Shares in British Airways Parent Flop After Weekend of Flight Cancellations

Updated: May 30, 2017 7:27 AM ET

Shares in the parent company of British Airways fell on Tuesday after a huge IT failure left 75,000 passengers stranded over a holiday weekend, dealing a major blow to an airline that once marketed itself as "the world's favorite."

The British flag carrier had to cancel all flights from London's Heathrow, Europe's busiest airport, and Gatwick on Saturday after a power surge knocked out its computer system, disrupting flight operations, call centers and its website.

Problems continued over the long weekend, and although BA said it expected to run a full schedule from Heathrow and Gatwick on Tuesday, it was left with work to do to in the longer term to restore its reputation.

Once a symbol of British pride, BA had already come under fire for charging extra for food and baggage and the sight of stranded passengers trying to sleep on the floor of its gleaming Heathrow Terminal 5 building had the potential to do huge damage to its brand.

Like other European full-service airlines, BA is facing increased competition from budget rivals Ryanair and easyJet.

BA Chief Executive Alex Cruz had said on Monday that the power surge was so strong that it also rendered the back-up systems ineffective.

Cruz denied a suggestion from the local GMB union that the outage was linked to a decision to cut staff numbers and outsource work to India.

"British Airways' IT failure over the weekend is clearly a PR nightmare and will take a real focus in terms of handling customer's complaints and compensations claims in order to rebuild trust and confidence with the public," said Mark Simpson, analyst at Goodbody.

Compensation Costs

Simpson estimated the cost of the outage at 82 million euros ($91.6 million).

Ryanair Chief Executive Michael O'Leary said his company saw very strong bookings over the weekend, but added it was unclear if this was related to the BA problems. Ryanair, which reported record annual profits on Tuesday, had taken to social media to poke fun at BA.

Shares in BA's parent company IAG(icagy), which also owns carriers Iberia, Aer Lingus and Vueling, fell as much as 4.5% on Tuesday, the first day of London trading this week. They were trading 2.9% lower at 11:10 a.m. GMT.

Flight compensation website Flightright.com said around 800 flights had been canceled at Gatwick and Heathrow over the weekend. BA did not comment on the number of cancellations.

Analysts at Deutsche Bank estimated that the costs of compensating passengers would be around 47 million euros and that the cost of restoring BA's network had an upper limit of 15 million euros.

But they said that IAG's management has been investing in renewing its IT systems, and expected customers to return to BA quickly as the incident was a "one-off."

"Whilst clearly a difficult weekend and week ahead for BA, we do not expect lasting damage to the franchise or long-term forecasts," Deutsche Bank said in a note, retaining a "Buy" rating on the stock.

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