May 30, 2017 / 12:06 PM / in 6 months

IAG can weather turbulence at BA

LONDON (Reuters Breakingviews) - British Airways’ IT systems can grind to a halt without the help of hackers. A computer mess forced the UK flag carrier to cancel hundreds of flights over a busy holiday weekend. Yet both BA and its owner, IAG, can weather the turbulence.

People wait with their luggage at the British Airways check in desks at Heathrow Terminal 5 in London, Britain May 28, 2017. REUTERS/Neil Hall

Embarrassing as the travel chaos was, BA is likely to suffer limited reputational damage. Its IT systems were running again on Tuesday and less than 0.5 percent of the carrier’s annual number of passengers were affected. Customers tend to have a very short memory when it comes to one-off blunders by companies. A case in point is German carmaker Volkswagen, whose sales were barely affected by the manipulation of diesel emissions data that affected 11 million vehicles.

Investors expect the financial damage will be manageable, if share-price moves are anything to go by. The weekend disruptions will reduce IAG’s earnings by around 100 million euros, Citi analysts estimate. The BA owner is currently trading on 7.4 times expected earnings for the next 12 months, according to Thomson Reuters data. So in theory its market capitalisation should have fallen by more than 700 million euros – a 5 percent drop from Friday’s closing price. In reality, IAG’s shares fell roughly half as much on Tuesday.

The relatively phlegmatic reaction is appropriate. Unions blamed the meltdown on IT services being outsourced in 2016 to an Indian services company, but BA Chief Executive Alex Cruz says there is no connection between cost cutting and crashed computers. True, IAG’s expenditure on property and IT-related costs has fallen to 3.9 percent of revenue from 5.6 percent five years ago but the figure in euros has remained broadly stable.

And the carrier has little choice but to keep reducing expenditure where it can. Tough regulation and industry-wide standards mean no airline can skimp on safety-related spending. Yet European no-frills rivals Ryanair and easyJet as well as long-haul competitors like Emirates operate with staff costs that are at least two-thirds below IAG’s as a percentage of revenue, and can therefore offer customers cheaper fares. As long as travellers are willing to put up with a bit of misery in return for cut-price tickets, Cruz and IAG can survive the rough ride they are experiencing right now.


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