Bottom for British Airways Still Ahead

By Dr. Declan Fallon

Airlines continue to struggle as cheaper oil prices aren't offsetting the losses from lower consumer travelling. From the FT:

British Airways (BAIRY.PK) reported a loss for its third quarter and in the first nine months, and warned the deficit would deepen for the full year.

Business travelling is hardest hit:

The plunge in demand for travel from premium business travellers, one of the most important sources of profits at BA, had worsened in the current fourth quarter with premium passenger traffic dropping by 13.7 per cent in January, it said.

Although the back-of-the-bus has held up well:

Overall in January, BA said it had cut passenger capacity by 2.6 per cent from a year ago while passenger traffic had fallen by 1.3 per cent, including the 13.7 per cent decrease in premium traffic and a 1.4 per cent rise in non-premium traffic.

With cargo traffic down sharply, there is no evidence of an economic recovery any time soon.

Cargo traffic fell by 16.7 per cent year-on-year in January reflecting the rapid weakening of world trade.

Big jump in debt:

Cash holdings fell by £278m to £1.6bn between March and the end of December last year, while net debt increased by £900m to £2.2bn with £600m of the increase due to currency factors.

Similarly, Aer Lingus also experienced drops in short and long haul traffic.

Passenger numbers on short-haul flights were 6.1 per cent lower while those travelling to long-haul destinations fell 8.6 per cent over the period.

And Qantas (QUBSF.PK) took a sharp hit as they diluted their stockholders with 270.3 million shares coming to market

But what does all of this mean for British Airways shareholders?

Historically, things got ahead of themselves in September 2006 when it broke through the top of a steadily rising channel. This created an unsustainable run to its eventual high in February 2007; a high which occurred 5 months before the top in oil prices. Since then it has been all downhill, but so far there hasn't been the capitulation which would firmly mark a bottom; even the September-October meltdown remained contained by its falling channel.

click to enlarge


Given the strong bearish conditions, are there any opportunities on the long side?

The 'bad news' from the company was unable to drive the price below October lows of £1.054. Instead it continued into a fourth day of rising prices; prices which originated from a low of £1.113 and appear to be part of a support band from £1.05 to £1.19

Other than resistance at £1.84, the real challenge looks to be in a band of resistance from £1.97 to £2.14 with long term buyers unlikely to get keen until it gets past £2.84.


All of this is a long way from its heyday peak at £5.79, but beggars can't be choosers. I have entered a YourCall for a push to £1.79 with a stop at £1.04; it's a poor risk:reward - real buyers would be better served by a push back into the support zone c£1.19.

Comments

[elliot_mllr:]

Here's a suggestion for BA. I'm certain that many other business travelers,besides me, who are using BA less this year than in the past are, as I was, downgraded from my Silver status in the Executive Club. If BA had a good sense of marketing (which it never has had) it would issue a moratorium on such downgrades and restore us to our prior status for the duration of the downturn in the economy and in business travel.

Feb 09 11:32 AM

[ppeer:]

On equitycatwalk.com you can find an interesting stresstest on BA's debt and a dcf model.

regards

Feb 18 04:35 PM

[lawrenceres...:]

What is the number of flights a day for BA?
What is the average passenger count & the average $ price of a ticket sold??
What is the price of jet fuel at Heathrow?
What does the flight plan of every BA aircraft show the fuel weight is?
Does the Queen subsidize any seats in down times?

Feb 18 05:34 PM