BA says airlines face challenging times

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The Independent Online

British Airways warned yesterday it faced a tough winter as profits for the second quarter of the year came in above expectations at £220m.

British Airways warned yesterday it faced a tough winter as profits for the second quarter of the year came in above expectations at £220m.

The doubling in pre-tax profits from £105m in the same period last year on turnover up by 2 per cent to £2bn was attributed to an improved cost-cutting performance which helped offset sharp increases in fuel and staff charges.

Rod Eddington, BA's chief executive, cautioned, however, that intense price competition in the coming months, particularly in the short-haul market, would create "extremely challenging" conditions for all airlines. He predicted that more low-cost carriers would fail over the winter and said that a number of full-service airlines were also "on the edge".

The market took notice of Mr Eddington's warning as shares in BA fell 5.5p to 219p.

In the face of declining yields and ferocious fare competition, BA said its focus would be on cost and debt reduction. Although the airline's debt is now down to £3.286bn - its lowest in 11 years - a resumption in dividend payments this year appears to have been all but ruled out. Martin Broughton, BA's chairman, said the board would give "serious consideration" to the issue, acknowledging that retail investors wanted the company to return to the dividend list, but he emphasised that the airline's big institutional investors were happier to see it continuing to drive down debt.

Yields in the three months from June to September - traditionally BA's most profitable period of the year - were down 5 per cent and Mr Eddington indicated he expected them to fall by 5-10 per cent over the winter. Passenger traffic in the second quarter was up 4.4 per cent compared with a 3.1 per cent increase in seat capacity.

Fuel costs were up by 12 per cent over the quarter to £271m and for the full year BA expects its fuel bill to be £245m higher than the previous 12 months. This will be partly offset by £160m raised through fuel surcharges. For the remainder of this year, BA has hedged 75 per cent of its fuel requirements at an oil price of $32 a barrel. Next year it has a little under half its fuel needs hedged at $34-$35.

The pay settlement with unions drove up staff costs by 7.7 per cent to £561m and delayed the implementation of the airline's latest £300m employee cost reduction programme.

But BA said that costs in all other areas fell, with net costs across the airline down by 3.2 per cent over the period. The biggest improvement was in selling costs which fell by 18 per cent as more passengers booked online and used e- ticketing. The proportion of short-haul leisure tickets booked over the web is now 53 per cent, while 60 per cent of passengers now buy e-tickets.

Mr Broughton said market conditions remained "broadly unchanged" since the summer and reiterated BA's forecast that revenues would end the year 2-3 per cent higher.

Mr Eddington said BA was looking at both the Boeing 7E7 and the proposed Airbus A350 as potential replacements for its fleet of Boeing 767s. But as its 21 767s were having their interiors upgraded to keep them in service for another four to five years, BA did not need to make a decision on a replacement until 2006 at the earliest.