LONDON British Airways BAY.L unveiled a $1 billion fundraising aimed at securing its future, including $540 million in bank loans that had been earmarked for its pension funds as a safety net against the airline going bust.
The cash removes any immediate threat to the struggling carrier as it endures one of the aviation sector's worst ever downturns coupled with competition from budget carriers, chief executive Willie Walsh told reporters on Friday.
BA shares were up 3.0 percent at 136 pence at 1240 GMT (8:40 a.m. EDT), having fallen nearly 70 percent in value over the past year.
The company, with a pension deficit estimated at over 3 billion pounds ($4.9 billion), said pension fund trustees had agreed the best way to prevent BA going to the wall was for bank guarantees provided in 2006 to be handed back.
These guarantees were accessible by the trustees only in the event of the airline's insolvency.
BA also said it planned to raise 300 million pounds through a convertible bond issue, boosting its balance sheet by a total of about 600 million pounds. The airline also unveiled a first-quarter loss of around 100 million pounds.
"This ensures that in all but the most extraordinary circumstances BA will emerge from the downturn intact, and without issuing too many shares (via a rights issue)," Evolution analyst Nick Cunningham said. "It is a very good compromise."
David Cumming, head of UK equities at BA shareholder Standard Life Investments said the fundraising would be well received by investors, but must be followed up by continued cost discipline.
"It was important to do the funding. Now, if it keeps costs under control things will improve," he told BBC radio.
Walsh said BA was now one of the strongest airlines in terms of cash. "Our trading position is difficult, but we have taken action ahead of competitors. The situation has now improved for (pension scheme) members," he said.
The extra cash will be used both for day-to-day operations and future investment, the airline said.
Danny Vassiliades, principal at pensions consultants Punter Southall, said BA pension scheme trustees may have concluded the bank guarantees were not enough to cover the pension fund deficit in any case.
"Had BA gone insolvent with a big enough deficit in the scheme the guarantee would have benefited the (government's) Pension Protection Fund (PPF) rather than members," he said.
Global sales of lucrative business class fares, which account for about 25 percent of airline revenues, fell 23.6 percent in May, the International Air Transport Association said on Thursday, underscoring the severity of the aviation sector slump.
BA has responded to the downturn by slashing costs, and is negotiating changes in pay and working conditions that could lead to thousands of job cuts.
BA also said on Friday it expected an operating loss of 100 million pounds for the three months ending June 30, on revenues of 1.98 billion pounds. It said the loss, which compares with an operating profit of 35 million pounds a year ago, was "slightly better than market expectation."
BA's convertible bond issue was fully taken up by investors, sources told Reuters. The notes fall due in 2014 and will be convertible into 15-20 percent of the airline's shares.
Also on Friday, a person familiar with the matter told Reuters that BA had hired investment bank Reynolds Partners to find a buyer for its loss-making upmarket airline OpenSkies which flies from Amsterdam and Paris to New York.
The Daily Telegraph newspaper reported OpenSkies had been valued at 30-70 million pounds.
A BA spokeswoman said: "We are reviewing all aspects of our business ... OpenSkies is a small part of our business and its losses are not significant compared to losses in other parts of the company."
(Additional reporting by Daisy Koo and Quentin Webb, Editing by Dan Lalor)
($1 = 0.6132 pound)