alexwuk

I know the BA cheerleading board doesn't have quite the same level of concern about our host airline's financial health as our bmi brethren, but did you know that British Airways CDS spread is now at an eye watering 750 basis points for 5 year insurance?

To explain: if means that one would have to pay 7.5% per year to insure against a British Airways default, or over the 5 year life of the contract, you need to pay 37.5p to insure 100p of BA debt. Which suggests the the financial markets think BA's creditworthyness is deep in junk territory. Ouch.

Think that's crazy? Well ... the bonds yield 7.5% now.

Think that's worrying? Time to spend some miles/avios-es/whatever-they're-called...

Food for thought?
Alex

PS: None of the above is investment advice or mileage spending advice. Please don't blame me if you either (a) lose your shirt buying BA bonds or (b) spend hours and hours on BA.com realising it's impossible to get premium award seats to SIN/BKK/SYD/MRU.

Swanhunter

Interesting statistic, but without context not hugely helpful. How do other airlines compare in the US, Europe, Asia?

KenJohn

BA's financial health and profitability is tied to the City's performance; the heaviest user by sector paying for BA's premium services. This is struggling at the moment given EU issues on Greece, Italy, etc.

alexwuk

Lufthansa's CDS spread is 260bp: so the markets demand a threefold risk premium for taking BA's credit risk as opposed to Lufthansa's. Mathematically: the implied default probability for Lufthansa is actually more than 3 times lower. Similar story for Swire (CX's parent) and for SQ.

Air France's, United and Delta's risk premia are similar to BA (although slightly lower).

AA's CDS rates are much worse than BA's and reflect the market's severe concerns that an AA bankruptcy is imminent.

Although, having said that, I fail to see how having more than one airline bankruptcy likely makes things better for me and my BA mileage balance?

VolcanoMan

Fair enough, but it doesn't mean it's actually going to happen, it is just a likelihood... I'm not worried.

origin

What an interesting thread. Should general cosumers be worried about BA's financial health. No, not at all.

However I do agree and sort of understand that insurance as described in post 1 is expensive at the moment. Its a bit like trying to get insurance for your house, when its already on fire. You cant.

The cheapest insurance at the moment is for a big increase in revenues as that is the least likely option for companies at the moment.

Should people stop flying BA. Not at all. Other airlines arent so lucky. But we do need Europe to help us in making sure that the world economy can survive what is looking like a hard winter.

Before people need to worry they need to look at the other airlines. BA are seeing a number of changes over the next few months. All this is designed to develop the company and help survive in the short term and win back new customers from the end of the down turn.

raino144

But if you are sat on a mileage balance in the hundreds of thousands maybe you need to think about using them - mileage balances would most likely get wiped out in the case of any bankruptcy....

Edit: BA are sat on a large cash pile and are in no immediate danger at all. Having thought about it some more, the CDS default probabilities probably read as much into the general panic in the markets than anything BA specific!

oscietra

Quite right; there's no danger of BA (actually IAG, not BA) going bankrupt imminently, though they did come close very recently.

It's never sensible to hold more miles than you can reasonably use in two years typical travelling.

And I don't think mileage balances would be wiped out; not sure of the exact structure, but I think avios might be separate firm from BA - but not sure about that.

What happened when Swiss went bankrupt?

I think the title of this thread is highly misleading and subjective. Plenty of firm will have a 30% risk of bankruptcy; I don't even take my brolly with me if there's a 30% chance of rain.

Jimmie76

To quote Catherine Tate "Do I look bovvered?"

elitetraveler

I thought most passenger airlines were junk level investment grade? I could see LH being better in that it is a bit more diversified - a large cargo op, catering, maintenance, etc.

It seems like you are frustrated with redemptions? It that why you posted this seemingly misleading financial analysis?

My concern is BA following AF, DL, UA, AC in devaluing their programs.

littlefish

I think I am completely mis-understanding the OP and the link ....
What I read is that a corporate bond is pricing out to give a 7.5% yield (the link doesn't show the price some I'm reading into OP for that). But a 7.5% corpoate bond yield is hardly new; or of itself imply a 37% bankruptcy risk in 5yrs.

Separately, the "offer" to insure against the 1yr risk at 7.5p in the £ seems a classic example of what the market is asking; completely different to (albeit with a relationship) the actual risk.
I dimly recollect from my days in that part of town that the margins in these type of trades were pretty generous (hence them being used as insurance back in the day).
So what? BA may well go bankrupt, the odds seem more likely to link to wider market finances (incl Fuel prices over the medium term).

henkybaby

Financial products... Credit ratings... Have we learned nothing?

Sixth Freedom

Or in other words over five years BA is almost twice as likely not to go bankrupt as to go bankrupt.

HIDDY

Yes I agree.

The people who would be most bothered about losing their miles will use their miles on a regular basis anyway so won't have a mega miles balance in the first place.
Those who do have several millions obviously don't use them so most likely wouldn't be all that bothered if BA did go bust. Unless they are keeping them for their retirement in which case....hell mend them.

silvergirl

When Swissair went bankrupt from what I remember we kept the miles and they transferred into swiss m&m later.