British Airways has announced a £450 million ($785 million) cost-cutting plan split across the next two years as it seeks to achieve its long stated goal of operating margins of 10%.

Chief executive Willie Walsh told analysts at the company’s annual investors’ day in March: “This plan will make us fit for the future. By resolving our pensions deficit, reducing cost and delivering world-class customer service we can make a 10% operating margin a sustainable reality.”

The jury is still out on whether this will be achievable by the target date of March 2008. “We are very sceptical,” says Nick van den Brul, financial analyst at London-based BNP Paribas. “The outlook, even on BA’s own assumptions, is for margins to fall next year. It then requires a huge leap of faith to believe they will achieve 10% by 2008.”

Van den Brul also notes that the £450 million figure effectively includes £300 million deferred from plans announced in 2005 by Rod Eddington, Walsh‘s predecessor. With much of the cost savings likely to be based on job cuts, and the issue of tackling the pension deficit causing much angst among the workforce, there are fears that BA could run into a further period of labour unrest. The carrier has been hit by wildcat strikes over the past two summers.

“On labour relations, we see a challenging six months ahead for BA,” warns Andrew Lobbenberg, London -based analyst at ABN Amro. “This summer the company has to negotiate a pay round, the implementation of later retirement age for pilots and cabin crew and [terminal 5] working practices, all in addition to pensions,” he warns.

Van den Brul adds: “At some point, it is likely they will have a strike,” pointing to the move of ground workers to the new London Heathrow terminal as a particular challenge, although not all services will relocate to T5 when it opens in 2008. ■

Source: Airline Business