British Airways Pension Deficit Swells
British Airways´ pension deficit more than doubled to 3.7 billion pounds at the end of March, it revealed on Monday, higher than analysts expected but not seen as big enough to derail a merger with Spain´s Iberia.
Shares in BA were down 0.7 percent at 199.90 pence by 11:55 a.m. while Iberia was 0.8 percent down at 2.01 euros.
“We´re not surprised by this figure. It falls within the expected range,” a source at Iberia told Reuters on Monday.
BA and Iberia announced in November that they had reached a preliminary agreement for a merger after months of negotiations.
BA´s pension deficit was one of the main stumbling blocks in the merger negotiations and Iberia has reserved the right to back out of the deal if the funding hole turns out to be too big.
Nevertheless, the deficit figure of 3.7 billion pounds could be higher by the time the valuation process is completed in June next year because Britain´s Pensions Regulator believes the assumptions used to calculate the shortfall are too optimistic.
“The regulator's provisional view is that the technical provisions may be materially below a level it feels appropriate,” BA said in a statement.
Analysts at Deutsche Bank described the figure as “towards the high end of market expectations” but said a recovery in the stock market since the end of March meant the current funding hole gap probably stood at around 2 billion pounds.
“However, even taking into account the rise in the stock market since March it seems that more money will have to be found for the pension deficit,” they said in a research note.
LABOUR TALKS
BA said the airline and pension trustees will work together to develop a recovery plan, a process which will involve the company consulting with employees and their trade unions and which must be completed by June 30, 2010.
BA and Iberia hope to conclude a merger deal by the end of 2010 and attention is now expected to switch to the nature of any pensions deal the British carrier can strike with its staff and what proportion of the gap will be covered by the company.
“The company may be forced to renegotiate pension benefits with employees if it is to avoid using more shareholders cash,” Deutsche Bank said.
“Industrial unrest could therefore worsen over the next few weeks.”
The Unite union is due later on Monday to give the result of a strike ballot of some 13,500 BA cabin crew who are expected to vote in favour of a Christmas walkout over planned costs cuts and changes to work practices.
BA wants three quarters of its crew to accept a pay rise of between 2 and 7 percent this year and next and for 3,000 staff to switch to part-time working, along with a reduction in onboard crewing levels on some flights from London Heathrow.
Unite expects the strike, which sources believe could begin as soon as December 21, to go ahead and bring the airline´s Christmas business to a virtual standstill.
A Unite spokeswoman told Reuters that it had expected BA´s pension deficit to be larger than the reported figure and that it does not want the issue “to dovetail into strike talks.”
Analysts estimate that a two-day strike over Christmas could cost the airline around 50 million pounds.
Independent pensions consultant John Ralfe said that although Iberia management may have been privy to the new pensions deficit numbers, investors in the Spanish airline would still be shocked.
“What a month ago looked like a deal that might work with a following wind … now looks much more difficult,” he said.
Ralfe said the statement appeared to imply that the company would be talking to unions and employees about cutting benefits at a time when industrial relations are already strained.
A spokeswoman for BA said the company could not afford to make any additional contributions to the pension scheme than those already being made but was looking at all other options for a recovery plan.
BA said an actuarial review had revealed a 1 billion pound deficit at its Airways Pension Scheme (APS) and a further 2.7 billion pound black hole at its New Airways Pension Scheme (NAPS). That compares with a funding gap of 1.8 billion pounds identified by trustees at the end of March 2008.
