Pension deficit weighs on British Airways
Willie Walsh has no incentive to be bullish right now. He has had British Airways on cold rations since joining as chief executive-designate four years ago, and another set of tough union negotiations looms.
However, a poor set of annual results shows that — even had he wanted to — there is no disguising the pension situation: dire and getting worse.
The accounting deficit widened by 1.2 billion pounds last year. Even that picture is reckoned to be too optimistic.
That is because the bean-counters use AA corporate bond spreads to discount future liabilities. Corporate bond spreads are very high right now, which has the perverse effect of reducing liabilities just because investors are becoming more risk averse.
Citigroup expects that the more realistic actuarial triennial valuation — due this September — will show a deficit of between 3 and 3.5 billion pounds.
At the upper end, that is almost on a par with BA’s gross debt and is almost twice the airline’s battered market capitalisation.
In principle, BA is on a ten-year programme to eliminate its deficit by 2016. In practice, the airline will need more time.
Britain’s Pensions Regulator, David Norgrove, recently introduced new guidelines to cut companies some slack during the downturn.
He said that employers could take longer than the usual decade to close the deficit. And he suggested that companies could make non-cash contributions in situations where they are cash-strapped. However, he also made it clear that companies could not continue to pay dividends at the expense of contributions to the pension scheme.
BA has passed this year’s dividend. Moreover, unlike many banks, it is not paying management bonuses and is freezing base pay. In today’s recessionary times, the pensions flexibility will be very welcome to BA.
It admitted that the pension liability “may…affect our ability to raise additional funds.”
Moreover, the pensions trustees will have a say in any tie-up, like the mooted merger with Iberia, or the joint venture with Iberia and American Airlines, which is in a holding pattern as competition regulators chew over the deal.
Trustees are becoming more imaginative about the sort of bargains that they strike with their sponsor companies.
It is in no one’s interest for the pension fund to cripple the company that sustains it. The pension fund should not take on too many company assets-otherwise it risks being hit by exactly the same forces currently bashing the airline itself.
However, assets like scarce Heathrow landing slots, have a resilience, whatever the economic weather. A trade of slots for pension contributions might just fly.
(Edited by David Evans)