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Monday July 27, 09:30 AM
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ANALYSIS - BA languishes despite fund-raising; stock under fire
By John Bowker
LONDON (Reuters) - British Airways is the most vulnerable among major European airlines to a prolonged industry downturn despite a near-$1 billion fund-raising, and external distractions will add to pressure on the stock.
The company's balance sheet is expected to show a 2 billion pounds ($3.28 billion) cash position after raising funds through a new convertible bond issue and the return of bank guarantees from its pension fund.
The move is expected to see it through the downturn, but AirFrance-KLM and Lufthansa -- BA's two main full carrier rivals -- have 4.5 billion and 4.8 billion euros in cash respectively, and both are strengthening that position ahead of anticipated lean years by entering the bond market.
"The most geared balance sheet is that of British Airways ... (while) Lufthansa has the strongest balance sheet of the Big Three carriers," said Jonathan Wober, an analyst at Societe Generale.
BA's debt stood at 2.4 billion pounds at end March, whereas Lufthansa -- seen by analysts to have the strongest balance sheet of the big three full carriers -- will only move into debt this year as a result of a string of mid-size acquisitions.
AirFrance-KLM has gone for a convertible bond -- which can be exchanged for company equity at a later date -- worth 660 million euros, while Lufthansa issued a 750 million euro bond at the beginning of the month.
Analysts said that raising cash, and the timing of it, was crucial.
"The underlying market is down 20 percent, and we don't know if it is a normal recession or worse. Airlines need to have a liquidity plan to see it through two years of losses," said Evolution analyst Nick Cunningham.
LBBW analyst Per-Ola Hellgren said that Lufthansa was "ahead of the game" due to the excellent timing of its recent debt placement.
Even for the German carrier, that may not be enough, meaning a round of equity fund raising could still be in the offing for European airlines, analysts said.
ROUGH WEATHER
BA shares have underperformed rivals this year amid the most severe industry downturn on record.
"Risks to (the share price) include a further weakening in demand, a spike in the oil price, labour unrest and a greater than forecast pension deficit," said analysts at Goldman Sachs in a note published this week.
The airline's frustrating failure to merge with partner of choice Iberia is also weighing on the stock.
BA is down 23 percent so far this year, compared with a 13 percent fall in Lufthansa -- the German airline's stock struggles partly due to worries over planned acquisitions -- while AirFrance has lost just 1.7 percent this year.
BA's market cap is less than half that of Lufthansa, which is valued at 4.3 billion euros.
The UK airline racked up losses of 100 million pounds for the quarter to end June, with details due next week.
It said at its annual meeting that its cash position had dropped to 1.25 billion pounds from 1.38 billion in the period. That would mean that if the downturn continued at the same pace the airline would run out of cash in late 2011.
Analysts are confident that won't happen despite the comparative strength of rivals, but add that the firm will have to overcome several other obstacles.
"As things stand, BA has sufficient liquidity to see it through for around 12-18 months, by which time if there isn't actually a full recovery, there should at least have some improved visibility of a recovery," said Jonathan Wober.
BA is pushing ahead with new ventures such as a business class only flight between London and New York -- a venture soon to be launched amid a desolate market for premium travel.
"We need the extra cash for day-to-day operations as well as future investment such as the business class only flight," a BA
spokeswoman said on the day of the bond news, adding that the move was about being well placed for an upturn.
BA's fight to reduce costs is ongoing, but the benefits of a low cost base have been shown by the performance of Ireland's Ryanair, now among the world's biggest airlines by market capitalisation.
"We've got 2.5 billion euros -- far more cash than we need. It's more cash than our total annual turnover," Ryanair Chief Executive Michael O'Leary told Reuters this week.
(Additional reporting by Maria Sheahan in Frankfurt and Daisy Ku in London)
(For more news on Reuters Money click http://in.reuters.com/money)
