Private Investor: Resilient BA flies through turbulence and turns a profit

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The Independent Online

Life is full of mysteries. Political comebacks by Peter Mandelson. The mass appeal of Sex and the City.

Life is full of mysteries. Political comebacks by Peter Mandelson. The mass appeal of Sex and the City. Greece winning Euro 2004. Powered flight. Powered profitable flight, indeed. This latter thought is prompted by the news last week that the new chairman of British Airways, Martin Broughton, has given his management team 18 months to find ways to increase profits and get the airline back on the dividend list.

It's good news, I suppose, although as I have reason to know, the fact that a chairman of a company asks for something doesn't necessarily mean it is going to happen.

In fact, the more remarkable thing about British Airways for those of us who count ourselves long-term shareholder is the simple fact of its survival. One day they will write a book about this, just as so many books and articles were written about BA's post-privatisation renaissance to become "the world's favourite airline" in the 1980s.

The list of problems the company faced was, and is, prodigious; vestigial overmanning and restrictive practices; terrorism; the price of fuel; the rise of the low-cost budget airlines; chronic overcapacity; continuing pressure on the regulators to liberalise the air travel market; huge debts; even a sex discrimination suit from its female staff. Many of its flag-carrying peer group have collapsed under the stress. And yet BA has managed to fly through all this turbulence in one piece.

More than that, BA has managed to turn a pre-tax profit of £230m on operating margins of 5.4 per cent. Mind you, Ryanair are running margins of more than 20 per cent, so the in-flight champagne can be kept on ice for now, I suppose.

So what of the future? The new management does seem determined to cut costs and place the airline on an even more stable footing. They are certainly right to do so. The same day as BA were announcing their results, Loyola de Palacio, the outgoing (by which I mean leaving, rather than expressive) EU Transport Commissioner, gave member states 12 months to scrap restrictive air travel agreements with the United States.

At the moment, Britain's agreement with the US limits the number of carriers operating across the Atlantic to four. In theory, abolishing the agreement would leave the airways open to all. Perhaps the worst affected airline in the whole of the EU would be BA. At the same time, the EU approved a £226m subsidy from the Italian government to the struggling Alitalia. You wonder why BA doesn't pack up and go home.

Yet, as I say, the company shows remarkable resilience and there is a sense of renewal abroad. The long-term prospects for air travel are still excellent, something that has to be borne in mind in such a gloom-ridden sector. That is why I still hold BAA, lastminute.com and Rolls-Royce, which adds up to quite an exposure.

British Airways is one of the stronger players in the industry, and is one of the better prospects for survival. Oddly enough for a British company engaged in fierce international competition, the management seems to have been given credit by the markets for this, with the shares standing well above their post-11 September lows.

That is in stark contrast to easyJet, which I bought with the specific intent of it being a hedge to my holding in BA. Now I find the reverse has happened as the chill wind of reality hits the budget carriers.

Hedging is all very well, but sometimes it might be better to simply follow one's instincts. I would like to add to my BA shares, but I think I will wait for one of those little bits of bad news that jumps on the shares every once in a while.

The sex discrimination suit was one that I missed out on, but there will be more. I am in the VIP lounge, waiting to board.

s.o'grady@independent.co.uk

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