British Airways will reveal the full effects of the soaring world oil price tomorrow by warning that its fuel bill could top £1.1bn and announcing an extra surcharge on long-haul flights.
The news will take the shine off BA results that will show the airline is turning the corner, with analysts predicting first-quarter, pre-tax profits of around £100m.
But BA's chief executive, Rod Eddington, will argue that the airline must place a special surcharge of up to £8 on every long-haul flight ticket to cover the sharp increase in aviation fuel prices. The surcharge, on both outward and return flights, will begin on Wednesday.
At BA's last set of results in May, the company announced a £2.50 surcharge on all airline tickets. BA refused to comment, but the latest surcharge on flights further than Europe will generate around £50m over the year.
BA's announcement is expected to prompt a similar move from Virgin Atlantic, which also has a £2.50 ticket charge because of the high oil prices. A Virgin Atlantic spokesman confirmed that its surcharge was "under review".
Oil prices in London last week peaked at $41.12 for a barrel of Brent crude - the highest since records began in 1988. Analysts expect BA to reveal that its fuel costs this year will be £1.12bn, some £200m more than last year and £50m more than the company predicted three months ago.
BA is heavily exposed to the rise in oil prices as jet fuel is the company's largest cost after wages. But BA is more exposed to the rise in prices than most other major European carriers. Airlines can set the price at which they buy fuel through long term "hedge" contracts with suppliers. Of the European airlines, BA is most exposed to the open oil market as only 45 per cent of its fuel purchases are hedged in contracts running until March 2005.
The record oil prices come at a bad time for BA. The company is showing signs of recovering from the effects of the 11 September 2001 terrorist attacks, the war on Iraq, the downturn in the global economy and the outbreak of Sars. The company is expected to reveal a 9 per cent increase in traffic over the same period last year.
The deep cost-cutting programme, in which 13,000 people were made redundant, is also paying dividends with all costs - bar fuel - being reduced.
But the BA chief executive is now facing resistance from the unions over what has been branded an "inflation-only" pay rise. BA is offering an 8.5 per cent rise over three years or 10.5 per cent if the money doesn't count towards employee pensions. But baggage handlers and check-in staff represented by the Transport & General Workers' Union (T&G) and the GMB are due to vote on strike action later this month.
The chances of summer industrial action increased last week when the T&GW and the GMB rejected BA's offer of binding arbitration with the Acas mediation service. The third union representing BA staff, Amicus, accepted the offer.
Chris Avery, a transport analyst at JP Morgan, wrote last week: "It is a critical test for Rod Eddington, whose target of winning £300m of ongoing savings from labour this year may be fatally damaged if too much is given away to avoid a strike."
BA's director of operations, Mike Street, wrote to staff earlier in the month warning that industrial action would cause "serious damage" to BA's reputation and finances.Reuse content