Bluechip: Profitable BA is set to fly high again

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The Independent Online
FOR a one-time stock market high flyer, British Airways has fallen to earth with a bump since it peaked at 748p in the middle of 1997. Although it has since recovered to 652p, the shares are still well off their highs and have lagged the market by almost 10 per cent in the past year.

The essential problems stemmed from difficult internal problems, including a cabin crew strike. Coupled with the strong pound, which set back profits by pounds 200m at the pre-tax level, and economic and political shocks in Asia, it is no surprise that sentiment took a tumble. The shares now trade on a 40 per cent discount to the market.

But the business has still been able to push profits higher at the latest stage, if only by a slender 3.8 per cent to pounds 714m, while a 10 per cent- plus hike in the dividend suggests management's confidence in the future is growing.

Further ahead, there are a number of encouraging signs to lend weight to the view that BA is now back as a buy. Lower fuel bills will cut costs, with jet kerosene prices tumbling by 27 per cent in the last quarter, and further efficiency gains of up to pounds 250m could significantly add to profits. While the latest interest rate rise won't do anything to reduce the strength of sterling, better growth prospects in continental Europe should boost revenues.

Much attention is focused on the prospects for the American Airlines alliance. Yet even if the deal is blocked, it is possible to see an upside. With the more limited co-operation permitted under existing agreements, there is the bonus to BA that US carriers will not be granted additional access to Heathrow.

Pre-tax profit could top pounds 700m in 1999, and if earnings per share reach 60p a share, that leaves the stock trading on a humble 10 times. It's unlikely that the shares could fall much below current levels. With limited downside, they are a strong speculative buy.