PUCCI GALORE

Hmmm! Jon - you are too kind! If I were in your situation, I think that I would hang on just until everything becomes clear one way or another. We are all jumping the gun just a little at this precise moment as we don't actually know we are trying to second guess that whole way through and quite honestly this could go either way.

Naturally, I do not know the reasons for you wishing to make the trip at this time as that might have made me give a different answer. That was not, by the way, an oblique question to pry!

Remember too if your travels involve Europe the now infamous Vancances de Fevrier where the entire popluation of France goes up a mountain in order to come down again. It is so popular that France has three different educational zones so that these are staggered. In the past there used to be 40km jams going up mountains. I only mention this as you might need to factor that in your travels.

No, for my money I would hang fire if you can. It won't be long. Remember that any changes accepted by the unions must go back for another ballot. If that happens you are clear for a good 2-3 weeks. Does that help?

As I say, I shall be in "Dry Dock" during half-term (Jon, they haven't been back at School more than 5 weeks and they are off again) so I will not experience the joys of teenagers being dragged round Sainsbury's by their Mothers in the depths of a British Winter.

IAMORGAN

I have to agree with you -ultimately I don't care about the politics of it, I just want to get there without any hassle. I would not say I am on any other "side" than my own!

HedgeFundFlyer

I'm surprised by the number of posters who automatically assume that the target operating margin is 'arbitrary'. There is a cost to doing business, the weighted average cost of capital, that takes into account the cost of the debt the company has to service as well as the cost of the equity that has been put into the company. One could open up philosophical discussions about calculating the cost of equity, but the main point is that there *is* a cost. If a company is earning less than its cost of capital, it's losing money over the long-term (some like to say "destroying capital"), and it's a dead certainty that this is the worst thing for everyone involved. It would be the same as taking out $100 in debt and putting it into a 5% bank account but paying 7% on the $100 -- you're losing money.

This should not be taken as a broad defense of the BA board and mgt. A 10% operating margin does not necessarily equate into a positive return on capital. This is a problem with setting easy-to-understand incentive bonuses, and any simplistic bonus scheme is susceptible to a "letter of the law, not spirit of the law" attempt to fulfill its terms.

But then that 10% operating margin goal might actually be a fairly reliable proxy for the company earning its cost of capital -- my suspicion is that the goal was arrived at after countless meetings with management consultants and investment bankers.

Of course this is neither here nor there in deciding whether to do IAH-DXB on BA in February.

Cheers.

IAMORGAN

I think that BA DOES have an obligation to ensure that the food they offer staff whilst on stopovers is of an acceptable standard -if the person is being ill after trips to Banaglore, then maybe it would be good to be careful what she actually eats, I know I have problems when I go to places such as Mumbai/Islamabad and I always try to get in and out in 24hrs, when I don't have to eat anything. It is the worst part of international travel.

IAMORGAN

I agree -BA don't rush into these things, their reasoning seems completely crazy at times, but it is a fitting testiment to the management team that they are now in profit, and many agree doing better than US carriers of similar calibre.

bernardd

Ahhhh, so it *IS* black magic then! Your point about a positive rate of return relative to the cost of capital is, of course, valid and correct, but who knows what the cost of money will be on average in 2007 let alone 2008 or 9. Or the price of oil for that matter, so yes, it's pretty arbitrary unless the consultants and bankers have suddenly got a lot more accurate than they ever used to be.

More likely it's a concensus of the targets BA has to set before the salespeople and the analysts to recommend BA as a "buy", ie to keep the share price up. Again, an arbitrary "feeling" kind of thing.

IAMORGAN

I would willingly pay c.6% more for F/J, but I think BA should not be putting their EuroChaveller prices up, because they need to attract occasional leisure travellers.

10% cost cutting makes sense to me, and it doesn't mean falling premium standards, it just means a more streamlined and dynamic operating style.

aristoph

Er, no. BA revs in the FY 06 were £8.5bn so a 10% operating margin would have been £850m. Equity and long-term finance on the balance sheet was £5.6bn, so that would have equated to a pre-tax ROIC of 15% which is way higher than any theoretical cost of capital number. (The only caveat is you really should add in aircraft leases but I don't think they are a significant proportion of the fleet.)

bealine

I would normally agree up to a point! Any cost-cutting (or "enhancements" as BA have dubbed them) should not be noticeable by the customers, unless they are paying substantially less for their tickets. First Class passengers should NOT have had the Krug taken away nor the JW Blue Label from the First Class Lounges as they are still paying the same "F" fares, or higher, than they were before!

Similarly, taking staff away and expecting those that are left to absorb the extra work with no extra pay or reward is a mug's game - you're just breeding resentment. Remember the psychology - people will always question "What's In It For Me?" whenever there is change! The old carrot of "Job Security" just doesn't cut the mustard any more - anyone with half an eye can see that the future holds massive job erosion (but will create more managers' opportunities)!

We've put up with cost-cutting for far too long - any more and we'll be shedding the life-blood of the company!

Globaliser

Interesting. If the cabin crew are right (and please note that I pose this in the hypothetical), how would you suggest that they press home their point other than in the way that they're doing?Of course, the company has to earn something, and ought to earn something decent to provide a proper rate of return.

But there are a number of things that suggest that 10% was an arbitrary - and, with experience under our belt, over-optimistic - target that was set for the hell of it. From my inexperienced and uneducated viewpoint:-
1. BA has never earned a sustained 10% operating margin in its entire life.
2. BA's peers are not earning a sustained 10% operating margin.
3. 10% is a round number.

If the target operating margin was picked after sophisticated financial analysis, using the best tools that the black arts could devise, I would expect it to throw out a number like a target operating margin of 9.735%. The round number is suspicious, precisely because it's round.Eventually cost-cutting will cut standards, rather than just streamlining and dynamicising.

The burning question is: Have we reached that point? There are more and more indicators that we have.

BahrainLad

You would be referring to the passengers here? Would you?

I think the main problem with trying to streamline and dynamicise BA is that the departments that need to be restructured cannot be due to total union intransigence. The only recourse is to simple cost cutting which has seen the erosion or 'enhancement' of service over the last 2-3 years.

Now...cost cutting can go no further and restructuring has started. And what a start it has been.

bernardd

Taken together I guess you're worried that BA will become a divison of the NHS? Thank heaven I no longer live in the UK!

On a more serious note, I'm sure the majority of revenue won't be influenced by whether a 747 has one less CC, has slightly lower graded CC, or the brand of booze dispensed 'free' in lounges, though it will notice if the entire CC is tired, grumpy and un-helpfull. If you want to see the effect of a tired, dispirited staff, climb on a US carrier.

One of my fears is this threat of a strike is coming to close on the heels of the security delays, fog delays, delayed baggage etc last year. Yes, I know they weren't down to the CC, or even BA (mostly), but passengers don't really distinguish. IMO the managers are crazy to provoke this fight now - the psychology stinks, but as you rightly say, job erosion seems almost inevitable and the union will be stupid if it doesn't recognize that and plan for the transition.

Which is not to say there isn't a place for a premium product in the airline business - there is, and I certainly hope BA is there.

oyster

Not been posting on the BA Board long have you???

bernardd

But is this really representative of where the bulk of BA's revenue comes from? My guess is most people don't bother expressing an opinion and simply vote with their feet.

john11111111111