Turbulent times for Europe's biggest airline

After settling a strike last week, British Airways is set to cut another 2,000 jobs in coming months.

Etain Casey says she'll never fly British Airways again.

Not because of any heart-stopping moment at 30,000 feet, but because of a ruined weekend at ground level.

Ms. Casey, an academic, was on her way to Stuttgart for a conference on English-language teaching. As it turned out, a strike by BA check-in staff meant she never got further than Heathrow Terminal One. "It was just bedlam," she says, recalling the weekend last month when she was among 80,000 stranded passengers. "One BA staff member even told me that if I was so desperate to get to Europe my best bet was to take the Eurostar [train] or swim."

For the airline, the walkout on the first weekend of the summer holiday was an operational and PR disaster.

BA acknowledged last week, as it finally resolved the dispute, that the strike would cost it as much as £40 million ($64 million). BA staff have since been calling thousands of regular customers to apologize personally in an attempt to hang on to future bookings.

The strike revolved around a new time card that BA management wanted to impose on staff to monitor working hours. It's all part of a painful cost-cutting effort that top executives say are essential. Chief executive Rod Eddington has even started talking in grim tones about "the road to survival."

In the mid-1990s, when the company was making hundreds of millions of pounds profit each year and adding new flights to its roster and new aircraft to its fleet, dark mutterings about whether BA could survive would have seemed ridiculous.

Now, however, with the global aviation industry in a tailspin following the events of Sept. 11, the war in Iraq, and the SARS virus, many airlines are facing the adapt-or-die challenge. The bankruptcy scourge that has threatened American carriers is never too far away from Europe, particularly as the economic downturn of the past two years bites.

"This is the most testing period in aviation history," said Mr. Eddington last week as his company unveiled one of its worst financial results in its history - a first quarter loss of £45 million.

He said BA is starting to address the crisis by streamlining staff. More than 11,000 jobs have been cut and another 2,000 will go in coming months.

It has been a steep fall from grace for BA. In March, as its share price plunged well below the level at which it was privatized in 1987, the airline was ejected from the elite club of 100 top British public companies known as the FTSE 100.

In April, BA announced that the Concorde, its flagship supersonic "old lady of the sky," was to be grounded for good in the fall.

Fares were slashed on many routes as it sought to persuade people to fly. But its debts remain substantial, and a leading financial agency last month cut its all- important rating to junk-bond status.

Airlines are fragile businesses. Their costs are so huge that a few empty planes can mean the difference between success and failure. "The cash flows are enormous, so with BA we are talking about a company that makes very slim profit margins on massive revenues, so if you take a total loss of revenue for a short period of time, it would be enough to bring an airline down," says Tim Coombs, a consultant at Aviation Economics, an industry consultancy.

Given this harsh reality, strike action like the recent walkout is far more dangerous to a company like BA than it is to other businesses and industries. "The one thing ... quite apparent is just how much damage a relatively small part of the organization has been able to do to BA's image and profitability," says Mr. Coombs.

BA managed to find a compromise on the time-card dispute.

But what challenges lie ahead for the British flag carrier - still Europe's largest airline and, with one exception in 2002, a perennially profitable airline?

Analysts predict that BA, along with Air France and Lufthansa, will continue to dominate European aviation, but will struggle to grow under the current European preference for every country preserving its own airline, profitable or not.

BA will also face rising pressure from cheaper rivals like easyJet and Ryanair who have muscled into its markets.

"Europe's two largest low-cost airlines are based in the UK, and they are only getting bigger," notes aviation analyst Stephen Clapham of brokerage Williams de Broe.

BA has sought to insulate itself from this aggressive competition by styling itself as the upmarket carrier, with beds in first class and other perks for premium travelers. But that addresses only half the problem, Mr. Clapham says. "For every person that flies in first class there are still half a dozen that fly at the back of the plane.

"BA faces a big competitive threat. The UK airline industry is the most intensely competitive environment in Europe, and even Europe is pretty competitive, and that isn't going to change."