In advance of IAG’s full-year results, due later this week, British Airways made two announcements yesterday about its plans to generate liquidity.
A pension scheme with a little airline attached ….
British Airways is occasionally described as a pension scheme which happens to own a small airline. This is not far from the truth.
The last published valuation of the New Airways Pension Scheme (NAPS), at 31st March 2019, showed that it had assets of £18.1 billion. The market capitalisation of IAG is currently £8.4 billion, of which BA accounts for around half. There is some truth in the remark.
The New Airways Pension Scheme, which has been closed to new members since 2003, has a funding hole of around £2 billion. British Airways has been working hard to fill this gap in recent years.
BA will defer £450 million of deficit contributions
British Airways has agreed with NAPS to take a 12-month break from making ‘deficit contributions’.
This has been backdated to October 2020 and will continue to September 2021. There is a cash saving to BA of £37.5 million per month, for a total saving of £450 million.
Under the current plan, BA will resume regular ‘deficit contributions’ from October 2021. The size of these payments will depend on the triennial valuation of the scheme due on 31st March 2021.
However, it will not start to repay the missing £450 million until March 2023. From that point, any dividends paid upstream from BA to its parent IAG must be matched by a deficit reduction payment. These will continue until the £450 million, plus interest, is repaid.
BA has put up various property assets as security in the event that the airline fails before the payments can be made.
BA is drawing down its £2 billion Government-guaranteed loan
This is funded via the Export Development Guarantee scheme. The money is provided by commercial banks but the loans are underwritten by the Government to, based on precedent, 80% of the total sum.
British Airways confirmed yesterday that it now needs this money, and will be drawing down the loan before the end of the month.
The good news for British Airways is that, in the short term, liquidity does not seem to be a problem. We should find out from the IAG financial results on Friday how long this £2.45 billion will last.
The hope is that it will see the airline through until passengers have confidence to start booking again. Remember that, if the airline fails, the majority of the £2 billion pension deficit will be picked up by taxpayers, as will 80% of this new £2 billion loan.
You can find out more on the IAG website here.