British Air and Its Unions Are Ready to Rumble

The skies have not been peaceful for British Airways (BAIRY) lately. Repeated shutdowns of Europe's airspace following the eruption of Iceland's Eyjafjallajökull volcano on Apr. 14 helped send BA's traffic down 22 percent last month. Now Chief Executive Officer Willie Walsh faces an even bigger challenge: restive workers.

The Unite union, which represents BA's cabin crew workers, since March has staged a series of work stoppages over stalled pay talks, crew cutbacks on long-haul flights, and the subsequent elimination of some free travel benefits. The union raised the ante by calling four walkouts of five days each to begin on May 18.

The latest strikes may cost BA up to 150 million pounds ($223 million), including business lost on the single days between walkouts. That would wipe out most of the $302 million operating profit analysts had been projecting for the fiscal year that began Apr. 1. "As a hit to profits it's painful, but as a drain on cash it's manageable," says Douglas McNeill at Charles Stanley Securities in London.

While BA's $2.36 billion cash cushion will help, the airline is still recovering from the estimated $147 million in business lost due to the volcanic dust disruption. The global recession has so depressed overall demand for air travel that Chief Financial Officer Keith Williams believes BA's pretax loss could hit a record $886 million for the year ended Mar. 31.

That's why Walsh is fixated on reducing costs at Europe's third-largest airline. He cut cabin crew staffing levels in November without union approval in an effort to save $187 million. So far he has hung tough in ongoing contract negotiations over pay.

BA, in a statement, said it is "saddened but not surprised" by the new strike call, and that it planned to continue flying throughout the walkouts.

One advantage for Walsh: The British Airline Pilots' Assn. says it will work normal hours through any strike. The pilots union last year reached a deal with BA that it says gives the airline annual savings of $36.9 million.

Still, BA says it will have to lease planes and crews from other carriers to maintain a reduced schedule during strikes and may have to rebook thousands of customers onto other airlines.

That could be expensive for both sides of the dispute. "I very much doubt that Unite can stage a successful strike of this duration," McNeill said. "Asking cabin crew to forfeit a month of wages seems to me to be a big ask."

Meanwhile, BA risks losing customers just as business travel is starting to pick up. Walsh must balance that possibility against his desire to get a permanent handle on costs.

The bottom line: British Air and its cabin crews are engaged in an expensive game of chicken, which could have a long-term impact on its costs.

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