British Airways - fighting on!

Why? Several factors are at play here. Firstly, following yesterday's court outcome BA now intends to push ahead implementing changes to the cabin crew contractual arrangements. For the record, according to the company this comprises incremental benefits of worth between two to seven percent for more than 10,000 crew members.

True, risks of industrial action remain but amongst those that watch the struggling airline industry and that know British Airways well there are few that would argue that if this one is to survive and prosper the urgency of need to bring the cost base down at least into line with peer legacy/flag carrier airline competitors is compelling. And by the way, this does not mean we believe that BA should attempt to emulate or even compete with Ryanair - quite the opposite in fact!

Whilst on the subject of what little good news BA was able to provide today worth mentioning that liquidity remains very strong at £2bn and that net debt as a whole decreased slightly to £2.3bn. The better than expected position on reserves at the end of the six month period and that was also helped by a partial refunding through the issue of a £350m convertible bond has, according to the airline, primarily been driven by retranslation of foreign debt and marked to market improvement on currency hedges.

A bit of luck then but nonetheless welcome. In fact fuel costs were down a hefty 17.3 per cent on those of the previous year and other operating costs fell by 4.3 per cent. The bad news is that passenger revenue was down 13.6 per cent on capacity reduced by 3 per cent. Neither was there any good news in the accompanying traffic data for October that showed RPK's (revenue passenger kilometres) down another 1.9 per cent on load factor slightly improved to 80.7 per cent.

For now we prefer to ignore any small signs that the airline appears to have noticed suggesting that premium class yields may be starting to improve. We reason this on the basis that whether or not cabin staff decide to take industrial action or not there can be little doubt that some potential BA passengers will have chosen to look elsewhere on the belief that there could well be strike action at BA over the Christmas/New Year period.

Meanwhile thoughts of most commentators quickly move away from actual results and the thought of possible industrial action that would make an already bad situation for BA a lot worse to the potential of the quarter seeing the potential of a three way merger alliance between BA, Iberia and American Airlines move on to a next stage. For that to occur is firstly in the hands of both US and EU regulators and the belief is that we should have movement on this over the coming days and weeks.

For my part I remain absolutely neutral to the potential benefits of a merger with the Spanish airline Iberia although I readily accept that there are benefits to be had for both airlines. As to the greater three way alliance with American Airlines I can see large scale benefits should this be allowed to occur. What are the chances of one or both mergers/alliances occurring? My reading currently is that the case for BA/Iberia has not fallen on deaf ears and that although regulators are bound to attempt to extract a cost from BA in terms of Heathrow slots (BA currently has a 40 per cent market share at Heathrow) the end results could be positive.

As to the forging of much closer relationships between BA and American Airlines and to attempt this in a three way form whilst we believe that the regulatory case is much better placed to pass muster than the two previous occasions and likely at a far lesser cost to BA in terms of potential slot losses at Heathrow it occurs to me that for political reasons the temperature on the 'Hill' may not be quite ready for this to occur.

No account of British Airways is of course complete without mentioning the huge pension deficit. Ahead of the next tri-annual pension valuation (due in the autumn of 2010) that, following market events over the past 18 months will likely show a steep increase in the actual New Airways Pension Scheme for now we are left to work on the £2.66bn net liability that the airline disclosed in September.

The disclosed liability is of course greater than the current market capitalisation (this stood at £2.299m at the time of writing). Nevertheless even though the assets in the scheme have fallen by around £2bn since March 2008 (from £14bn to £12bn) BA continues to have the full support of the pension fund trustees. Indeed, as it released BA from £230m of guarantees to the Airways Pension Scheme (this is the older scheme that is believed to carries no deficit) and £100m to the New Airways Pension Scheme earlier this year the trustees confirmed that they were satisfied with corporate activities and initiatives being taken by BA management will serve to improve the financial position and prospects of the company with a view to meeting its obligations to the scheme. Clearly BA is in no position to increase contributions to the fund and we suspect that following the next actuarial review a revised funding plan will need to be agreed with the trustees.

There can be absolutely no doubt that the outlook for BA remains very difficult and fraught with many difficulties. However, we continue to view that management, provided it does not allow any of its plans to cut cost to be watered down, is taking all the right measures to improve the situation. The bottom line is that BA is just not competitive and must bring its costs into line with its peers.

I would, as I have said many times, like to see BA pull away from short haul and European allowing the airline to concentrate on long haul and North Atlantic routes. Nevertheless, whilst BA cannot have any control over the current weak airline market it is in my view making the best of a bad job. IF - and it is a big IF - BA can get its industrial relations on a sound footing, get it cost base down and, if allowed by regulators, make the best of the consolidation opportunities it is currently pursuing then two to three years from now we may see a fit for purpose airline emerge. There is a long way to go before then and a lot of problems to deal with. Financially though I do believe that BA has enough muscle to survive this huge process of change and I for one do believe that this is an airline that will not only survive but given time, will again prosper.