BA's £1.4bn pension deficit punctures dividend hopes

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British Airways warned yesterday that it was unlikely to be able to pay a dividend for at least the next year because of the increase in its pension fund deficit.

Despite reporting a near-doubling in pre-tax profits last year to £415m - its best performance in seven years - BA again failed to pay a dividend and said the prospects of a payout in the current year were remote.

This is because the airline's pension deficit, which increased by £205m last year to £1.4bn, will now be included on the balance sheet under new international reporting standards, virtually wiping out all of BA's distributable reserves.

Martin Broughton, the chairman, said: "Sitting where we are now, the chances of a dividend in the current year are not looking good but going forward after that, I would not like to take a view."

The Government's new occupational pensions regulator, David Norgrove, served notice this week that he would challenge dividend payments or share buy-backs by companies with large pension fund deficits.

But Mr Broughton clashed with the regulator by questioning his right to do this. "Can you tell me what authority he has? This sounds to me like a personal view but I don't think he has the power to do this," the BA chairman added.

Although shareholders have again missed out, the profit improvement means that BA's 46,000 staff will receive their first bonus since 1998. A total of £45m has been set aside to fund the payment, which will be £610 or 1.2 weeks' salary, whichever is the greater.

Presenting his last set of annual results before he retires in September, BA's chief executive Rod Eddington said the biggest challenge facing his successor, Willie Walsh, was to keep driving costs down and productivity up at the same time as the price of fuel continued to escalate. BA is projecting that its fuel costs this year will be £400m higher than last year.

BA's operating margin improved to 6.9 per cent last year but Mr Eddington indicated that further job reductions were inevitable if the airline was to achieve its target of a 10 per cent margin.

"To get there BA has to be a more streamlined, efficient business and that means we have to make further improvements in the productivity of the workforce."

BA said it exceeded its £450m cost saving target in the 2003-05 period by 7 per cent, but its has been forced to put back its £300m efficiency plan for 2004-06 by a year.

Yields fell 4.4 per cent last year - the third year in a row that they have declined - as intense competition drove down fare levels. But BA forecast that they would flatten out in the current year. Turnover is expected to increase by 4-5 per cent this year after rising by just over 3 per cent to £7.8bn last year.

The airline continued to make improvements in turning around its short-haul operations, recording an underlying loss in Europe of just £10m last year compared with £60m the previous year and £300m three years ago.

BA also announced a boardroom shake-up, with Mike Street retiring as director of customer service and operations in September and Dr Ashok Ganguly, Lord Renwick of Clifton and Captain Mike Jeffrey standing down as non-executive directors.

Mr Street will be replaced on the board by BA's commercial director, Martin George, while Baroness Symons, the former Foreign Office Minister, and Ken Smart, the former head of the UK's Air Accidents Investigation Branch, will join as non-executives.