Analysts braced for BA profit warning as oil price leaves airlines struggling

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The Independent Online

British Airways will issue its second profit warning of the year next month due to the record oil price that has already sent several carriers into bankruptcy and forced others to raise fares to deal with the unprecedented rise in costs, analysts said.

At BA's investor day last month, the chief executive, Willie Walsh, abandoned his long-trumpeted target of achieving a 10 per cent operating margin and predicted that it would fall to 7 per cent next year. Analysts said yesterday that since then the carrier has been "actively guiding" their expectations lower before its annual results on 16 May and that the sustained high oil price would mean its margin would shrink to as little as 3 per cent next year.

"They are already guiding lower," said Andrew Lobbenberg, an analyst at ABN Amro. When BA made its profit predictions last month, they were based on $85 (£43) per barrel oil. Yesterday it hit a new high at $120 after the shutdown of up to 70 platforms in the North Sea due to the refinery strike at Grangemouth in Scotland and civil unrest in Nigeria causing production stoppages. The price of oil has increased by a quarter since the start of the year, confounding experts who had predicted that the slowing economies in Europe and America would lead to a relaxation of demand. Sustained growth in emerging economies in China and India and vast amounts of money being poured into oil by investment funds seeking a hedge against the falling dollar have instead sent it to new highs.

This is excruciating for airlines, for whom jet fuel makes up between a third and half of their overall bills. BA, for example, has said that for each dollar increase to the oil price, £18m of operating profit disappears.

Such rapidly shrinking margins could be the catalyst to consecrate long-simmering merger talks between carriers. A BA spokeswoman said that it continues to "explore opportunities" with American Airlines on a deeper alliance. Mr Lobbenberg said: "To the extent that their earnings are under pressure, there will be greater impetus for them to do something." BA is particularly vulnerable because only 54 per cent of its fuel is hedged on fixed long-term contracts this year – well below the 75 per cent hedged positions of rivals like BMI and Virgin Atlantic.

There is no relief in sight. The president of Opec, the cartel of oil-producing nations, predicted yesterday that oil could hit $200 per barrel if the dollar continues to fall.

Carriers are doing everything in their power to offset the costs except, oddly, reducing capacity by cutting routes. Qantas, the Australian flag carrier, announced an across-the-board fare increase. After Continental Airlines abruptly ended long-running merger talks with United Airlines at the weekend, it emerged yesterday that United had redoubled talks with US Airways and could announce a tie-up within days. The news came less than a week after the beleaguered carrier, just two years out of bankruptcy, unveiled its largest ever quarterly loss of $537m.

Meanwhile Eos Airlines, the first and best capitalised of the small fraternity of business-class only airlines that started up in recent years, folded last weekend after it failed to secure an 11th-hour $50m bailout package. In its last desperate days, it appealed to larger rivals to see if they would buy the company, Virgin Atlantic among them. There were no takers. Paul Charles, of Virgin Atlantic, said: "A lot of airlines out there are getting pretty desperate. There will certainly be a lot more consolidation. The landscape a year from now will be very different."

Silverjet, the only remaining business class-only carrier left – Maxjet folded in December – is in talks with several investors about a possible deal to shore up its financing or to be taken over outright.

Ryanair said yesterday that from next week it would raise the fees it charges customers to check in at the airport, from £3 to £4, and to check luggage into the hold from £6 to £8. The low-cost carrier billed the charges as part of its drive to get 50 per cent of its passengers to use online check-in and only travel with carry-on bags in its never-ending quest for efficiency. More crudely, the move was all about oil. Ryanair chief executive, Michael O'Leary, said in February that if oil stayed at $85 per barrel and demand softened slightly, the company's profit of €510m (£401m) last year could halve this year.

With oil brushing up against $120, charging up to an extra £12 per passenger per flight becomes not a profit padder but a necessity for survival. Assuming for a moment that every one of the 50 million-plus passengers the carrier flies annually pays the extra fees, those extra fees equate to £600m.

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