BA warns on cost cuts and £1.4bn hole in pension fund

Willie Walsh, the new chief executive of British Airways, yesterday described the airline's failure to cut costs in what is traditionally its most profitable part of the year as "disappointing", reinforcing his message that the workforce should brace itself for a tough new efficiency drive.

He also warned that the £1.4bn deficit in BA's pension fund was "unsustainable" - an indication that staff can expect to see their contributions increase, benefits trimmed or a combination of both when the shortfall is tackled next year.

Despite better-than-expected second-quarter operating profits of £261m - 6.5 per cent up on last year - Mr Walsh said costs had risen in most parts of the business. In particular, employee costs increased by more than 3 per cent to £568m even though the workforce fell marginally to 46,144. Unit costs during the three months to the end of September rose 2.2 per cent, largely due to a "staggering" 51 per cent increase in fuel charges.

Mr Walsh described the results as "reasonable", with improvements in revenues, load factors and yields. "It is clear, however, that we need to re-energise our drive on controllable costs," he said. "We have demonstrated time and again that it is possible to offer world-class service while improving unit costs."

Mr Walsh is due to set out his detailed cost-reduction plans in February or March. At the same time, BA management will sit down with pension trustees and unions to discuss how to plug the hole in the fund. BA has already begun the softening up process with a full-page question and answer article devoted to the subject is this week's BA News. Since 2003, BA has doubled is contribution to £225m a year and is paying additional deficit payments of £115m a year over 10 years.

BA raised its revenue forecast for the year slightly, saying it now expected income to grow by between 6 and 7 per cent due to stronger demand from passengers travelling in business and first class. But the airline's chairman Martin Broughton said overall market conditions remained "broadly unchanged".

BA's fuel bill for the 12 months to the end of March is expected to be £525m higher than last year. The airline has hedged 81 per cent of its requirements for the remainder of this year at an oil price of $45 and 50 per cent of its needs for the following year at $55. There are no plans for further increases in fuel surcharges this year but BA's finance director John Rishton said it expected its fuel bill to rise again next year, indicating that still higher fuel surcharges were possible.

Mr Walsh said he expected BA's European network to make a profit this year after cutting its losses to £26m last year. The network has been helped by an increase in the number of short-haul passengers booking online to 55 per cent. The BA chief said he was still hopeful of an "open skies" deal between the US and the EU to liberalise transatlantic air travel. But he described Washington's failure to offer any substantive concessions this week on foreign ownership of US airlines as a "missed opportunity".