
Rising insurance premiums will be the most pressing concern, but there are a range of other worries. The prospect of US attacks on Afghanistan and the possibility of the conflict spreading into the Middle East has raised fears that the price of oil could rise to levels not seen since the 1991 Gulf War.
Then, jet fuel rose to $500 per tonne, against the current price of $261. Such a jump would easily cancel out the entire profits of Ryanair, the most successful of the low-cost businesses, and send Virgin Express, Sir Richard Branson’s Brussels-based no-frills airline, into a loss.
Ryanair has hedged 90 per cent of its fuel costs until March next year and 70 per cent between April and August next year. EasyJet has no such hedging in place and a rise in the cost of oil will make it difficult to do this. Go rushed to extend its hedging soon after the attacks.
Not every company in the sector is well prepared for a downturn. EasyJet frequently
experiences losses in its first half and Go is a young business which needs to boost its balance sheet. If investors see falling growth, they are likely to become impatient with expensive expansion plans, such as the building of new continental bases.
Airport landing charges are also set to rise. The hiatus in flights which followed the attacks resulted in significant lost revenue for airports - money that they will want to win back. And security delays could slow the number of aircraft that can be processed. This, combined with a drop in demand, will mean fewer flights and higher charges.
EasyJet has spent months renegotiating a vital contract with Luton airport’s owners TBI. A temporary agreement has already seen the company’s landing fees rise to £5.50 per passenger.
Overall these guys are going to be the winners rather than the losers
Last week TBI recommended its shareholders accept a take-over offer from French construction group Vinci. If it accepts TBI’s offer it will want to recoup some of its expenditure from easyJet. If it does not, the £5.50 price tag is likely to become permanent.
Ryanair and Go also face higher charges at Stansted airport. BAA, Stansted’s owner, is expected to be allowed to charge more for landings when the results of a regulatory review are revealed. Its publication was delayed after the disaster, but higher charges are still thought certain.
Extra security will also drive up costs. All airlines have been forced to spend more time checking passengers’ bags. But the most significant costs may come in the policing of airports. This is currently paid by their owners - variously TBI or BAA, which owns the London airports - and clawed back from airlines. Budget airlines are particularly sensitive to the inefficiencies of security.
They rely on keeping their aircraft flying for as long as possible every day to maximise the return on investments. Any delays in the turnaround time taken to clean and refuel a plane and get it in the air again threaten their businesses. Although delays have largely been a problem for passengers, extra security for those with access to aircraft could prove problematic.
The low-cost carriers themselves dismiss suggestions that they face a tough time in the coming months. They say all the problems that could affect their well-being will have an equal impact on full service airlines. While prices could go up, they argue, easyJet and Ryanair will still have lower costs than British Airways and Aer Lingus and will still be able to offer lower prices.
They also insist a slowdown will see business customers turning to low-cost travel as they seek to cut back on travel spending. Above all, they insist it is the US routes that will suffer and cut-price airlines do not cross the Atlantic.
Some analysts agree. Robin Horne, analyst at HSBC Investment Banking, said: "These guys are going to be the winners rather than the losers.
"Overall the market will shrink, but they will take some passengers from other airlines."
Ryanair told analysts last week that there was no need to downgrade forecasts.
Many remained upbeat about the low cost business, although Jonathan Wober, an aviation analyst at Deutsche Bank, warned: "Ryanair’s valuation looked stretched before the recent share price fall, and it still does."
The airlines themselves have been uncharacteristically restrained in the wake of the US atrocities. They are understandably concerned not to be seen taking advantage of their larger rivals’ troubles.
In the coming weeks, investors will be looking to them to do just that. Low-cost carriers will begin to offer more expensive tickets as fears of terrorism and an economic slowdown push prices up and patronage down.
But they will still be under-cutting full service operators, and for many leisure travellers will provide the only economic way to fly. The next year will be a crisis one for aviation, but it could see low-cost business come of age.
This article first appeared in Sunday Business on 23 September, 2001.
Ross Hawkins
Monday, 24th September 2001
The Scotsman