British Airways heads for the sunset

For many years, British Airways was one of the more conspicuous successes of the Thatcherite privatisation programme of the 1980s. Free from the dead weight of government ownership, the carrier was able to boast that it was the "World's favourite airline". But now the global recession has ruthlessly exposed the weaknesses in the group's business model, and the airline is floundering as business traffic falls and nimbler rivals poach its market. Now, serious commentators are questioning whether the airline can survive the downturn in its current form, or continue as a quasi-social service by flying to too many destinations.

The recession has forced companies to cut their travel budgets and well-heeled businessmen are now willing either to slum it in economy class, or even to fly Ryanair. Yet BA's business model is heavily weighted towards ferrying premium passengers to New York on the lucrative transatlantic route, and the fall in passenger numbers is sobering. BA's latest traffic figures for May show a 17 per cent year-on-year decline in premium passengers. A drop of this magnitude used to be unheard of, even in the dark days following the 9/11 attacks in 2001. It makes it tough to predict when recovery might come, and even the more optimistic City analysts forecast that BA will make losses for at least the next two years.

The other millstone for BA is the deficit in its pension fund. Indeed, the airline is often caricatured as a pension fund with a sideline in running aeroplanes. In one sense, the group is an innocent victim of current events because, without the global meltdown in financial markets, the deficit, £1.46bn and counting, would be nowhere near as big as it is. On the other hand, the pension fund is a legacy of a particularly generous defined-benefits scheme inherited from BA's government-controlled predecessor company, BOAC, and should have been reformed years ago. The deficit on its own would not prove fatal unless additional contributions were demanded by the funds' trustees. That is unlikely to happen as it is not in the interests of BA's pensioners - both present and future - for the group to be forced into bigger losses. Yet the deficit still has an impact at the operational level - it is the main stumbling block to a proposed tie-up with Iberia, Spain's leading airline, which could yield substantial cost savings.

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Staff unrest could also prove to be a feature of the summer for BA. Management and trade unions are in urgent negotiations over proposed pay cuts and redundancies, and chief executive Willie Walsh has asked for volunteers to take unpaid leave or work without pay. Mr Walsh - monthly salary £61,000 - is working July for nothing. Around 7,000 have volunteered so far, which will save £10m. But that's peanuts compared with BA's global wage bill of £2.2bn. If no agreement is reached, then industrial action could cripple the airline during the peak summer holiday season. BA's pilots have agreed a pay cut, but it could prove tricky to bring lower-paid cabin and ground staff on side. Conserving cash is the key for the group, which consumes around £2.5m a day, according to analysts' estimates. The airline has around £1.4bn of available cash on the balance sheet, but the market will get nervous if this falls close to £500m, prompting fears of a rescue rights issue. The airline also needs to improve its cost control as the latest accounts record big spikes in non-fuel items, such as engineering - a poor record when compared with the budget airlines.

Still, there is one chink of light. Figures from the airlines' trade organisation, the International Air Travel Association (IATA), indicate that the decline in passenger numbers may have been reached. In March, figures from IATA showed that the year-on-year drop was running at 11 per cent, but - encouragingly - May's figures show the drop has slowed to 9 per cent. Small comfort perhaps, but it serves to remind us that passenger numbers should recover quickly when confidence returns to the global economy.