Now raising intellectual capital
Issuing a bond or taking out a bank loan to support a pension fund deficit is not a solution to a problem. It is simply a way of funding one future liability with another. At best it defers the problem; at worst it can magnify it.
So when British Airways <BAY.L> gets a big pat on the back for borrowing 300 million pounds and securing the facilities to borrow another 330 million pounds, in spite of having net debts of 2.5 billion pounds at the end of June, this just underlines the nastiness of the financial state it is in .
The financial crisis is a sort of perfect storm for BA. Premium air travel, especially over the north Atlantic where it makes much of its money, is plummeting. Global business class fares fell by 23.6 percent in May according to the International Air Transport Association. Meanwhile, the slump in the prices of most financial assets have ballooned its pension fund deficit. BA is undertaking a triennial review of its pension funds and the word on the street is that the deficit may be in excess of 3 billion pounds. That compares with a market capitalisation of just 1.4 billion pounds.
In its latest annual report, BA wryly observed: âIf the financial markets deteriorate further, our pension deficit may increase, impacting balance sheet liabilities, which may in turn affect our ability to raise additional funds.â
It’s a bit rough on BA that the triennial review of its pension funds should have co-incided with the bottom of the equity market at the end of March, since the result will be a deficit in excess of 3 billion pounds.
Even that might be said to be too optimistic, if the last declared discount rate of 6.9 percent is repeated. The higher the rate, the smaller the current value of the liabilities. BT’s, for example, is 6.85 percent, and the Royal Mail’s 6.4 percent,