Cut early, cut deeply. This is a well-established response by the airline industry in times of crisis and, sadly for 12,000 staff at British Airways, it is likely to mean mass redundancies.
A ratio of slightly more than one-in-four jobs at the airline seems astonishing, but it’s hard to argue with the company’s analysis that Covid-19 will undermine demand for flying for “several years”. A global recession is certain and travel restrictions may be with us for ages. BA is not being uniquely pessimistic: over in Germany, Lufthansa thinks recovery will take until 2023, with 10,000 job losses possible.
“There is no government bailout standing by for BA and we cannot expect the taxpayer to offset salaries indefinitely,” said its chief executive, Alex Cruz.
The first half of the statement isn’t quite right: BA, if it could be untangled from parent IAG, which also owns Iberia in Spain and Aer Lingus, would qualify for a Bank of England-backed loan. The French and Dutch governments have been able to find a fudge for Air France-KLM. The point, though, is that adding debt doesn’t really help in the long-term if the revenues aren’t there – the sums still have to be repaid.
As for the government’s furlough schemes, the chancellor, Rishi Sunak, is under pressure to extend, or taper them until the autumn. But he plainly cannot afford to underwrite wages for months on end. Amid the current talk about returning to work, the government will be alarmed by BA’s cost-cutting – but it’s hard to see what it could do to avert it.
A classic display of dividend bravado from BP
The oil environment is “brutal”, said BP chief executive Bernard Looney, but shareholders can have their dividend anyway – at least for now.
A display of dividend bravado was probably to be expected since every big oil company likes to promote its balance sheet as muscular. Investors, though, should not mistake willingness to swallow greater quantities of debt for real strength. In the current climate, BP, now carrying an astonishing $51bn (£41bn) of net borrowing, is straining credibility on its dividend.
What, for example, is the point of setting a supposedly rigid target for debt if you then ignore it? BP didn’t just miss its 20-30% ambition for gearing – defined as debt as a percentage of total capital – it was out by miles. The ratio was 36.2% at the end of first quarter. Even BP expects it remain above 30% “into 2021” before the trend turns downwards “over time”.
The company isn’t twiddling its thumbs, of course. It’s cutting capital expenditure by a quarter this year to $12bn and can probably knock a billion or two off next year’s budget. It will also hack $2.5bn out of costs by the end of 2021 and reckons its cash flows, including a stable dividend costing $8.4bn a year, would then balance at $35 a barrel. In normal times, that would be impressive. The trouble is, Brent stands at $20 a barrel today.
The full blast of the new oil world will only be felt in second quarter’s figures. Tuesday’s numbers, showing a slide in profits from $2.4bn to $791m, covered a period in which oil averaged $50 a barrel, which feels like a different age.
The real decision on the divi, then, lies ahead. For believers in the idea that BP will be able smooth its way through the current turmoil, the shares offer an enticing 10.5% yield. It feels unlikely.
Hong Kong investors’ beef should be with HSBC
Resentful Hong Kong investors won’t agree, but should: the Bank of England did the right thing when it included HSBC in its ban on banks’ distributions to shareholders this year.
HSBC’s capital position is currently healthy, but profits almost halved to $3.2bn in the first quarter as the first batch of credit impairments arrived. Over the course of this year, provisions could hit $7bn-$11bn, a wide and tentative estimate that could yet become worse. Best to err on the side of caution on dividends.
Instead of raging about perfidious regulators in London, Hong Kongers should ask their board a few hard questions. Within the first quarter’s $3bn provision, there was a “significant change related to a corporate exposure in Singapore”, thought to be a bust oil trader. It rather suggests risk controls could have been better.