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Ayling declares BA has turned the corner despite 80% profits slump

BRITISH AIRWAYS declared yesterday that it had started to turn the corner despite reporting a drop of more than 80 per cent in profits for the second quarter - traditionally its most profitable period of the year.

Announcing an unchanged dividend, Bob Ayling, the airline's beleaguered chief executive, said: "We feel things are beginning to turn around. Of course, these results are bad but they are not as bad as people were expecting. I don't think there is anybody who follows this industry seriously who doesn't support or strongly support what we are doing."

Analysts are forecasting losses of pounds 160m to pounds 200m for the full year - BA's first loss since privatisation in 1987. But Mr Ayling said its strategy of cutting capacity and concentrating on business class passengers was starting to pay off. "Everyone is paid by results and these results are encouraging," he added.

He was speaking as BA unveiled an 83 per cent decline in pre-tax profits from pounds 240m to pounds 40m for the July to September period but reassured investors by maintaining the interim dividend at 5.1p.

BA said that the "glut of low fares" which had affected it so severely during the summer would continue to hit profitability over the winter months.

But the BA chairman, Lord Marshall, said the prospects for next summer gave it grounds for "cautious optimism". Other airlines were now following the lead of BA and cutting back on capacity growth, while the UK economy was strengthening and South-East Asia was improving fast.

In a message aimed as much at BA's 65,000 staff, Mr Ayling said that the target of pounds 1bn of cost savings had now been achieved under the airline's business efficiency plan and employees could look forward to an era of investment. "From now on we will be investing in products, in people and in our customers," Mr Ayling added.

While 1,000 management and back-office jobs have gone since August as part of a further pounds 225m cost-cutting plan, there will be be no reduction in front-line staff.

Although a number of analysts had pencilled in a dividend cut, Mr Ayling said there had been no serious discussion about reducing the payout based on current trading and BA's confidence in the outlook.

Brokers are now forecasting a bottom-line loss of pounds 160m to pounds 180m for the year and losses at the operating level of about pounds 230m for the second half.

But Chris Tarry of Commerzbank, a bull of the stock, said: "Step by step, people are becoming clearer about BA's strategy, how it will be delivered and what that means. The salesforce now have a product and the confidence to sell it."

Both the second quarter and interim figures were distorted by a series of one-off items. On a pre-tax basis, BA made a profit of pounds 240m for the half year, compared with pounds 385m last year, but pounds 191m of this was due to the disposal of its stake in the Galileo ticket reservations system and aircraft sales.

Stripping out pounds 42m of redundancy costs, a pounds 62m charge for re-translation of yen-denominated borrowings and a pounds 14m profit on asset disposals, Mr Ayling said that underlying profits in the second quarter were pounds 132m - down by a more modest 46 per cent on the previous year.

Mr Ayling said that BA would use British Midland's entry into the Lufthansa- led Star Alliance to argue for a level playing field if and when it resubmits its alliance with American Airlines for approval.

The sale of a 20 per cent stake in British Midland to Lufthansa for around pounds 110m is being announced this morning.