View Full Version : BA Could Run Out of Cash in Five Months?

The Guvnor
7th Oct 2001, 12:50
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

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.

7th Oct 2001, 13:05
This post is not surprising - if anything eight months seems optimistic.

BA are negotiating with all suppliers other than fuel and aircraft lessors - for a 3 month interest free extension on settling bills

Recent work undertaken in March/April by a BA contractor was not settled in full until late September

The comment about aircrat values falling is true in the short term - BA will need to consider that older aircraft in their fleet will end uo potentially being parked or at best with dramatically reduced sale values - 50% would be my guess.

A widespread sale and lease back of owned assets would unlikely appeal to banks and leasing companies at this time of uncertainty.

As with Virgin - the question has to be - where will the cash come from?

7th Oct 2001, 13:40
BA probably needs Virgin to go before things start looking up!

7th Oct 2001, 14:20
If BA has enough cash to tide it over for the next five months, that's better than I imagined. Look what's happened in the last five. I would think that any airline that can see it's way through the next five months will be doing well.

7th Oct 2001, 14:30
It is a truism that you should not believe everything that you read in the papers, and I firmly believe that this is yet another example of scaremongery. The cash reserves and assets which the paper has alluded to are accurate, but it is pure speculation to forecast that this money will run out in 5 months time, perhaps this is an accurate figure assuming that BA meets all of its commitments, but I rather suspect that it will politely be declining to pay on time for anything. Only last week in the Telegraph BA was forecast to be one of the only European airlines that will survive this extraordinary situation...which only goes to prove what I said in the first place.

7th Oct 2001, 16:30
Many, many years ago BA and its forerunners should have gone to the wall. They were bailed out by the government of the day, Trident, for example. I have no doubt they will, rightly or wrongly, be bailed out again.

Having flown the mutual skies for the past thirty six years it is very obvious that they do not operate from a commercial base.

Much as they would wish to be seen as 'in the loop', sadly they are not even close.

No reflection on the individual pilots, they are within a rotten system.

The Guvnor
7th Oct 2001, 16:40
Shuttlecock - nice theory about BA "politely be declining to pay on time for anything" - the reality is, of course, rather different. All of those suppliers have staff and their own commitments and if BA together with other large creditors refuses to pay on time then those companies will go to the wall.

In the worst case scenario, if BA was to employ such tactics, all of their suppliers would put them on a 'cash only' basis - and as we all know that means that airlines can no longer take advantage of the cashflows.

Evolante's scenario is considerably more accurate.

I'd suspect we'll see substantially more job and pay cuts in the very near future coming out of Waterworld - as well as the sale of subsidiary operations (including BACE?) ... if they can realise anything for them!

As for Virgin - without direct government aid, it looks like the Woolly Pully's house of cards may well tumble before Christmas instead of April as many were forecasting.

7th Oct 2001, 17:22

The Ansett/Air NZ fiasco may not have had its genesis in exactly the same form that Swissair and potentially BA and others face.
But they do bring some latent but fundamentally important issues into clear and bright focus.

What is becoming increasingly clear is that the rush to "deregulation and privatisation" may have been politically opportunistic (not to be confused with politically correct) and the share staggers may have made a quick bob but have in fact been a resounding failure.

If they haven't worked it out by now flag carriers should remain just that, reregulation of the industry should proceed apace and the aviation infrastructure returned to its rightful owner, the national estate.

The profit imperative and the provision of domestic and international services by individual countries are mutually exclusive and is/was/always has been a sovereign matter for the state and the protection of their citizens.

Recent events and their impact on the aviation structures and infrastructure have irrevocably changed and will never be the same, regardless of how optimistic for the future we may be.

Private corporations will forever have a precarious financial existence as they do not nor ever can have, any control over sovereign issues, viz September 11. The recent requirements for Government guarantees for “war” insurance are a classic example.
They do not nor can they be expected to have the financial resources to deal with the effects of the actions of or against their sovereign states or bear the consequences thereof.
The ad hoc, quick fixes that are invariably applied by Government to airlines seeking support for this and compensation for that merely disguise the underlying problem.
Think about it.
Back to square one and a fundamental rethink of the whole schlemiel, methinks.

Ideas anybody?

7th Oct 2001, 18:25
Prophets of Doom. You guys need to get out more often. What exactly are you aiming to achieve from this depressive line of miserable speculation?

Are any of you actually employed in the aviation industry, has your job or your company's future been affected by the terrorist attacks last month? It doesn't sound like it to me.

No-one knows what the future will hold for any of us, any more than anyone could have predicted that some lunatic fanatacist would fly a 767 into the WTC. But anyone with even the merest regard for the Industry is crossing their fingers, wishing everyone well whilst every airline employee I know is working their balls off to make sure we get through this crisis.

Your depressing pessimism does no-one any good, is entirely speculative and not even that accurate. To rub your hands whilst watching others struggle is distasteful in the extreme.

[ 07 October 2001: Message edited by: Carpe ]

The Prisoner
7th Oct 2001, 18:47
BA is backed by the true "British " spirit. Virgin are cowards, run by public school boys, failed business entrpeneurs, and Ex RAF bozos.
BMI is backed by a nuance of truth in rumours about what happened all those years ago on the M1 and in the lift with M Bishop. How soon we forget how Midland were the scourge of Europe, how soon we fall into their clutches when times are hard.Its not what you do, but how its done.

Electric Sky
7th Oct 2001, 19:18

BA is true "British Spirit" is it??

I still vividly remember them removing the British flag from their aeroplanes!!

We are all in the same profession. Lets stop speculating as to "who is next?" and pull together to hope that BA, Virgin, bmi or whoever get through this crisis and keep us all in work. MY MORTGAGE DEMANDS IT!

ES ;)

7th Oct 2001, 19:47
Spot on Electric

7th Oct 2001, 21:55
well said electric sky in these times of uncertainty vs ba and bd should get there heads together to make sure they all survive to resume their battle another day after all about 70 000 peoples mortgages demand it! :rolleyes:

8th Oct 2001, 02:33
I don't think I have ever read more childish trash on this site than has been apparent since September 11th and an example of which is this thread.

I have friends in many airlines and work for one myself. We are all worried. This constant sniping, speculation and abuse is of no earthly use to anybody.

8th Oct 2001, 05:13
Ah well it seems the standard of "debate" hasn't changed much.

Lets all go bury our heads in the sand, pretend everything is going to be OK if we don't talk about it, hope all the bad bits go away and sing "It's a long way to Tiperary" as we drive the bus over a cliff :rolleyes:

Pollyana lives! The Swiss, not famous for a sense of humour, are just playing a little jokes, BA are only trying to hit up on the Government because they belong to the same clubs, UA, AA and the rest are shedding something like twice as many jobs as there are at BA because they can.

Bring back Winnie?

Nasty Nasty
8th Oct 2001, 07:58
As usual the Guvnor is busy reading the worlds media for something to post. To pick on BA is strange as he needs to look closer to home. The recent issue of Aviation Week 24 Sept carries an article that shows the US carriers in far greater distress than BA.

It indicates that the cash reserves of the various carriers are as follows:

AirTran < 15 days
CO < 15 days
NW < 50 days
Amercia West < 52 days
US < 52 days
DL < 74 days
UA < 81 days
SW< 309 days!

This was as of 17 Sept.

Clearly the coverage suggesting poor management does not understand simple maths.

For airlines to buy (or lease) an aircraft of lets say an average US$100m costs about US$900,000 to service the montly debt and that is without paying insurance, fuel, crew, landing fees etc etc. Multiply that by a fleet of say 100 aircraft it is a lot of money to find each month to have an aircraft to fly. Cut the loads, fill with low yield traffic means cash reserves dry up p-d-q.

The Avweek article also talks about asset values each acrrier has to sell if cash is needed. Not pretty reading either! Selling aircraft is an option as no one is buying.

The fact is a lot of airlines are broke by normal standards but the banks and leasing companies dont want to let them go as there is nowhere for the planes to go.

In this part of the world, Asia only QF, CX & & SQ have cash in any amount. The likes of MH, TG, PR, CI are all but broke.

When will the Guvnor have an original thought?

Boeing Boeing.... gone! :(

9th Oct 2001, 00:07
You know the old story - a 100 overdraft is your problem, a million pound overdraft is the bank's problem. In this case for banks read aircraft leasing companies. The point of the parable is that it very unlikely that BA will do a Swissair.

There will be changes, some of them very traumatic for the individuals concerned, but BA will probably weather the current storm in a recognisable shape.

BA might well be overstaffed, but it is very difficult to make a valid comparison of employees per a/c. It depends on what services are bought in, and what are done in house. Route network and size of aircraft also affect the numbers.

In the short term exposure to N.Atlantic routes is probably the critical factor. BA is much less exposed than say Virgin.

All of us, whatever our place in the UK aviation sector need BA or its equivalent. VERY generally BA sets standards of salaries and conditions of service that many outside BA aspire to.

The point of this whole post - lets stop talking down BA or any other airline. Right now we need to be positive. There can be no winners - only losers. (OK the low cost airlines will probably do allright for the time being, but they are predominately in a niche liesure related price sensitive market and we need them too).

Remember the song from "The life of Brian!"

The Zombie
9th Oct 2001, 13:25
'Always look on the bright side of life'...!!

I have just been told that BA has cash reserves that will see them throught until early next year.

Hope things get better soon.
These are troubled times indeed.


[ 09 October 2001: Message edited by: The Zombie ]

9th Oct 2001, 16:24
I quite agree with the previous;
[/b]>"Your depressing pessimism does no-one any good, is entirely speculative and not even that accurate. To rub your hands whilst watching others struggle is distasteful in the extreme"

I have friends at Virgin who have already lots their positions... I find some of the above postings quite sickening and deleterious to all of us in aviation.

[ 09 October 2001: Message edited by: knows ]

9th Oct 2001, 19:43

Saw your post on the Virgin Atlantic topic...

Did they not give you a job then? Don't suppose you know too many of their pilots!


Magnus Picus
9th Oct 2001, 20:00
The loads are up here at BA (Shorthaul). Long Haul is down 10% across the pond (Someone mentioned 33% - That was for the week after the 11th).

Guvnor - Post something nice. Like your obituary.

BMI, Virgin etc. Good luck and I for one do not wish ill upon you. Hope to see you in a couple of years downroute.