IT ONCE styled itself "The World's Favourite Airline", but now it seems we have fallen out of love with British Airways, as sliding passenger numbers were earmarked as one reason the airline's fortunes have taken such a nosedive: yesterday it revealed a record £401 million loss.
In the worst performance since the flag carrier's 1987 privatisation, BA suffered under the lethal combination of a global recession, surging fuel bills and lower numbers of business and first-class passengers.
The news has sparked speculation
BA might step up the pace of its long-running merger talks with Spanish carrier Iberia.
Willie Walsh, BA's group chief executive, said it was "the hardest trading environment we have ever faced".
And he added that: "With no immediate improvement visible, market conditions remain challenging."
BA's slump – which follows a £922m pre-tax profit the previous year – comes despite 25,000 job cuts in recent years, including 2,500 in the past 12 months.
BA's operating loss of £220m compared with a record operating profit of £878m last time, as it carried 1.5 million fewer passengers at 33.1 million.
The airline also faced a fuel bill of nearly £3 billion as oil prices rose 44 per cent last year.
Mr Walsh said there would be further job losses, but declined to say how many of its 40,000 workforce would be affected.
Having already slapped a pay freeze on BA staff, the company confirmed it was now offering staff unpaid leave or a switch to part-time working. Management will also forgo bonuses.
And Mr Walsh announced that both he and finance director Keith Williams will work for no pay in July as part of the cost-cutting programme. Mr Walsh is paid £735,000 a year and Mr Williams gets £440,000.
Mr Walsh said: "This is no stunt. I do not easily give up anything I have earned."
The chief executive also cancelled the group's dividend just a year after reinstating it for the first time since 2001.
Sir Martin Broughton, BA's chairman,
said the swing from record profit to record loss underlined the extremely difficult trading conditions the airline faced, adding "any recovery is likely to take longer than initially envisaged".
In the fourth quarter alone, to the end of March, BA's revenues were down 8.4 per cent with a pre-tax loss of £331m.
BA said premium traffic – meaning business and first-class travellers – was down 13 per cent in the second half of the year.
A company spokesman said: "There was some weakness in premium traffic last August and it steadily declined in the second trading half."
The company said capacity for next winter will be cut, with 16 aircraft being mothballed.
Aviation analysts said business people were travelling less in the recession to try and cut costs, and flying more cheaply when travel was essential.
Walsh said he was now prepared to "chase volume" or offer cut-price tickets to keep as many people flying with BA as possible. The airline recently launched its first two-for-one offer to help fill planes.
Douglas McNeill, airlines analyst at broker Blue Oar Securities, said: "This is a sobering set of numbers from BA and reflects an extraordinarily tough year for airlines.
"Things might get tougher in the first trading half of this year, but there may be some recovery in premium business travel later on, should there be a pick-up in the economy."
Analysts said the crisis could see BA speeding up the slow progress of its merger talks with Spanish carrier Iberia.
First announced last summer, the talks have got bogged down in corporate governance issues and on how the holding company would be structured.
Neil Glynn at NCB Stockbrokers said: "A merger (with Iberia] would dramatically enhance BA's position and place it on a more equal footing with its large peers, such as Air France and Lufthansa from financial strength and a global diversification perspective.
"I wouldn't call a (BA-Iberia] merger defensive at all; it is a case of seeking to maximise returns rather than protecting market share given limited network overlap between two very complementary airlines."
Another analyst said: "In the short term, both BA and Iberia have said they are focusing on managing their own businesses. But this sort of dire performance must strengthen the medium-term case for such a merger."
BA and Iberia also expect a ruling by October on their plans for an anti-trust transatlantic alliance with American Airlines. The move would follow the recent venture between Air France-KLM and Delta.
The British carrier's debt rose to £2.4bn at end March, up from £1.3bn the previous year, while its cash position slid £483m to just under £1.4bn.
However, BA should also get a boost from a fuel bill in 2009-10 about £400m lower than this past year, analysts believe.
The City and institutional investors in BA have also expressed concerned about the group's pension deficit, which was valued at £1.5bn at March last year but is likely to have grown substantially since then.
In a statement, the airline said: "If the financial markets deteriorate further, our pension deficit may increase, impacting balance sheet liabilities, which may in turn affect our ability to raise additional funds."
A full review of the retirement scheme is underway, with the results expected to be published in late summer.
On the FTSE 100, BA's shares closed down 3.75 per cent at 156.7p. The stock is down 20 per cent over the last 12 months.
Unions were unnerved by BA's mountainous losses and the prospect of further job cuts at the airline.
Jim McAuslan, general secretary of pilots union Balpa, said his members were "extremely concerned".
He said: "BA is facing an unprecedented downturn in trading and this will make the task of agreeing cost-saving measures even more challenging."
However, Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said there were "some glimmers of hope, albeit on the horizon".
He said: "The company's focus on costs, the possibility of mergers and strategic tie-ups and any sign of an economic recovery could all give the stock a much-needed fillip."
