British Airways loses traction before profit report. Lufthansa, Air France-KLM also soft

British Airways' shares (-3.6%) lost ground on expectations of bad news in today’s annual and 1Q09 report. The other majors, Lufthansa (-2.8%) and Air France-KLM (-2.3%) also came off, as jitters about the UK’s sovereign rating shook markets. Societe Generale lowered its recommendation for Air France-KLM from “buy” to “hold”. Meanwhile, still under attack from Ryanair over directors’ fees, Aer Lingus (+4.8%) was the biggest gainer on Thursday.

Europe selected airlines daily share price movements (% change): 21-May-09

British Airways

British Airways, due to report financials on Friday, was down as the British economy totters from bad to worse. Standard and Poor’s announced that the government’s AAA credit rating could be at risk, downgrading its debt outlook from stable to negative.

The UK flag carrier is suffering badly from slack premium travel figures. And – unlike the positive announcements from Lufthansa and Air France-KLM about alliances and mergers – has had little to offer in that direction.

BA will today have to bring the market up to date on developments with the much-delayed Iberia merger. This was supposed to have been consummated by the end of the first quarter, but the absence of news since then is raising concerns that the parties still have fundamental differences, mainly over the respective market capitalisations and, in particular, BA’s pension funding overhang.

Where Air France-KLM was able for example to cut back heavily on its own US services this summer to reduce losses, its Joint Venture with SkyTeam partner Delta allows it to maintain and even expand its codeshare presence in the market. Meanwhile, British Airways is still awaiting approval for its own trans-Atlantic operating alliance with oneworld partner American Airlines – which in turn reported a gloomy outlook this week. Anything which suggests a further long delay – or even cancellation – of the merger with Iberia will be seen by the market as a competitive setback for the UK flag carrier.

Just over a week ago, the two carriers sent out varying noises to the market, with Iberia saying it was aiming to focus on internal restructuring, after reporting heavy losses for the first quarter. BA simultaneously stated that merger talks were still on. This may be posturing with a view to gaining higher ground in the negotiations over the respective shares in a joint company. But in these fragile times the market remains less than impressed.

So long as these delays continue, British Airways continues to lose money and, more seriously for the medium to long term, to concede market share on all of its key routes.

Air France-KLM this week reported an ugly first quarter of 2009, with a heavy loss of EUR574 million (against a 1Q08 loss of EUR 37 million) and Willie Walsh, BA CEO stated as recently as this month that he expected things to get worse before they improved – heavily implying a continuation of the downward trend for the carrier right through the first four months of this year.

BA’s premium traffic numbers were down 17.7% year on year for Apr-2009 (although non-premium increased 5.2%, but with heavy fare discounting). So a weak financial result can be expected.

The market has already factored a lot of these negatives into the airline’s current price, but after the FTSE wobbled yesterday, investors are nervous. Worse than expected news from BA will not be well received.

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British Airways’ Premium vs Non-Premium traffic growth (% change year-on-year): Apr-2008 to Apr-2009

Aer Lingus

Ryanair CEO Michael O’Leary meanwhile continued to stir the pot with Aer Lingus, seeking to drive a wedge between management and employees by tabling a resolution attacking the level of fees paid to Chairman and acting CEO, Colm Barrington.

The carrier’s board meeting was to address the issue, but with a strong recommendation from Mr Barrington that the proposal be rejected.