British Airways parent warns of drop in passengers for ‘several years’ as it switches from furloughs to layoffs

April 29, 2020, 10:58 AM UTC

IAG SA will slash the work force at its flagship British Airways by almost 30% in a painful restructuring aimed at shrinking the airline group for a downturn that could last for years.

IAG shares fell as much as 6% Wednesday, after the airline group said that as many as 12,000 jobs will be lost at the U.K.’s former state-owned airline.

A 1.3 billion-euro ($1.4 billion) charge from fuel and currency hedges added to the group’s first-quarter operating loss, according to a statement late Tuesday. With its planes on the ground, IAG said operating results are likely to be “significantly worse” in the current period because the virus has pushed down demand.

The harsh steps are likely to be repeated by other airlines in days and weeks to come, after flight restrictions aimed at fighting the coronavirus threw the industry into its steepest downturn ever. Carriers are in desperate need of cash, with peers such as Air France-KLM and Deutsche Lufthansa AG chasing multibillion-euro bailouts. IAG has so far avoided tapping government-supported fundraising plans.

“In the last few weeks, the outlook for the aviation industry has worsened further and we must take action now,” British Airways Chief Executive Officer Alex Cruz said in a letter to employees. “Any money we borrow now will only be short-term and will not address the longer-term challenges we will face.”

Planemaker Airbus SE said Wednesday it burned through 8 billion euros in cash in the first quarter, and said it would have a better grasp on the the scale of the crisis by June. Boeing Co. will report results later Wednesday.

British Airways now leads a stable that includes Spanish flag carrier Iberia, Ireland’s Aer Lingus and discount brands Vueling and Level. Like other European carriers, the company was hit with a double-whammy from fuel-hedging contracts that failed to protect the company against a sudden drop in oil prices.

European airlines typically hedge most of their fuel costs to protect against a sudden jump in one of their biggest expenses. But because of the way some of the contracts are structured, the unexpected drop has forced many of them to hand cash over to banks even as many ask governments for multibillion euro taxpayer bailouts.

Lufthansa and Ryanair Holdings Plc have already said they’ve lost money on hedging contracts, with more revelations expected with quarterly results.

IAG doesn’t expect passenger demand to recover to 2019 levels for “several years.” The company said its operating loss before exceptional items was 535 million euros in the period ended March 31.

Now its fleet is almost fully grounded, sapping revenue further. With cash and undrawn credit lines totaling 9.5 billion euros, the carrier is undertaking painful cuts to stretch its resources during the downturn. The carrier’s market value has plunged by about two-thirds this year, to 4 billion pounds ($5 billion).

The job cuts are also a blow for the U.K. government, which is paying part of the wages of furloughed workers in the hope of preventing a sharp spike in unemployment as the country remains in lockdown. Britain’s economy will contract by 7.6% this year, the biggest annual fall since 1921, according to Dan Hanson of Bloomberg Economics.

Labor Resistance

BA, which has already placed 22,626 workers on the furlough plan, will now start discussions with labor groups on permanent reductions. Pilots represented by Balpa said they were surprised by the move, especially since IAG said it was wealthy enough to weather the storm.

“Balpa does not accept that a case has been made for these job losses and we will be fighting to save every single one,” General Secretary Brian Strutton said in a statement.

The job cuts followed an announcement by SAS AB, Scandinavia’s biggest network airline, on Tuesday that it would eliminate as many as 5,000 jobs.

The Tuesday announcement left some questions unanswered, said Daniel Roeska, an analyst with Sanford C Bernstein—including the status of IAG’s planned takeover of Spain’s Air Europa.

“On balance, this should not come as a surprise but we would have preferred more color on what cost flexibility and cash burn the company expects during the shutdown in the upcoming weeks,” Roeska said in a note.

–With assistance from Christopher Jasper and Neil Callanan.

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