BA warning overshadows return to black

British Airways warned yesterday that a combination of economic downturn, terrorism and Sars would lower revenues in the first quarter and made it impossible to predict income for the rest of the year.

The gloomy outlook, coupled with news that its pension fund deficit has ballooned to £1.2bn, overshadowed a better than expected set of figures for last year when the airline bounced back to a £135m pre-tax profit and BA shares lost 4 per cent of their value. They closed 6.75p lower at 137.5p.

Rod Eddington, BA's chief executive, said the airline was "flying into a strong headwind" and all it could do in such circumstances was keep driving its costs down. He said the Future Size and Shape Initiative, which involves 13,000 job cuts, was comfortably ahead of schedule. Savings up to March this year totalled £570m against a target of £450m and Mr Eddington said he was confident of surpassing the overall goal of £650m in savings by March next year.

Last year's £135m profit compares with a £200m loss in 2001-02 and came despite a loss of £200m in the final quarter as BA was buffetted by the Iraq war, the Sars virus and the general economic downturn.

Turnover for the year was down by 8 per cent to £7.7bn but in the final quarter sales fell by 14 per cent as traffic levels plunged by 7 per cent compared with a year earlier.

Lord Marshall, the BA chairman, said he expected the business environment to remain "challenging" for the remainder of this year ahead of an economic recovery but he did not say when the airline expected that.

Mr Eddington said BA hoped not to have to approach the Government for financial aid if the threat of terrorism, which has already grounded BA flights to Kenya, grew worse. "We have always looked to solve our own problems which is why it is so galling to see the US carriers being given so much support by their Government", he added. The BA chief executive also said he was "uncomfortable" with the Government's apparent decision to have armed sky marshalls on board UK airlines. BA has lobbied hard against the idea on the grounds that it is best not to have any weapons on board aircraft, no matter whose hands they are in.

Despite the uncertain outlook, BA's balance sheet remains robust compared with those of rival carriers. Cash inflow before financing was £1.23bn while net debt fell by £1.45bn to £5.12bn - its lowest level in four and a half years.

The £1.2bn pension deficit is based on a snapshot of the fund's liabilities versus its assets using the FRS17 accounting standard. BA is carrying out an actuarial review of its pension fund which will be completed by the end of the year. Finance director John Rishton said it was "fairly likely" that BA would have to increase its £160m a year contribution to the scheme.