You’d think that an airline with grounded planes would have a falling share price? Think again.

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At the time of writing this, British Airways’ cabin crews are on strike, claiming that management has attempted to impose harder working conditions on them.  Both the airline and the labour union acknowledge that BA must make very substantial cost savings in order to survive, so the dispute is about where those cost savings can come from.

BA have contingency plans which they claim will get 65% of passengers to their destination, including “wet leasing” aircraft from other airlines. It’s one of the biggest news stories in European business at the moment.

Against a backdrop of record trading losses, costs of a strike (lost revenue, lost goodwill, extra standby costs), you might well expect the share price to fall.

In fact, since the start of 2010, British Airways’ share price has steadily risen by 20%.  The actual announcement of the strikes had no significant effect on the share price at all.  How can this be?

The answer is simply that the share price in an efficient market reflects expectations about long-term future profitability.  BA is seen by many analysts as a company with a great core business, but with simmering problems with unrealistic labour unions and inflated staff costs.  This has long produced a discount on the company’s share price, with low P/E ratio.  The fact that this has erupted into a strike has long been anticipated, so its actual occurrence hasn’t surprised anybody.  Indeed, the market’s confidence in the long-term future of the company appears to be rising, as Willie Walsh, the airline’s CEO, is seen as tackling some of the company’s deepest long-term problems instead of skirting around them.

Regardless of the alleged rights and wrongs of the dispute itself, it’s an interesting illustration of how share price valuation actually happens and how markets for some very deeply traded shares do appear to be rational.

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