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International Airlines Group, the parent company of British Airways, and Aer Lingus, Iberia, LEVEL and Vueling has released its preliminary first quarter results for 2020.
Total revenue in the first quarter fell 13% to €4.6 billion compared to €5.3 billion last year. IAG reported a loss before exceptional items of €535 million compared to a profit of €135 million last year.
IAG has also taken an exceptional charge of €1.3 billion. This is due the ineffectiveness of fuel and foreign currency hedges for 2020 due to over-hedging. Put simply, this means IAG has not been able to benefit from significant falls in fuel prices in recent weeks.
IAG airlines have reduced capacity by nearly 95% in April and May. The group has not announced any capacity plans for June which are subject to both the easing of country lockdowns and the lifting of travel restrictions.
Industry views on how long it will take for demand to return to 2019 levels vary widely.
Most optimistic is Michael O’Leary who believes that, with significant discounting, demand will recover quite quickly. Many airlines believe it will take around 3 years for demand to recover and demand will remain subdued well in 2021.
IAG has said today that it expects it to take several years for demand to return to 2019 levels.
British Airways Restructuring
British Airways has begun a consultation with its trade unions on a redundancy exercise.
This may affect up to 12,000 BA employees. To put this into context, BA has approximately 40,000 employees. 22,626 employees were furloughed in April.
Whilst this will clearly have a significant impact on the livelihoods of many BA staff, the number of 12,000 is a likely worst case scenario to open negotiations with BA’s trade unions. It is likely that this will be achieved through voluntary redundancy as much as possible which is a “red line” for trade unions.
BA is also likely to be receptive to other cost savings suggestions, particularly productivity improvements.
It also points to a significant reduction in capacity in the coming years and, in turn, many changes to BA’s airports, route network and fleet.
The letter below from CEO Alex Cruz has been released by BA.
Note that it makes a specific reference to the airline not expecting state support beyond existing schemes available to all businesses.
This is in contrast to Air France-KLM and Lufthansa which are in negotiations to receive loans of several billions from their respective governments.
Negotiations between Lufthansa and the German government have stalled over whether the German government should have a seat on Lufthansa’s board, which is a situation which IAG would want to avoid.
A potential nightmare scenario for IAG is individual governments in Ireland, Spain and the UK taking equity stakes in IAG airlines or seats on IAG boards in return for state support. This could then lead to IAG management constantly have to meet the different demands of governments.
Letter from Alex Cruz
Yesterday, British Airways flew just a handful of aircraft out of Heathrow. On a normal day we would fly more than 300. What we are facing as an airline, like so many other businesses up and down the country, is that there is no ‘normal’ any longer.
The global aviation body, IATA, has said that the industry has never seen a downturn this deep before, and that full year industry passenger revenues could plummet 55% compared to 2019, while traffic falls 48%. Many airlines have grounded all of their planes. Sadly, we will see some airlines go out of business with the resulting job losses.
Our very limited flying schedule means that revenues are not coming into our business. We are taking every possible action to conserve cash, which will help us to weather the storm in the short-term. We are working closely with partners and suppliers to discuss repayment terms; we are re-negotiating contracts where possible; and we are considering all the options for our current and future aircraft fleet. All of these actions alone are not enough.
In the last few weeks, the outlook for the aviation industry has worsened further and we must take action now. We are a strong, well-managed business that has faced into, and overcome, many crises in our hundred-year history. We must overcome this crisis ourselves, too.
There is no Government bailout standing by for BA and we cannot expect the taxpayer to offset salaries indefinitely. Any money we borrow now will only be short-term and will not address the longer-term challenges we will face.
We do not know when countries will reopen their borders or when the lockdowns will lift, and so we have to reimagine and reshape our airline and create a new future for our people, our customers and the destinations we serve. We have informed the Government and the Trade Unions of our proposals to consult over a number of changes, including possible reductions in headcount. We will begin a period of consultation, during which we will work with the Trade Unions to protect as many jobs as possible. Your views matter and we will listen to all practical proposals.
The scale of this challenge requires substantial change so we are in a competitive and resilient position, not just to address the immediate Covid-19 pandemic, but also to withstand any longer-term reductions in customer demand, economic shocks or other events that could affect us. However challenging this is, the longer we delay difficult decisions, the fewer options will be open to us.
I want to pay tribute to the thousands of British Airways colleagues who are playing a vital role in the global response to the Covid-19 crisis. Whether you are supporting our repatriation flights or the transport of essential cargo; or one of the hundreds of colleagues volunteering with organisations such as the NHS, you have my sincere respect and thanks.
This has been a difficult message to write and one I never thought I would need to send. I know how tight-knit the BA family is, and how concerned you will be, not just for yourself but for your colleagues, too. We must act decisively now to ensure that British Airways has a strong future and continues connecting Britain with the world, and the world with Britain.
Thank you.
Alex
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