Dark skies still loom for the airlines

Yesterday’s announcement from British Airways (BA) that it was set to merge with Spanish carrier Iberia provided a predictable boost to the company and its prospects.

As well as the immediate share price reaction, the duo argued that shareholders would benefit going forward as the two businesses were ideally suited, with little crossover between them.

In truth the deal could not have come at a better time for BA, with soaring oil costs impacting the business and a consumer slowdown likely to reduce the number of passengers.

BA’s chief executive, Willie Walsh, admitted as much when he said: ‘The aviation landscape is changing and airline consolidation is long overdue.’

Admittedly BA would be less affected by a reduction in cheap weekend breaks than its rivals, given its focus on premium services.

However, investors noted that even Walsh’s firm was stuck in a challenging environment at present.

UK fund manager Neil Cumming, who runs the £6.7 million PSigma UK Growth fund, has been avoiding both BA and its low cost rival easyJet within his portfolio.

He noted that while both companies faced different challenges, they would be jointly impacted by high oil costs as well as a poorer consumer who is looking to cut back on discretionary spending.

Speaking before yesterday’s merger announcement, he said: ‘While BA has made a point of moving to offer premium class services, it will be a challenge for them to keep load factors up.’

Investors need not look far to find examples of other high-end airlines that have struggled, and indeed subsequently collapsed. In May Silverjet, the luxury carrier, grounded its fleet after the business-class only transatlantic carrier went into administration.

Prior to Silverjet’s collapse, other business airlines including Maxjet and Eos went under as oil costs soared.

There are also other negatives to consider. Cumming added that BA had an older fleet than the other carriers and may need to replace it. Given the environment for borrowers at present, even if the company opted to do so using a loan arrangement any deal would likely cost more because of the credit crisis.