BA slumps on Brussels warning

BRITISH AIRWAYS took a severe buffeting yesterday as the airline warned of deteriorating economic conditions and Brussels insisted that it would not allow BA to sell runway slots to gain approval for its alliance with American Airlines .

The double dose of bad news provoked a 6 per cent fall in BA shares. They closed the day 34p lower at 557p despite first quarter profits towards the top end of expectations and an overwhelming response to BA's summer sale of 2 million cut-price tickets.

Karel Van Miert, the European Competition Commissioner, warned that it would be "unacceptable" for BA to sell the 267 slots at Heathrow and Gatwick that it has been ordered to surrender. The Commissioner added that it would be in breach of EU Council regulations and would disadvantage smaller carriers trying to break into the transatlantic market.

Last week the Office of Fair Trading urged the new Trade and Industry Secretary, Peter Mandelson, to override Brussels and authorise BA to sell the slots, which are worth an estimated pounds 500m.

The stand-off between the two competition authorities threatens to turn into a full-scale row between London and Brussels. However, Bob Ayling, BA's chief executive, described the OFT's ruling as "highly significant".

He was speaking as BA reported a 23 per cent increase in operating profits to pounds 173m for the three months to the end of June. Pre-tax profits came in at pounds 145m against pounds 220m the previous year when BA had a one-off gain of pounds 130m from the sale of its stake in US Airways.

Despite the underlying improvement, the markets were spooked by a 4 per cent fall in yields - the profit per kilometre per passenger - and a warning from BA of economic downturn in UK and Far East markets.

The airline was also hit by the strong pound, which wiped more than pounds 20m off profits in the quarter and could lower full-year profits by pounds 80m-pounds 100m.

Mr Ayling said that the damage to profits would have been greater had it not been for the airline's Business Efficiency Plan, which is scheduled to produce savings of pounds 500m this year against pounds 250m last year.

He added that the ticket sale, featuring savings of up to two-thirds on the standard air fares to 80 mainly European destinations, had been a huge success. BA's reservations hotline took 70,000 calls over the weekend and long queues formed at BA's travel shops and at travel agents.

BA has been accused of targeting routes where it faces competition from rival low-cost airlines. But Mr Ayling said this was "unfounded and without justification" as only 12 of the 80 routes selected were in this category.

He said BA was still negotiating with both Boeing and Airbus over an order potentially worth pounds 3bn for new narrow-bodied jet aircraft to operate on its regional European routes.