BA to raise fares as fuel costs put end to 'year of plenty'

The chief executive of British Airways has become the latest airline executive to warn that it will sharply increase its fares as its struggles to protect its profitability in the face of the unprecedented price of fuel and "an uncertain economic outlook".

Willie Walsh issued the warning yesterday as the carrier reported record profits of £875m last year and approved its first dividend since 2001. He cautioned, however, that the performance will be a high point – the carrier hit Mr Walsh's long-coveted target of a 10 per cent operating margin, triggering a £35m bonus scheme for its employees – from which its financial performance will slide backward.

The economies of its two biggest markets, the UK and America, are slowing rapidly. This has already begun to manifest itself in a marked drop in non-premium transatlantic bookings, the company said. BA also increased its estimate for this year's fuel bill to more than £2bn, roughly double its previous annual total.

Mr Walsh said the massive increase will unavoidably mean that it will push its fares higher. He said: "It's inevitable these costs are going to flow through to the consumer." Asked if customers should be surprised by further hikes, Mr Walsh said: "No, they shouldn't." This is despite the company's move earlier this month to foist its 13th fuel surcharge increase on to customers.

Mr Walsh's counterparts at easyJet and Ryanair have introduced a range of new fees aimed at offsetting their rising bills, while Virgin Atlantic has pushed through several fuel surcharges of its own. Several other airlines have filed for bankruptcy in the face of the unprecedented costs.

BA has thus far been able to protect it margins through the charges and cost-cutting. The scope to continue to do so is limited, and BA yesterday tried to prepare investors for the rough ride ahead. It said it will cut its capital spending programme and predicted a pedestrian 3 to 3.5 per cent increase in passenger numbers this year.

A crucial factor for the company will be how premium transatlantic bookings hold up. BA makes most of its money from that customer group, which has so far held steady. Yet as the spectre of recession in America looms larger than ever while the UK also heads into serious slowdown, analysts expect it to begin to weaken.

Douglas McNeill, an analyst at Blue Oar Securities, said: "The year of plenty is going to be followed by a very lean year indeed. Sensibly, BA will respond by cutting [spending] to conserve cash. It will also look to pass on higher fuel costs to customers – and the big unanswered question is whether that will cause them to stop flying in significant numbers."

Mr Walsh said the present quarter will be "particularly challenging". BA has improved its fuel hedging position, with 72 per cent of its fuel needs on fixed contracts for the first half of the year, and 60 per cent for the latter half. This is up from an average of 54 per cent hedging it said it had secured at below market prices earlier this year.

With such turbulent times ahead, Mr Walsh came up with a pair of populist moves to keep investors keen. This will be the first year since 2001 that the company will issue a dividend, and Mr Walsh said yesterday that it will not be a one-off. Mr Walsh said: "This is a measure of our confidence in our ability to not only survive in these challenging times but to actually succeed in these challenging times."

He also declined to take his annual bonus, equal to his £625,000 annual salary, as penance for the disastrous opening of Heathrow's Terminal 5. The move will have saved Mr Walsh from a likely controversy with some shareholders who were nonplussed by the T5 debacle, which saw hundreds of flights cancelled and the carrier's reputation sullied.

Other problems lurk. Monday marks the beginning of the High Court case between the carrier and its pilots. BA is trying to stop Balpa, the union, from striking in protest against a plan to start a new airline, called OpenSkies, to fly between the Continent and America. The pilots fear that BA will try to impose the terms given to the non-unionised, lesser paid pilots for the new business on the larger workforce.