BA heads for the stratosphere

The best thing about the airline business is that once you have passed breakeven, a very high percentage of any further business can go straight through to profits.

British Airways is in that happy position, and yesterday reported profits above even the best expectations, at pounds 135m for the three months to the end of June: a 57 per cent increase on the restated pounds 86m a year ago.

Capacity was up, the number of seats filled went up still faster, most costs were restrained - apart from those that are volume-related - and as a result profitability increased sharply.

And some of the problems that looked so disastrous a year ago, such as the stake in USAir and the loss-making European alliances, are now under much better control.

The main growth was in the long-haul market, where BA has concentrated this year. There, capacity rose by 6.5 per cent, compared with an increase of only 1 per cent for short-haul routes.

By going out into the market and selling hard, using schemes such as the World Offers promotional fares, BA managed to produce a 14 per cent increase in long-haul traffic and a 5 per cent increase in-short haul, well above the extra capacity laid on.

Long-haul provides less revenue per passenger mile, so BA's overall yield figures fell by 2.4 per cent compared with a year ago. Some analysts were concerned at that slippage, but it is not the best guide at a time when the business is growing and capacity usage is rising.

The cost of putting passengers on a plane and taking them off again is much the same, no matter how great the distance travelled. But once the plane is in the air, costs per passenger fall dramatically with mileage. Costs per unit of capacity have risen by only 1 per cent.

The figures were flattered by difficulties a year earlier - the IRA mortar attack at Heathrow and a late Easter - so it will be harder to keep up the momentum in the peak second quarter.

There is, however, no disguising the success with which BA is coping in a competitive market where some of its smaller competitors - such as Iberia, to name but one - have to be heavily subsidised to stay in business at all.

The shares, up 9p to 447.5p, should be capable of getting much nearer to the 495p they reached last year.

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