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LONDON — As demand for premium class air travel is steadily whittled away by the global recession, British Airways PLC is leading moves among European flagship carriers to strip out costly services like onboard meals that had previously distinguished them from budget airlines.
BA Chief Executive Willie Walsh, who has warned that the key premium market may never recover, said Friday that his cost-cutting ax would swing for some years yet as the airline posted a 94 million pound ($155.5 million) quarterly loss.
The economic downturn has hit carriers including BA, Air France-KLM and Lufthansa harder than their low-cost rivals like Ryanair and easyJet as cash-strapped individual travelers and companies balk at paying for a seat in first or business class, particularly on short-haul flights.
The latest International Air Transport Association figures show that the number of premium ticket holders slumped 23.6 percent in May — the 12th straight month of declines.
Underscoring the extent of the rout, BA's first-quarter operating loss was the first time since the airline was privatized in 1987 that it has recorded a deficit at the beginning of the fiscal year.The April to June quarter is usually the second strongest earnings period after the summer peak — the airline earned a 35 million pound profit in the same period a year ago.
Revenue in this year's quarter fell 12 percent. Air France-KLM and Lufthansa fared even worse, reporting falls in revenue of 20.5 percent and almost 20 percent respectively and significant losses on Thursday.
In contrast, both easyJet and Ryanair are expected to post full year pretax profits, albeit with Ryanair scaling down its forecasts earlier this week to the lower end of its range.
"On short-haul flights, business class is on the way out and might even disappear within the next few years," said Panmure Gordon analyst Gert Zonneveld.
With that awareness growing, full-service carriers are beginning to resemble their low-cost counterparts more than ever by taking a page from the low-cost business model and removing perks. BA earlier this week said it is scrapping meals in economy class on short-haul flights to save some 22 million pounds each year. It's also considering cutting the chocolates and canapes it serves up to business class passengers.
The airline's trans-Atlantic, business-class only subsidiary, Openskies, last week dropped its service between Amsterdam and New York and shelved plans to add four more jets serving other European cities by the end of 2009.
In the United States, some carriers have begun charging for drinks on long-haul flights. Deutsche Lufthansa AG announced a euro1 billion cost-cutting plan on Thursday and while it did not unveil full details, analysts have little doubt it will include cutting back on ancillary services like catering or use of credit cards.
Oddo Securities analyst Yan Derocles in Paris said future cost-cutting exercises by big carriers meant that customers are likely to find themselves paying for things like changing a ticket that used to be free.
"In terms of service and pricing, they are getting a bit closer to the Easyjet, on short- and medium-haul flights," Derocles said. "We will see more and more of this on intra-European flights."
But BA argues that it is a long way from the likes of Ryanair, which charges for onboard refreshments, check-in, seat priority and hold baggage, noting that it will still serve breakfast on short-haul flights that take off before 10 a.m.
Zonneveld and Derocles said that the differences between low-cost and full-service airlines would remain sharper on long-haul flights, but Zonneveld cautioned that even then there would be "nonstop cost reduction."
Walsh said that BA's its stringent cost plan was already bearing fruit, with a 6.6 percent reduction in operating costs since October — a result that was welcomed by investors who pushed up BA's shares 6 percent to 142.4 pence.
However, he added that "with revenue still weak, there is much more to be done," including pushing through a plan to slash some 3,700 jobs from its 40,000-strong work force and freeze pay for several years. It has also taken 5 percent of its winter flight capacity out of service.
The staff and pay cuts have met with resistance from unions. BA recently called in a government-backed mediator in an attempt to reach a deal and avoid crippling strike action. Walsh said Friday that both sides are currently in a "cooling off" period with talks halted.
The carrier's engineers and pilots have accepted a separate deal.
Walsh has also delayed delivery of 12 new superjumbo Airbus A380 aircraft, but declined to comment on the status of talks with Boeing Co. over the 24 Boeing 787 jets it ordered in 2007, following a report he was seeking to renegotiate installment payments.
"Talks are ongoing and confidential," he told reporters.
In more positive news, BA said it expected its full year fuel bill to be between 450 million pounds and 500 million pounds lower. It also said that its debt had fallen slightly to 2.3 billion pounds.
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AP Business Writer Greg Keller in Paris and AP Writer Karolina Tagaris contributed to this report.
