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BA freezes pay and looks for job cuts after £70m loss

Airline hit by collapse in premium traffic and the decline of the pound

British Airways is freezing staff pay and looking for further voluntary redundancies after global recession and the weak pound pushed the airline to a £70m loss in the first nine months of its financial year.

Although BA's revenues were up 6.2 per cent to £7bn due to rises in the dollar and the euro, sterling falls took a £100m chunk out of profits, leaving them 109 per cent down from last year's £816m. Fuel costs were also a factor, shooting up by £723m over the first three quarters as the oil price spiralled to an all-time high of $147 per barrel.

BA's biggest problem is the fall in premium traffic. The company makes more than half its revenues from corporate travel, but the business has been hurt by both the overall economic situation and the ructions in banking, an industry on which airlines are particularly reliant. Although economy traffic rose by 1.4 per cent last month, the number of passengers in BA's premium cabins was 13.7 per cent lower than in 2008, and the trend is still downwards.

With little optimism about the economic outlook – BA's planning assumption is that tough conditions will continue for 24 more months – the airline is forecasting full-year losses of £150m, and is in talks with trade unions about cost-cutting plans. Formal negotiations will start next week. Willie Walsh, the BA chief executive, said: "We've said to the trade unions that in the currentenvironment, given the deterioration in financial performance, we can'tenvisage any rise in base pay this year."

Headcount will also come down, though BA will not give any indication on numbers. The company has already cut 480 managerial positions, 35 per cent of the total staff at this level, and the voluntary redundancy scheme will now be offered elsewhere. "There will be some targeted voluntary redundancies where we know people can bereleased without replacement," Mr Walsh said. "We know there are people looking for the opportunity and when we mentioned this to the trade unions there was recognition that there are people who are willing."

BA's market capitalisation is still below that of Iberia, the Spanish flag carrier with which it is in merger talks. Although both airlines profess support for the deal, negotiations have been protracted as BA's ballooning pension deficit and plummeting share price belied the 60/40 merger ratio targeted by Mr Walsh.

Earlier this week, the chairman of Caja Madrid, which owns 23 per cent of Iberia, said an agreement was imminent, and hinted at a 55/45 split. Mr Walsh said yesterday: "A lot of progress has been made in a short time, but a number of critical issues are still to be agreed."

The merger may make sense for the airlines, but it will be difficult with so many fluctuating variables, said Gert Zonneveld, an analyst at Panmure Gordon. "It is like trying to hit a moving dartboard and still get maximum points," he said.