British Airways, strikes, and a final Christmas competition reminder

As BA goes to court to try to stop the 12 Days of Christmas strike by its UNITE cabin crew members, I dug out the paper mentioned in the Times yesterday about the impact of striking on workers’ pay.  The paper is called Do strikes pay? by Metcalf, Wadsworth and Ingram, and you can read it here (scroll down to section 9 on page 179).  Having done a comprehensive analysis of strikes in the UK in the 1980s, the authors concluded that going on strike boosted workers wages by just 0.3%, and that given the average strike length was 11 days, “the ‘average’ strike is unlikely to be a good investment (for the strikers)”.   They do caveat their findings – the mere threat of strikes, without there actually being one, might elevate pay levels, and having to follow through with the threat periodically is necessary to show the employer that the threats are credible.  In addition, striking by some workers might lead to the small gains being won even by non-striking workers (even in related industries, or at competitor firms) increasing the overall benefit to workers.  Finally, non-wage gains might be realised which are not included in the analysis.  However, even with these caveats, losing around 4.5% of an annual wage (11 days out of 250 working days) to gain 0.3% per year doesn’t look compelling.

As for BA, we rate it as a BB high yield company.  Its 5 year CDS spread is currently at 500, implying an annual 7% default probability on average over the next 5 years (assuming a 30% recovery rate).  Its 1 year CDS is only 200 however, which suggests that the market doesn’t believe that this strike will prove to be terminal for the airline. The good news for BA is that it does have a lot of cash on its balance sheet, and also that there has been a return of passengers to the premium cabins on its expensive London to New York routes.  The bad news is its £3.7 bn pension fund deficit and a rising trend in fuel costs.  We don’t own any of their debt.

Lastly, a final call for all Christmas Quiz entries.  Gates will be closing at 5pm on Friday.  Frequent Fliers are reminded of the “one entry per person” rule.  I’m looking at you Lisa Taylor.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Jim Leaviss

Job Title: CIO Public Fixed Income

Specialist Subjects: Macro economics and fixed interest asset allocation

Likes: Cycling, factory records, dim sum

Heroes: Brian Clough, Morrissey, Neil Armstrong

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