Bottom Line: Flight reservations on BA shares

FIRST-QUARTER pre-tax profits from British Airways were not up to the highest expectations, but it was more the equivalent of a flight arriving 10 minutes late than being cancelled entirely.

Within a 40 per cent rise in pre- tax profits to pounds 88m - earnings per share were flat because of a higher tax rate and last year's rights issue - there were plenty of encouraging signs.

BA's core business continues to do well. Passenger yields on scheduled services improved by 3.4 per cent thanks to a 12 per cent growth in the lucrative premium traffic, twice the increase seen in main cabin seats.

An average passenger increase of 6.9 per cent comfortably swallowed up a 6.5 per cent rise in seat capacity, reflecting additions to the fleet, and this enabled the passenger load factor to edge ahead.

BA has recently terminated four operating leases on Boeing 747-400s. Further progress on this front, reflecting improved aircraft utilisation, will gear up BA's returns and provide a useful cushion for yields against what is likely to be a highly competitive marketplace on pricing.

Meanwhile cost control appears to show few signs of slackening, with unit costs up just 1.8 per cent against an 11 per cent rise in total turnover, including buoyant cargo revenues, boosting operating profits by 32 per cent.

Despite the good news from the core the stock market is rightly concerned about the fate of USAir and the prospects of a write-off of BA's pounds 275m investment if the required cost-cutting agreement is not reached by unions and local management.

Until this is resolved a yield of 3.5 per cent and a p/e of 14.5, assuming profits of pounds 400m this year, may not be enough to bring in buyers in the short term.

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