BA plans massive rights issue to shore up its balance sheet: Shareholders face cash call as investments in rival airlines take big carrier's debts to more than pounds 2bn

BRITISH AIRWAYS is expected to ease the pressure on its increasingly strained balance sheet by announcing a rights issue of up to pounds 600m this week. On Tuesday, the company will also unveil a sharp drop of more than pounds 80m in its pre-tax profits to around pounds 200m for last year.

Following a string of investments in other airlines, BA's borrowings have soared to about pounds 2bn - equivalent to 250 per cent of shareholders' funds - putting it among the most heavily indebted of Britain's large companies. Sir Colin Marshall, BA's chairman, warned earlier this year that BA's gearing was close to the top of its acceptable range.

The Stock Exchange is expected this week to investigate the source of the leak about the rights issue.

The BA rights issue is only one of a number of substantial cash calls said to be in the pipeline. Allied-Lyons, the foods group, is one company in the frame. But stockbrokers are worried that further large rights issues on top of the BA fund raising could knock share prices as investors sell some existing shareholdings to afford the new issues. They are already being asked to absorb a pounds 1.3bn rights issue from ICI announced last week, a pounds 400m cash call from Royal Insurance, and the sale of more than pounds 5bn of British Telecom shares due in July.

Some analysts believe the rights issue may be on a one-for-four basis at up to 260p per share. BA's share price rose 3.5p on Friday to 303.5p despite the rumours of the issue.

BA has spent more than pounds 500m over the past year, including a dollars 300m ( pounds 200m) investment in USAir, pounds 311m for a 25 per cent holding in Qantas, pounds 17m for a minority stake in Deutsche BA, and pounds 183m in absorbing the debts of Dan Air, which it bought for pounds 1 last year. But BA is also facing further payments, such as dollars 86m to exercise share options in USAir and another dollars 450m to raise its stake in the airline to 43.7 per cent if the US regulatory authorities allow.

The airline is also facing substantial costs from purchasing new planes, with agreements to buy 76 new aircraft. According to NatWest Securities, pounds 400m of new aircraft will have to be funded through operating leases this year.

The fall in BA's profits last year was partly due to a loss of up to pounds 40m in the last quarter. Analysts are expecting profits to recover in the current year - to pounds 295m, according to Clive Anderson of NatWest Securities. But this will largely be the result of greater cost cutting by the company rather than a significant rise in passenger numbers.

Strengthening the balance sheet will eliminate only one of several headaches for BA's senior management, however. The company has recently faced disruption among staff at Gatwick over cost-cutting plans, and Robert Ayling, the newly created chief executive, is trying to allay fears of large-scale redundancies. He has promised them that BA will do all it can to prevent further staff cuts.

BA's embarrassing legal battle with Virgin is also continuing over the alleged dirty tricks campaign against Richard Branson's airline. Virgin launched its legal action earlier this month for compensation from BA on top of the libel damages already paid by BA. The legal action may result in Lord King, BA's life president, having to appear in court to give evidence.

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