BA's £1bn fuel bill threatens to put cost-cutting into a tailspin

British Airways will tomorrow warn that its annual fuel bill could rise to £1bn, threatening its wide-ranging cost-cutting programme.

British Airways will tomorrow warn that its annual fuel bill could rise to £1bn, threatening its wide-ranging cost-cutting programme.

The announcement will take the gloss off the airline's full-year results presentation, where it is expected to reveal a £200m pre-tax profit against a backdrop of Sars, the Iraq war and the threat of terrorism.

On top of this, BA will announce that its previous cost- cutting programme, called Future Size and Shape, which concluded in March, achieved savings of £800m - some £150m ahead of target.

But the soaring crude oil price, which last week reached the highest level in the US since records began in 1983, will undermine BA's latest efforts to strip £300m a year out of its business. The main plank of the programme is expected to be a further 4,000 redundancies.

BA is understood to have calculated that if the oil price remains at the current level then the company will spend £1bn on jet fuel this year. This will be around £100m more than it spent last year and over 12 per cent of its total operating costs.

Last week BA controversially introduced a £5 surcharge on return flights to offset some of the extra fuel costs. The company will tomorrow reveal that it expects to raise £75m from the levy.

Writing in BA's staff newsletter, chief executive Rod Eddington justified the surcharge by saying that the company "cannot afford to undo" the savings made through the Future Size and Shape programme. "To do so would make the job of reaching a 10 per cent operating margin that much more difficult. The only alternative, therefore, is to pass on the increase in fuel prices to customers," he said.

Fuel is now the only cost within BA that is rising significantly above inflation. Therefore, the company will come under pressure to make deeper cuts elsewhere to offset rising oil prices.

This will raise fresh fears among BA's main unions, the Transport & General Workers Union, the GMB and Amicus. The three are already battling with the company on planned redundancies, the level of future pay rises and policies to shore up the company's pension fund deficit.

BA has warned unions that if their demands are too high, it will be forced to lay off more staff.