Although BA remained one of the few airlines in the world to record substantial profits last year, it was hit by a slump in passengers paying premium fares, a wave of cost increases and losses on exchange rates and investments in associate airlines.
The proceeds from the discounted rights issue - BA is offering one share for every four held at 245p - will be used to reduce its borrowings. These soared by more than pounds 1.5bn last year as BA embarked on an ambitious programme of global expansion and fleet renewal.
Strategic investments - notably the acquisition of 25 per cent stakes
in USAir and Qantas - totalled pounds 574m, while BA laid out more than pounds 1bn on new aircraft and other assets. The proceeds from the rights issue will reduce BA's debt-to-equity ratio from 160 per cent to 100 per cent.
The Stock Exchange is conducting an investigation into how details of the cash call were leaked into the market four days before the announcement, and BA has instructed its lawyers to carry out an internal inquiry.
Sir Colin Marshall, chairman, warned that excess capacity and weak levels of premium traffic would continue to affect yields. But he said BA expected its new marketing and cost- cutting initiatives to bear dividends.
Last year's 5.7 per cent decline in passenger yields knocked about pounds 260m off profits, while employee and fuel costs, landing fees and handling charges all rose significantly. This resulted in a 35 per cent, or pounds 100m, drop in profits from 1991/2 adjusted to exclude the pounds 274m profit from the sale of BA's engine overhaul business to General Electric.
In the final quarter BA suffered a pounds 25m loss compared with a pounds 25m profit a year earlier, partly due to one- off items such as a pounds 23m increase in severance payments to staff and a pounds 5m operating loss at Dan-Air.
But all this was offset by cost savings of pounds 150m- pounds 200m - a level BA expects to achieve again this year as it pushes through cost reduction programmes, notably at Gatwick.
Sir Colin, in his first formal appearance since taking over the chairmanship, refused to be drawn on the row over the Virgin Atlantic dirty tricks saga or the writs launched by its chairman, Richard Branson.
'We will defend our position at the appropriate time and in the appropriate place and that is it,' he said, referring to the High Court action begun by Virgin.
BA's shares, which had already been adjusted by the market to take account of the rights issue, shrugged off the larger-than-expected drop in profits, closing just 0.5p down at 296.5p.
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