Chairman's speech

RNS Number : 6160V

British Airways PLC

14 July 2009

 



Speech by Martin Broughton,

Chairman, British Airways

Annual General Meeting,

Tuesday, July 14, 2009

[Check against delivery]

INTRODUCTION

Ladies and Gentlemen,

It's a great pleasure to be here once again in the Queen Elizabeth II Conference Centre. It is appropriate we are in a venue named after Her Majesty, because as I have reflected on events in our industry over the last year, one of the Queen's most famous remarks has repeatedly come to mind.

This has indeed been an 'annus horribilis' for the aviation industry.

We have swung from record profits to record losses - and, like many other airlines with similar experiences in the last 12 months, now face critical challenges in restructuring our business to achieve sustainable profitability in the future. 

So let me set out some of the economic background, outline its impact on some specific issues facing the company and - with help from Willie - tell you about our plans to come through.

STATE OF INDUSTRY

Twelve months ago, I told you the airline industry could be facing the greatest crisis it had ever known.

At that time, the price of oil was above $140 a barrel and consumer confidence was clearly weakening as the impact of the credit crunch spread. 

The prospects were gloomy enough. But what I did not foresee - and nor did anyone else - was the dramatic collapse of the financial markets in the autumn, which accompanied the near-implosion of the banking sector and precipitated the steepest economic recession since the 1930s.  

So there is no longer any need for qualification. This is the biggest crisis the aviation industry has ever known - and it continues.

According to the International Air Transport Association (IATA), global losses for the industry in 2008 totalled $10.4 bn.

And IATA now forecasts that losses this year will add up to $9 bn. This is nearly double the estimate IATA made as recently as March, a change that reflects a rapid deterioration in revenues. 

Worldwide, traffic levels fell by nine per cent during the last financial year - but demand for premium cabins was down around 20 per cent. And the reduced numbers travelling at the front of the plane were paying much less for their seats. 

This is extremely grave news for major full-service airlines, which have a traditional reliance on the premium market to generate a high proportion of their total revenue.

British Airways is one such airline.

That is why in the final quarter of the last financial year, our revenue dropped dramatically and we recorded an operating loss of more than £300 million for those three months alone - the worst quarterly result in our history. Again, many other carriers shared this experience.

So this is no ordinary aviation downturn. This is no cyclical swing that will automatically turn up again, as day follows night.

Of course, the general economy will recover - though we don't know how fast, or how strongly.

But the market for premium travel may never fully recover. There is evidence that business customers no longer place the same value on the levels of flexibility offered in the highest fare categories. Corporate travel budgets have been cut back severely and consumers are determined to reduce their debt. 

This represents permanent structural change in the market - and poses a fundamental challenge to our traditional business model.

It also means the aviation industry is crying out for consolidation and we continue to believe our proposed merger with Iberia will be in the best interests of our shareholders and theirs. While we have been frustrated at the slow progress, we are hopeful that the management changes at the top of Iberia announced last week will provide an impetus to discussions.

LIQUIDITY

The world's major airlines are now facing up to the need to add more liquidity to their balance sheets to give them sufficient lift to weather the current storm. 

Some, like Qantas and SAS, have approached their shareholders for additional funding. Others like Lufthansa have raised borrowing levels and Air France/ KLM has opted for a mix of the two.

We also believe it in to be in the interests of our shareholders to look at options to increase our own liquidity. Our current liquidity is above our desired minimum of 15 per cent of revenues. However an extended economic downturn would be stretching.

We do not believe that the timing is right to approach the financial markets for a rights issue as there are a number of key issues that need to be resolved over the next 12 months. However, there are other options to raise funding which are available to us. 

We have no intention of disapplying pre-emption limits without the support of shareholders. We are in discussions with our institutional investors exploring opportunities in the convertible market, which we believe is the best way of increasing our cash reserves.

PENSIONS  

The perilous state of the industry has been the favourite subject of aviation reporters for many months. And often their second favourite subject, at least when it comes to writing about British Airways, is the state of our pension funds.

As you know, the detailed three-yearly actuarial valuations of the APS and NAPS schemes are under way. The results of the valuation will be known in the autumn.

Following the plunge in equity markets and the falls in interest rates to historic lows, it is already clear that the deficits will be higher than when the trustees wrote to members last September, when there was a deficit of £240m in APS and £1.5bn in NAPS. 

In the year to March 2009, the accounting valuation of the funds (which is undertaken on a different basis) has worsened by £1.2bn. It is likely therefore, that the full actuarial valuation will have worsened by at least that amount. 

In the past three years, the company has paid £1.8bn into the two schemes, in an effort to eliminate the deficit.

It is a sobering thought that this level of contribution is far in excess of our cumulative profits, which have been £1bn, over the same period.

What is absolutely clear is that the trustees are reliant on the company's ability to return to profitability and earn substantial profits. The benefits from the schemes can be safeguarded only if this is achieved quickly. 

Nonetheless, the deficits remain huge - and in the current climate the company will not be able to afford to increase its own contribution.

To make up the shortfall, the company and trustees will need to agree a revised funding plan after the actuarial review is completed.

DIVIDEND

Returning to sustainable profitability is also the key to our dividend policy.

It is a matter of regret that after last year's reintroduction of the dividend, we are unable to recommend one this year. The simple truth is that the trading position of the company left us no alternative. For the same reason, we have not awarded bonuses to our senior executives.

I recognise that some will regard this as cold comfort, but I can assure you that it remains our long-term objective to provide shareholders with a dividend stream that is consistent and increasing.

AIR PASSENGER DUTY

As the global financial crisis took hold, there was a great deal of intervention by governments to try to mitigate its worst effects. Bailing out the banks, or at least some of them, became a high priority.

In some parts of the world, bailing out airlines seems to have become a similar priority. Japan Airlines has just been granted a $600m loan from the Japanese government's Development Bank. And the Indian government has responded favourably to Air India's request for another major injection of state funds.

We have even seen one aviation figurehead raise the issue of state aid in the UK.

But we should not be too critical of Richard Branson. After all, he is rather worried about his own airline. And he knows quite a lot about subsidies - because he's been welcoming them into his train operations for years.

Well, let me make one thing absolutely clear. British Airways remains totally opposed to state aid for airlines: in the UK, Europe, the US or anywhere else. State aid is the enemy of efficiency - and a huge impediment to the establishment of free aviation markets that benefit consumers and shareholders alike.

We do not believe airlines should receive state hand-outs. But nor do we believe they should be singled out for unfair taxation.

The Government's plans to raise Air Passenger Duty are unjust, untimely and unhelpful for the economy.

The Treasury still falsely claims that the tax is levied to compensate for aviation's impact on the environment.

Yet the Government's own figures show that UK airlines meet their full environmental costs at the existing rates of APD, so there can be no 'green' justification for further increases.

These phased rises mean that by November next year, economy-class passengers flying to Singapore or Sydney will pay £85 each, compared with £40 now - a rise of 112.5 per cent.

Travellers to the Caribbean will pay at least £75 instead of £40 - an increase of 87.5 per cent. 

No wonder the travel industry in the Caribbean and other developing regions is furious about this proposal, which will cost jobs and wealth in areas where employment outside the tourist industry is difficult to find.

The EU emissions trading scheme is due to include airlines from January 2012. As governments know, this will be far more effective in tackling emissions and incentivise the industry to accelerate greener solutions. It will also impose substantial new costs on airlines, so there will be no case whatever for continuing with separate environmental taxes such as APD.

CONCLUSION

Ladies and Gentlemen, 

I described at the outset the extent of the crisis facing this industry and this airline.

To get ourselves through this crisis, we don't need state help -and we don't need extra state burdens either.

We intend to come through this with self-help - and we have clear plans, which Willie will describe in a moment.

I believe that you, as shareholders, can have confidence in the future of this airline. 

No matter how grave it is, this recession will not last forever. The challenge for us now is to get ourselves in the right shape to outstrip the competition when the upturn comes. 

END

 

END

 

 

AGMGIGDRXSBGGCS