Butmosturgentofallisagreeingaplantofillthe£3。

7bnpensionhole。

Theproblembeingthat,untiladealonthisisstruck,Iberiacanwalkawayfromthemarriageifitisnotsatisfiedwiththeoutcome。

Ominously,theBritishPensionsRegulatorhasalsowarnedthatprovisionsmaybemateriallybelowappropriatelevels’–indicatingthatthedeficitcoulddeterioratefurther。

BritishAirwaysalsofacestwostrategicthreats。

Thefirstisfromaggressiveshort-haul,low-costairlines,andthesecondfromtheGulf。

Emirates,QatarAirwaysandEtihadallcontinuetobuildmarketshareandinvestinnewaircraft。

Andconsideringtheirproximitytotheoilproducers,Isuspecttheyhavesecuredprettygoodtermsonthefueltoo。

TheMiddleEastairportsareprovingsopopularasatransitstopforjourneysbetweenEurope,AsiaandAfrica,thatBAisbeingforcedtoheadwestintothecut-throatUSmarket,whereitistryingtosealajointventurewithAmericanAirlines。

Finally,letsnotforgetthatair-travelisalsosubjecttocripplingovercapacity,reducedpremiumtraffic,risingtaxes,environmentalconsiderationsandterrorism。

WhenvaluingacyclicalbusinesssuchasBritishAirways,itscrucialtolookatsustainablereturnsthroughboththickandthin。

Assumingathrough-cycleEbitamarginof5%andoverlayinganeight-timesmultiple,wegetanenterprisevalueof£3。

2bnonturnoverof£8bn。

Hence,afterdeductingthe£2。

3bndebtloadandadjustingforthe£3。

7bninretirementobligations,IestimatethatBritishAirwaysequityiswortharound–£2。

8bn(or–240pashare)。

IfthemergerwithIberiaandthejointventurewithAmericanAirlinesgoahead,thiscouldadd100pashareofvalue。

AndtheresthechancethatsomebodymaywanttobuyBritishAirwayscovetedlandingslotsatHeathrowandGatwick。

Allthesame,withthegroupsdebtalreadyclassedasjunkbyMoodys,Idgivethestockawideberth。

Recommendation:SELLat200p



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