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BA hit by £1bn pensions black hole

Michael Harrison,Business Editor
Tuesday 06 May 2003 00:00 BST
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British Airways is poised to reveal a hole in its staff pension fund of up to £1bn because of the sharp fall in equity markets over the past 12 months.

The airline is racing to put out a statement setting out its pension fund deficit under the FRS 17 accounting rule in advance of its annual results on 19 May.

BA's deficit has soared from the £276m it reported at the end of the 2001-02 financial year. Citigroup Smith Barney puts the figure as high as £1bn although it rates the airline as one of the best equipped to deal with financial pressures because of its efficiency gains and £1.8bn in cash.

The company's two pension schemes have 100,000 members and, as of 31 March last year, they had assets of £10bn. Falling equity markets and the increased cost of pension provision forced BA to close its final-salary scheme to new members last year and replace it with a defined contribution scheme known as the British Airways Retirement Plan. Alongside the FRS 17 review, which gives a snapshot in time of BA's pension liabilities, the airline is also conducting a full actuarial valuation, although this will not be completed until November or December.

John Rushton, BA's finance director, said at the airline's third-quarter results that there would be no change in its pension contributions until the valuation was complete. This means that the earliest BA will start to increase payments is January 2004.

BA is anxious to clarify its pension position before publication of its annual results so that it can concentrate on the operating performance of the airline and its prospects post the Iraq war and the severe acute respiratory syndrome (Sars) epidemic.

However, a spokeswoman said the FRS 17 review was still ongoing. "It has not yet been completed and we will announce it in due course when it is ready. The timing is dictated by the completion of the review and that has not yet been reached."

Despite the Iraq war and the Sars virus, BA is expected to report profits of about £100m for 2002-03 compared with a £200m loss the previous year. Citigroup rates BA as one of the most robust of all the flag-carriers because of its cash resources and lower cash burn – which is less than half the average sector rate. But it forecasts that BA will slip back into a loss of £84m for the current year. It has also cut its target rate for the BA share price from 200p to 170p.

Easyjet, BA's low-cost rival, is expected to report a first-half loss of £40m to £50m tomorrow. The carrier is thought to have made an operating loss of more than £20m in the six months to the end of March – a period when it traditionally makes a loss because it flies to a greater proportion of "sun routes" which are most profitable in the summer. In addition, easyJet has had to lower fares on former Go routes to bring load factors up to the same level as those on the existing easyJet network.

Easyjet has also incurred a number of one-off charges relating to the integration of Go and the cost of taking out an option to buy BA's German subsidiary, Deutsche BA, which it decided in the end not to exercise. Shares in easyJet dipped to an all-time low of 173.5p on concern over its prospects for the full year.

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