What's going on?
Following a weekend of cancelled flights stemming from an IT failure, the stock price of British Airways’ parent company, IAG, fell almost 1.5% on Tuesday as investors digested the mess.
What does this mean?
Virtually every British Airways flight due to leave London’s two busiest airports was cancelled on Saturday following what the company said was a “power surge” affecting its computer system. British Airways is on the hook for a number of costs, including a hefty bill for passenger compensation. But the bigger damage might be longer-term as customers link recent cost-cutting initiatives at the airline with a marked decline in customer service.
Why should I care?
For markets: It’s a tough time to be a traditional European airline.
Air France is beset with labor problems, Alitalia just declared bankruptcy and now British Airways takes a big reputational hit. Meanwhile, European discount carriers, like Ryanair and EasyJet, are expanding (Ryanair announced further expansion plans on Monday). Even in the long-haul space – once the preserve of legacy airlines like British Airways – the upstarts are making inroads as Norwegian Air and others have expanded their overseas routes. Ryanair has also said it will act as a connecting airline for certain low-cost long-haul operators.
The bigger picture: We’re about to get a case study in the importance of a brand.
For many years, British Airways had the reputation of a premier airline: you got a free drink, even on short-haul flights, and a reserved seat so that your boarding process didn’t resemble a mosh pit at a Metallica concert. However, in recent years British Airways has consciously pursued a strategy to more closely match its “discount” competitors, cutting its operating costs as well as ticket prices. Gradually, its reputation for better customer service has eroded and this past weekend’s events will almost certainly hasten that. The question, for investors, is whether it really matters – whether people will still just book the cheapest flight for their next adventure.